The trustee, Universities Superannuation Scheme Limited, has determined that steps must be taken to cover the rising cost of providing benefits to members, and to address the funding deficit in the scheme – both identified in its 2017 valuation.
However, following discussion between Universities UK (UUK) and the University and College Union (UCU), the JNC withdrew the proposals on Friday 27 April 2018 and no replacement proposals were put forward.
UUK and UCU separately agreed to set up a Joint Expert Panel (JEP) (JEP) to assess the 2017 valuation.
The JEP delivered its assessment of the 2017 valuation to UUK and UCU on 13 September. Based on the JEP’s assessment, the JNC may propose changes to benefits and/or contributions which, subject to due diligence by the trustee, would then be subject to a further consultation by employers.
In the meantime, the trustee must demonstrate to the Pensions Regulator:
- that USS has sufficient funds to pay the pensions promised;
- that it has a deficit recovery plan to achieve this; and
- that it is continuing to make progress towards completing the valuation.
It must also take action to address the scheme’s funding position which will include the operation of the cost sharing rules. This means that any changes agreed following the completion of this consultation would take effect from 1 April 2019, before any changes which arise as a result of the work of the JEP could be implemented.
The proposed changes are outlined on this website. The information is supported by videos, questions and answers and other resources, which will help you understand the effects the proposed changes may have on your future pension contributions and benefits.
You will also find the consultation response form, so after you have considered all of the resource material, you can submit your comments on the proposed changes to USS.
If you are not sure whether the proposed changes affect you, check with the person at your workplace who wrote to you about the consultation.
Your employer has a legal responsibility to consult with all recognised employee representatives. It is also consulting directly with all employees who may be affected by the proposed changes.
Braille and large print versions of the content on this website are available on request from the person at your workplace who wrote to you with details of the consultation.
- The valuation
- Scheme funding position
- The cost of building up USS benefits
- The Joint Negotiating Committee and its role
- The Joint Expert Panel
- The cost-sharing rule
- The two sections of USS
- What to do next
- Proposed changes to USS
1. The valuation
The USS valuation is a process required by law that is carried out at least every three years to determine the scheme's funding position.
It is a review of the scheme’s assets and liabilities, and it estimates:
- whether the scheme’s assets can fund the benefits that members have already built up in USS; and
- how much money employers and members need to pay into the scheme to continue to provide the current level of defined benefits being built up in the future.
The trustee is obliged to meet statutory deadlines regarding the completion of the valuation: the law required completion of the 2017 valuation by 30 June 2018.
However, due to the withdrawal of the JNC's previous proposals, stakeholders’ ongoing discussions and the creation of the Joint Expert Panel, the trustee missed the statutory deadline.
As a result, the Pensions Regulator has been clear that the trustee must take demonstrable steps to complete the valuation, and implement any necessary scheme changes, as soon as possible.
Therefore, the trustee cannot satisfy its legal obligations if it waits for the JNC to propose any changes to USS contributions and/or benefits based on the Joint Expert Panel’s review. Instead, it will complete the 2017 valuation under the default cost sharing provisions in parallel with the JEP and any subsequent JNC processes.
2. Scheme funding position
The USS Retirement Income Builder is funded by contributions from members and employers. These contributions are invested by the trustee, to provide your retirement benefits.
The level of contributions needed to make sure the scheme has enough money to provide your benefits depends on three main factors:
- The level and type of benefits offered;
- key member demographics (such as life expectancy and dependants); and
- the investment returns the scheme’s assets can reasonably be expected to achieve.
The latest valuation looked at the position of the scheme as at 31 March 2017. It found that, while returns on investments since the previous valuation in 2014 had been higher than forecast, the outlook for future returns had reduced significantly.
In 2014, the trustee forecast that the scheme’s investments would return around 5% a year, and with assets worth £41.6 billion, USS was 89% funded (a funding deficit of £5.3 billion). As a result, employer and member contributions increased and benefits changed on 1 April 2016.
Between the 2014 and 2017 valuations, secure investments, like UK government bonds, offered less future income, with yields falling by 1.6% a year from already below-inflation levels.
As a result, investors looked elsewhere for secure returns, and this drove up the cost of investing in all asset classes.
These factors combined to result in lower future returns expected by the trustee, resulting in a funding deficit of £7.5 billion (89% funded, with assets of £60 billion) as at 31 March 2017.
3. The cost of building up USS benefits
Investment outlook is the fundamental issue, when considering the cost of building up defined benefits in USS.
Lower investment expectations have affected USS because the contributions currently being paid by members and employers – and the contributions expected to be paid by future scheme members – will:
- buy fewer assets than they could in the past; and
- those assets are expected to generate lower future returns because of their higher purchase prices.
The impact of this, according to the 2017 USS valuation, is an increase in the cost of funding defined benefits of £900 million a year.
4. The Joint Negotiating Committee and its role
Under the USS rules, the Joint Negotiating Committee (JNC) is the body responsible for deciding how increased contributions requirements are dealt with.
It is made up of five representatives of the employers (nominated by Universities UK), five representatives of the members (nominated by the University and College Union) and an independent chairperson.
As economic conditions, lifestyles and a number of other factors are constantly changing, the trustee is required by law to assess regularly whether the scheme is expected to have enough money to provide members’ benefits: this is the valuation.
With each valuation, the trustee determines the contributions that members and employers would need to pay to fund the scheme based on the benefits being offered at that time.
It then gives this information to the JNC, which decides how the required contributions should be split between employers and members and whether any changes should be made to the retirement benefits the scheme will provide for future service.
In January 2018, in response to the results of the 2017 actuarial valuation, the JNC proposed changes to USS benefits.
However, following discussion between UUK and UCU, the JNC withdrew those proposals on Friday 27 April 2018. It is now reviewing the assessment of the 2017 valuation carried out by the Joint Expert Panel (JEP), before it proposes any future benefit changes.
5. The Joint Expert Panel
UCU and UUK set up the Joint Expert Panel (JEP), to assess the 2017 USS valuation.
With an independent chair, the JEP is made up of actuarial and academic experts, nominated by UUK and UCU. The USS trustee supported the JEP process, and engaged fully with the JEP’s assessment, which was reported to UUK and UCU on 13 September.
Based on the JEP’s assessment, the JNC may propose changes to benefits and/or contributions which, subject to due diligence by the trustee, would then be subject to a further consultation by employers. However, any scheme changes proposed by the JNC as a result of the JEP’s assessment could not be implemented until after 1 April 2019.
6. The cost-sharing rule
The cost sharing process (USS rules 76.4-76.8) was introduced through the JNC in 2011 (and subsequently amended in 2014) at the request of UUK and UCU (via the JNC). It is a default process set out in the scheme rules which applies where a change in the costs of the scheme has been identified and the JNC has not reached a decision on benefit and/or contribution changes to deal with that change, as is now the case.
The USS valuation shows that the cost of funding benefits has increased by £900 million a year, and that meeting this cost, including addressing the £7.5 billion deficit, requires a combined employer and employee contribution of 37.4%.
The required contribution rate of 37.4% is 11.4% higher than the total contributions currently saved to the scheme by members (8%) and employers (18%).
It is proposed that, as a result of the increased cost of funding benefits and in order to address the deficit, the cost sharing rules will operate with effect from 1 April 2019, with phased contribution increases, split 35:65 between members and employers.
The cost sharing rules require the trustee to consider to what extent the 1% employer matching contribution to the USS Investment Builder should be reduced to accommodate the necessary increases to the aggregate contribution rate. The required increase to the contribution rate means that the employer 1% matching contribution would be removed completely (from 1 April 2019). This would reduce the contribution rate from 37.4% to 36.6%.
Therefore, it is proposed that the members’ normal contributions would increase from 8% to 8.8% from 1 April 2019, and the employer contribution would increase from 18% to 19.5%.
Under the proposal, further increases in member contributions would take place on 1 October 2019 (to 10.4%) and 1 April 2020 (to 11.7%). At the same time employer contributions will increase to 22.5% and 24.9% respectively. These increases will ensure that, by 1 April 2020, the total contributions being received by the trustee will be sufficient to cover the costs of future benefits and deficit recovery contributions.
Subject to further consultation and due diligence by the trustee, and subsequent implementation, these changes would supersede the cost sharing provisions from the date agreed as part of that process. This means that any changes agreed following the completion of this consultation would take effect from 1 April 2019, before any changes which arise as a result of the work of the JEP could be implemented. The trustee will work with the stakeholders to implement any further changes as soon as practically possible.
7. The two sections of USS
The USS Retirement Income Builder
When you become a member of USS, you automatically join the USS Retirement Income Builder. This is the defined benefit section of USS, providing you with a set level of retirement income, based on your salary during each year of membership of the scheme and how long you’ve been a member.
Every year, you earn 1/75th of your salary (up to the salary threshold*), and at the end of each year, your benefits are calculated and ‘banked’. They are then increased broadly in line with inflation, each year**.
On your retirement, you will also receive a tax-free lump sum of three times the level of your USS Retirement Income Builder pension.
*The salary threshold is £57,216.50 for 2018/19. It increases annually, broadly in line with inflation.
**Benefits you build in the USS Retirement Income Builder are subject to index-linked increases (Consumer Price Index). The first 5% of any inflation rise is matched. Above that, the increase is 0.5% for every 1% rise in inflation up to a maximum rise of 15%.
The USS Investment Builder
If you earn above the salary threshold, have made additional contributions, including the match, or transferred in from another pension arrangement from October 2016, you save in the USS Investment Builder. This is a flexible way to save for the future, allowing you to invest in one or more funds offered by the trustee. It is the defined contribution section of the scheme.
You can build up savings based on how much both you and your employer contribute and on the investment returns those contributions generate, minus any investment charges. It also gives you the option to make additional contributions to build your savings.
There are various ways in which you can use your savings, including as a tax-free lump sum, investing in a drawdown product or buying an annuity, which will provide a guaranteed income for life.
8. Key dates
- 3 September
- Consultation start date.
- 2 November 2018
- Consultation end date (responses must be received by 5:00pm).
- November 2018
- Your responses are considered and the final changes are decided on.
- From December 2018
- The final position decided upon will be communicated to you.
- 1 April 2019
- The date from which any changes will be implemented.
What to do next
You can provide your views on the proposed changes to your employer and the trustee by going to the response page.
9. Proposed changes to USS
Increase in contributions
Under the cost sharing rules (incorporating the removal of the employer match), members’ normal contributions would rise from the current rate of 8% and employers’ contributions would increase from 18%.
The increase in total contributions would be split 35:65 between members and employers respectively, and the trustee plans to phase in contribution increases from 1 April 2019 to 1 April 2020.
Increased contributions apply to total salary, i.e. salary above and below the salary threshold (currently £57,216.50).
Under the proposals, members with Enhanced opt-out will not be affected by any proposed increases in contributions. Contributions from members with a Voluntary Salary Cap would increase in line with the proposals up to the level of the cap, with their optional contributions above the cap to retain death and ill-health benefits being made in addition.
How the cost sharing contributions would fund USS benefits:
The cost sharing process will run separately to, but in parallel with, the outcome of the JEP's assessment and will be in effect until such time as any subsequent JNC decision on benefits and/or contribution changes is implemented.
Removal of the employer match
As part of the operation of the cost sharing rules, it is proposed that the employer’s match would be discontinued from 1 April 2019.
This would reduce the maximum combined contribution required from members and employers from 37.4% to 36.6% (the reduction is slightly less than 1% because not all USS members currently take the match).
Should it be removed, any members who currently take the match would continue to make their 1% additional contributions to the USS Investment Builder, but employers would no longer match those contributions from 1 April 2019.
Any members that wish to stop making the 1% additional ‘match’ contribution can do so using My USS.
Contributions above the salary threshold
Members that earn above the salary threshold (£57,216.50 for 2018/19) will continue to save in the USS Investment Builder.
Currently, 20% of salary above the threshold is saved in the USS Investment Builder: 8% from members and 12% from employers.
It is proposed that contributions on salary above the salary threshold would rise in line with contribution increases under the cost sharing rules. Under the proposal, 20% would continue to be invested in members’ USS Investment Builder savings.
The excess would go towards supporting the benefits provided by the USS Retirement Income Builder section of the scheme.
Under the proposal, as further contribution increases are phased in, contributions above the salary threshold would also rise. However, the contributions saved to the USS Investment Builder would remain at a combined 20%.
No other changes to benefits
There are no other proposed changes to members’ benefits as part of this consultation, with members’ contributions and employers’ contributions on behalf of members continuing to build up at the same rate of 1/75ths in the USS Retirement Income Builder (up to the salary threshold), and continuing to be invested in the USS Investment Builder (where members earn above the salary threshold or make additional contributions).
- Active members’ defined benefits will continue to be increased, broadly in line with inflation.
- Members will continue to have the same death in service and ill health retirement benefits for as long as they are active members of the scheme.
- Members will continue to be entitled to the same pension payments and lump sum from the USS Retirement Income Builder in retirement.
- The USS Investment Builder will continue to be available for members who make additional contributions or transfer benefits from another pension arrangement into the scheme.
- Members can still choose to manage their own USS Investment Builder funds or opt for the trustee to do it on their behalf.
Any pension benefits members have already built up in USS to the date of change are secure and protected by law. USS is governed by a trust deed and rules and if there is any difference between the content of this website and the trust deed and rules, the latter will prevail.