Financial market movements mean payment rates could be slashed for Universities Superannuation Scheme
Payments from universities and their staff needed to support the Universities Superannuation Scheme are likely to be significantly lower next year following a “major turnaround” in its financial position.
In recent years, the amount that staff and employers pay into the pension scheme has gone up, while benefits paid to those retiring have decreased, amid concerns about the health of a scheme that covers the majority of university staff and is the largest in the UK. The pension scheme’s financial woes have been at the root of a long-running clash between staff and universities, which has seen staff go out on strike several times over the past few years.
Now, thanks to a “significant improvement in the scheme’s funding position”, the USS Trustee confirmed on 19 July that a £14.1 billion deficit in 2020 would swing to a surplus of £7.4bn under the Trustee’s proposals for the 2023 valuation of the scheme. The significantly improved financial position is mostly down to rapidly rising interest rates as inflation has soared.
Currently the scheme requires contributions of 31.4 per cent of salaries, which includes 6.2 per cent to eliminate the previously-calculated deficit. This is split 9.8 per cent for staff and 21.3 per cent for employers.
The update means the deficit-battling contribution could be eliminated entirely and the overall rate could fall to 16.2 per cent. If cuts to retirement benefits made in April 2022 were reversed, total contributions would need to be 20.6 per cent.
USS Trustee chair Kate Barker told journalists at a briefing on 19 July that the cost of making new pensions promises, known as the future service contribution rate, “has fallen sharply” and that USS expected to make higher returns on its assets in future.
“This is really a major turnaround,” she said.
Looking forward
The USS Trustee set out the changes as it launched a consultation with universities on its funding assumptions and methodology, which forms the next step for a 2023 valuation of the fund. It hopes that if the universities agree with the proposed methodology, and the Joint Negotiating Committee (JNC) of UUK and the University and College Union agree a split contribution rate by December, significantly lower payments could come into force in April 2024.
UCU, which has been coordinating pensions strikes, said the announcement was “a vindication of UCU’s position that the April 2022 cuts were flawed, unnecessary [and] deeply irresponsible”.
“This is yet another step towards the restoration of our members’ pensions,” UCU general secretary Jo Grady said.
UUK chief executive Vivienne Stern said that the figures “point towards union and employer representatives being able to take forward their agreement on creating stability, lowering contributions, and improving benefits”.
“This will make a big difference to staff in this cost-of-living crisis and to USS employers faced with significant budget pressures,” she said.
Changeable conditions
Barker said that although a “small element” of the sunnier financial position for the USS was down to the April 2022 cuts, “the big change has certainly been the change in financial conditions”.
She added that a valuation conducted in 2020 that kickstarted many recent changes had “coincided with Covid, a good deal of uncertainty [and] a good deal of unrest in the financial markets”.
“It was a very difficult time to make judgements,” she said. “I don’t look back at that and think it was a mistake, but I am obviously pleased today that financial conditions have improved and we’re able to produce a much more favourable set of numbers.”
The USS believes the improved financial position for the 2023 valuation means it can now consider how to improve the stability of both contribution rates and benefits.
Barker said that although the Trustee had not made any specific recommendations on how to stabilise the scheme, it had run through scenarios of what could happen at the next valuation.
“Clearly there is a…non-zero risk that contributions might have to go up at the next valuation,” she warned. But if the current surplus in the scheme continues and is “not used up in improving benefits further, then the position at the next valuation is more likely to be one in which nothing needs to happen”.
The JNC has set up a working group to look at options for improving the stability of the scheme.
Barker said it was “very much a matter for [the JNC] how much they want to trade off what could happen at this valuation with trying to protect the next valuation”.