It is March 2021, and once again USS pension members have been told there is a ‘deficit’ in the valuation of the scheme. USS are planning further contribution increases, going up from 30% of salary (combined total of employer and employee contributions) to potentially 56%, in order to cover this ‘deficit’. This is clearly unaffordable for both members and employers, and would tend to push early career and lower paid staff to opt out of the pension scheme altogether, thus gradually killing what is currently a perfectly healthy pension scheme.
A ‘deficit’ is not an amount of missing money (in fact, the pension scheme funds increased in value year on year this last decade and currently stands just short of £80bn)1 but is instead a calculation of what would be needed in extreme circumstances to ensure payment of all pensions going out now and of those to be paid to people in the future. That calculation makes a set of assumptions about things like future salary levels and stock market growth of assets, so different sets of assumptions can create different results. The 2014 valuation, for example, assumed salary growth of 16% over four years (It was closer to 6%). As such, the ‘deficit’ is always an extreme ‘what if’ guess of a future amount, not a fixed actual loss in the present day.
Talk of a ‘deficit’ sounds like there is difficulty right now in paying out pensions. This is not the case. The contributions paid in (by us and our employers) have exceeded benefits paid out (pensions) for at least the last 20 years, and the gap is growing, so the assets of USS are increasing every year. Contributions exceeded benefits by 37% in 2020. And with roughly £2 billion paid out in pensions each year, the current USS assets of £80 billion could fund that for 40 years even if no more contributions were paid in.
[Confused by pension jargon? See this post: The ABC of USS – a guide to the jargon that surrounds our pension scheme]
The USS have an obligation to provide a ‘prudent’ valuation every three years. In this context ‘prudent’ means an outcome that is considered to be more than 50% likely. The UCU argue that ‘excessive prudence’ is being applied (such as assuming much lower growth of assets than has ever been historically achieved in the long-term, and assuming higher salary increases than employers have ever agreed to). In 2018, a dispute between UCU and employer institutions was brought about by the UUK/USS proposal to end the Defined Benefit nature of the scheme and replace it with a Defined Contribution scheme (one in which we would know what money we pay in through our contributions, but would have no knowledge of what our pensions would look like). That dispute was brought to an end by the commitment to form a Joint Expert Panel which would make recommendations about the 2017 valuation and about future processes and procedures.2 However, the USS only paid lip-service to some of the recommendations, and replaced the 2017 valuation with a 2018 one which eased the ‘prudence’ slightly, but still implied a gradual increase in our and the employers’ contributions over three years.
That behaviour appears now to continue in the 2020 valuation, figures from which indicate that ‘prudence’ is at the highest rate yet, and implying contribution rates that would risk putting members off joining the scheme, and therefore act as something of a self-fulfilling prophecy, causing a devaluation of a healthy scheme. UCU and UUK have been more aligned in the last year in their frustration with the USS, and the failure of the latter to offer clear and transparent workings and assumptions. Now that the latest valuation is upon us, we need to prepare to stand by the sound arguments for more appropriate prudence, and demand that the Universities stand by their ‘covenant’, their backing of the pension.
The downward sloping line in this chart is what the current valuation implies will happen to the scheme’s assets. This shows the extent of the ‘excessive prudence’ used in calculating a ‘deficit’, and you can see that compared to previous ‘prudent’ valuations’ it is way more prudent. Look at when those other valuation said that the value of the assets would reach where they actually are today – £80bn. The 2011 Valuation suggested we won’t reach the current value until 2030; the 2014 valuation pushed that back to closer to 2040, and the 2017 valuation went further still with its prudence and said that it will take to beyond 2045. They have all been proved wrong. And yet the prudence is being pushed still further, to the point where the deficit calculation implies that the assets will never reach the value that they actually stand at in the real world.
The USS employers (Universities UK) have also responded to the valuation update, and although it’s welcome that they too are saying that the increased contributions proposed are unaffordable, and that USS should accept that the ‘covenant’ is stronger, they seem to accept that there is a genuine ‘sizeable deficit’. We don’t agree. The danger here is that university employers will react by once again pushing for a change to Defined Contribution pensions (which was what we went on strike about in 2018!). We can’t accept that either. We want the employers, including the University of Leeds, to join UCU in pushing USS to:
- re-do the valuation now instead of in March 2020, when the stock market was incredibly volatile due to the Covid-19 outbreak
- reduce the excessive levels of prudence in the valuation
- implement the full recommendations of the Joint Expert Panel
- act upon the commitment to strengthen the covenant
If you were able to attend one of the university’s ‘Conversation’ events that have been held in the last two weeks by the VC on USS, you will have heard our UCU pensions rep, Mark Taylor-Batty, making some important points about this situation. We were pleased that UCU was invited to participate in these events, but we feel that a 3 minute slot wasn’t enough to explain UCU’s views and what we believe needs to happen.
So we would like to invite you to an Open Meeting on this, where Mark will expand on the points he raised in the ‘Conversations’ sessions and the very serious concerns we have. The meeting is on Thursday 11th March from 12 noon – 1 pm. There will be plenty of opportunity for questions and discussion. Register for this event here. Once you have registered we will send you a link to the meeting, which will be held on Zoom. You are welcome to eat your lunch at the same time!
Please encourage colleagues who may not be union members but who pay into a USS pension to come too. Everyone at University of Leeds who pays in to a USS pension is very welcome.
- The assets of the scheme have grown over the last decade at an average rate of just under 11% year on year, and currently stand at around £80bn. The contributions paid in stand currently at around £2.7bn annually, and have increased over the last decade at a rate of just under 7% year on year. The money that the scheme has had to pay out in pensions each year has by contrast increased at a lower rate of 5% annually, and in the last accounts stood at around £2bn. The scheme has therefore always been and remains cash flow positive, with no need to dip into its assets to pay its liabilities. All figures extrapolated from published USS accounts.
- We responded to the first JEP report here, and the second JEP report here.