Update for members: proposed changes to your pension benefits

Dear colleagues,

As I wrote in my message of 3 September, the USS joint negotiating committee (JNC) – the body responsible for agreeing what changes may need to be made to your pension – voted to take forward UUK’s proposal for benefit reform as part of the next phase of the 2020 valuation.

USS is required by law to undertake a valuation – essentially an assessment of the scheme’s financial health – every three years, and the pensions regulator expects these to be completed within a certain time period. The last two valuations have been contentious, with the three main parties involved – the USS trustee, UCU and UUK – struggling to reach agreement on how the valuation should be conducted (often referred to as the ‘valuation methodology’) and the level of contributions required to maintain existing defined benefits.

What is being proposed

If fully implemented, the UUK proposal would see the following changes to pension benefits:

• A rise in total contributions of 0.5%, with the new contribution levels coming into effect in October of this year. Employers would increase the rates they pay from 21.1% to 21.4% of salaries, and individual member contributions would rise from 9.6% to 9.8% of salary. However, these rises are not yet confirmed and UUK believes USS can, and should, keep contribution levels as they currently are
• The defined benefit accrual rate (the annual rate at which pensionable service is built up in the scheme) would move from 1/75th to 1/85th
• The salary threshold for defined benefits would be lowered from just under £60,000 to £40,000. For earnings above the salary threshold, the equivalent of 20% of those earnings will be paid into the defined contribution (DC) section of USS
• Changes to inflation protection: until now, benefits have been fully protected from inflation to 5%, and half-protected for inflation of between 5% and 15%. The UUK proposal would cap inflation protection at 2.5%.

Please note that these changes would apply to future accrual only. The benefits that you have already earned are protected by law.

In addition, USS has offered to work with UUK and UCU on:

• The exploration of alternative models for scheme design that have the potential to offer enhanced benefits and better value for money, as called for recently by Cambridge and Oxford universities and their respective UCU branches.
• The progression of a high-quality, lower cost pension option within USS for those who find current contributions unaffordable
• A review of the scheme’s governance.

Examples: how would these changes affect the future benefits of a member earning £30,000 and a member earning £60,000?

These examples were modelled by the University’s actuary for a recent USS open meeting. Under the UUK proposal, someone earning £30,000 would see a 12% annual reduction in their defined benefits due to the lower DB accrual rate. They would be unaffected by the lower salary threshold.

Someone earning £60,000 would see a 41% annual reduction in their defined benefits as a result of the lower accrual rate and the lowering of the salary threshold. This would be partly offset by a build-up of DC benefits at a rate of 20% salary.

Both members may also have their benefits further eroded by the lowering of the inflation cap described above.

While the reduction in the overall benefit value at retirement depends on a number of variables, including the future growth of the DC fund and age of member, the overall reduction in benefits for both examples is estimated to be greater than 20%, with a greater reduction for the higher salary example than the lower salary one. We hope to model further, more detailed examples for members in due course.

Timeline and next steps

The 0.5% per cent rise in contributions will now be subject to a short employer consultation, with employers and members expected to pay the additional rises mentioned above from October of this year.

The JNC vote in favour of the UUK proposal, including the 0.5% rise in contributions, assuming they are approved through the employer consultation, takes the potential for even higher contributions scheduled for this October – see this article on our USS webpages – off the table.

Individual members will not be consulted on their portion of the contribution rise at this time as this formed part of a previous consultation for the 2018 valuation, which included the potential for these higher, ‘backstop contributions’. However, the full UUK proposal for benefit reform will now be subject to a member consultation. We expect that you will be able to have your say on the proposed changes from the start of November, and we will keep you informed of when and how you can do this.

If, having considered member responses, the USS trustee decides to implement the changes, these are likely to take effect from April 2022. It should also be noted that UCU might formally table proposals of its own for consideration by both employers and members.

Cambridge’s view

The University has made clear its position on both the UUK proposal and its views on how the long-term challenges facing USS should be addressed. It has also called into question the assumptions USS has made as part of its valuation methodology, and made the case for alternative scheme designs to be explored where benefit levels above a guaranteed minimum could be ‘risk-shared’ between employers and members. Given the very conservative expectations of market returns made by USS as part of its valuation methodology, this has the potential to materially enhance expected benefits for a given level of contributions (although benefits could also be eroded during times of very poor market performance relative to inflation). Unfortunately, we now know that alternative scheme design will not be possible as part of this valuation but hope that all the stakeholders can commit to this as a matter of priority for the future.

As previously stated, the University believes that the outcome of the 2020 valuation should be viewed as a short-term solution while alternative scheme designs that could produce better benefits for the same, or even lower, contributions are explored.

Open meeting

We will hold an online open meeting to explain these latest developments in more detail – most likely in the second week of Michaelmas Term. Details of the meeting will be communicated to you shortly, and there will be opportunity to submit questions in advance and at the meeting itself.

Anthony Odgers, Chief Financial Officer and Chair of the University’s Pensions Working Group

This update was sent to all USS members at Cambridge on 13 September via the USS Bulletin.