USS in Crisis? What is really going on? A message for all USS members.
This is the message sent to members of the USS from the UCU today.
USS in crisis? What’s really going on?
Academic staff in universities within the USS pension scheme have seen their pay fall in real terms since 2009, the cumulative loss to pay (compared to rises in RPI) is over 16%.
There are 53,237 academic staff at Pre 92 universities on fixed term contracts, many of them attempting to build a career.
In this context, the USS pension scheme is a vital and valued benefit for these staff, to some extent offsetting the pressure on pay and careers for these hard-pressed staff.
Since 2011, after 35 years of being a stable pension scheme, USS has been affected by great instability and turbulence.
Successive valuations in 2011 and 2014 have produced notional deficits that have been used to justify cuts to members’ pension benefits, with the closure of final salary pensions to new members in 2011 and then in 2014 the complete closure of final salary, together with the introduction of inferior Defined Contribution benefits for staff currently paid above £55,500.
In both cases, industrial action taken by UCU members staved off the introduction of significantly worse packages.
On 31st March 2017, the latest valuation of the USS scheme produced a notional deficit of £5 billion and the Trustee Board of the scheme indicated that to cover this, the cost of pensions need to be raised by 6 to 7%.
UCU is deeply concerned that if further cuts to pension benefits are proposed it will inject real long term risk into the USS scheme by making it increasingly less attractive to staff.
This is a real threat. USS faces the risk that it will become a decisively inferior package to the Teachers’ Pension Scheme, which staff in new ‘post-92 universities’ pay into. For example, a researcher joining USS at 38 with a 30 year career will receive more than £200,000 less in the USS scheme than they would in TPS over an average retirement.
The scheme is fundamentally sound
UCU argue that the USS scheme is fundamentally sound. Cash flows are positive. The sector is not likely to implode, the employer covenant is robust and the contributions from active members broadly cover pensions in payment. The scheme has £60 billion in assets to back up this situation. It is a ‘last man standing’ scheme where employers share the risk.
However, the way in which USS values the scheme is creating the appearance of a crisis which, the solution to which, ironically, threatens to generate a real long-term problem.
Since 2011, UCU has consistently argued that the USS ‘deficit’ is based on a flawed actuarial model. This model is creating an appearance of a scheme in crisis that then means it invests in more and more ‘safe assets’ which leads to lower returns then it is more expensive in effect a vicious circle.
Creating the appearance of crisis
The USS Board has opted for a valuation methodology based on a set of assumptions that UCU argue undervalues the robustness and unique nature of the USS scheme, which is one of the largest private sector schemes in the UK.
Most fundamentally, the Board has chosen to interpret the Pensions Regulator’s call for ‘prudence’ with unnecessary strictness by insisting on discounting the scheme’s liabilities using a complex measure termed Test 1 which is expressed in terms of the rate of return on government bonds rather than the rate of return on the scheme’s actual mix of assets.
As many commentators and pension experts have noted, this insistence on tying valuations to historically low gilts yields is creating artificially inflated deficits in many defined benefit pension schemes.
UUK is consulting the employers on the draft technical provisions which if accepted would lead to a watering down of benefits for scheme members. UCU argue that more confidence in the sector from employer and its ability to grow and support a decent pension scheme for staff would not only be important in retention but be valuable in recruiting world class academics.
UCU has commissioned its own actuarial analysis from First Actuarial, based on a different methodology, ‘Best Estimate minus’. ‘Best Estimate’ assumes that schemes will continue to pay out benefits as they fall due and make an actuarial best estimate of the future returns they will make on their actual investments, the minus is the introduction of prudence. We believe this methodology better reflects the reality of the sound fundamentals in the USS scheme and the UK higher education sector. Using this produces a surplus rather than a deficit in the scheme and obviates the need for the flawed ‘Technical Provisions’ being proposed.
At the very least, the fact that this is possible demonstrates the wildly different situations that can be generated by small changes in the assumptions being made by the Board.
Given what is at stake, we believe this makes it incumbent on the Board to reconsider this alternative approach in its valuation assumptions.
The approach being taken by the USS Board may be supported by the Pensions Regulator but the facts remain that:
- their approach has been criticised by significant pensions experts who recognise that it is creating artificial deficits by linking asset values to historically low gilt yields;
- their assumptions are based on a harsh, some might say ‘fantasy’ interpretation of prudence that does not reflect the real performance of actual USS assets;
- the vision of ‘prudence’ is founded on a vision of the UK higher education sector suddenly shutting up shop overnight and winding itself up;
As a result of this, UK higher education employers who have cut staff pay consistently for years have taken fright and indicated they will not raise their contributions any further, leaving hard-pressed academic staff, vast numbers of whom are struggling to build careers on insecure contracts, to pay more or work longer to get a decent pension.
USS shows no sign of deviating from its chosen course and University employers show no sign of willingness to take on extra risk to cover the requirement for increased contributions that will inevitably follow.
Such a situation is highly likely to lead to significant industrial action in the UK higher education sector.