The contributions members and employers pay into USS, and the way future retirement benefits are built up, are both set to change.
The Joint Negotiating Committee (JNC) has proposed the changes in response to the rising cost of providing the scheme’s current benefits. Its decision also paves the way for us to introduce new contribution rates.
Subject to consultation, members will contribute 9.8% of salary from 1 October and their employers will pay 21.4%. That is an increase of 0.2% and 0.3% respectively on current rates. But, if implemented, they would replace the contribution rates of 11% (member) and 23.7% (employer) otherwise scheduled under the 2018 valuation.
What the JNC has decided
From 1 April 2022, the way future benefits are built up will change. This is subject to a statutory employer-led consultation with affected employees and their representatives, due to be launched later this year.
Benefits USS members have already earned are protected by law and the Scheme Rules. But the pension members are promised in future, via the Retirement Income Builder, will build up at a slower rate:
- The salary threshold – that is, the income on which defined benefits will be earned – will reduce from close to £60,000 today to £40,000.
- The annual rate at which defined benefits will be built up will also reduce – from 1/75 of salary (up to the threshold) to 1/85. For example, 1/75 of £40,000 is about £530 whereas 1/85 of £40,000 is £470.
The impact on members who earn more than £40,000 is partially offset by proportionately more money from salary above the threshold being paid into individual Investment Builder accounts.
The JNC has also decided to limit the extent to which members’ benefits are protected from inflation, based on CPI, by capping the annual uplift applied to future benefits at 2.5%. Any defined benefits members have already earned will still increase every year in line with previous increases. For benefits earned before October 2011, this is inflation in full. For benefits earned since then it is inflation in full up to 5%, and then by half if inflation is between 5% and 15%.
In all other respects, the scheme will stay the same. It will still be among the last remaining private defined benefit (DB) pension schemes in the country open to new members. It will still have two sections:
- The defined benefit Retirement Income Builder, which promises members a set, inflation-linked income for life regardless of what happens to the economy and HE sector in future.
- The defined contribution Investment Builder, which builds up a separate, individual pot of money for each member. They can choose how it is invested and can use it in various ways when they retire – but the size of their pot is affected by investment returns.
Members will also continue to benefit from death in service cover (a lump sum worth three times their salary) and other features such as other death and ill health benefits, including a spouse’s pension, that provide valuable and important financial support for their dependants.
The rising cost of DB pensions
Our primary legal duty as Trustee is to protect the benefits promised to USS members. The JNC decides what benefits are provided by the scheme, and how the contributions required to fund those benefits are shared between members and employers.
The JNC’s decision responds to the funding challenges facing the scheme, by slowing the pace at which pension promises are built up in future. Long-term economic and demographic trends have made DB pensions much more expensive to fund than in the past.
This is as true for USS as it is for others. Other pension schemes serving the higher education sector have recently had to propose changes to contributions and/or benefits (eg Superannuation Arrangements of the University of London; the Teachers’ Pension Scheme). Many private sector scheme have in these circumstances found it difficult to continue at all (89% of private DB schemes in the UK have closed to new members since 2006, according to the Pension Protection Fund).
The 2020 valuation has found that new pension promises are being under-funded. The longer that is the case, the greater the impact will be on the scheme’s existing funding deficit in respect of pensions already promised.
Employers have said current contributions are at the limit of what is sustainable, while a significant proportion of members are already opting out of the scheme primarily on grounds of affordability.
Dame Kate Barker, Chair of the USSL Trustee Board, said: “We understand that the decisions faced by the JNC, and its members who represent UCU and UUK, have been difficult. We are also very much aware of the value members place on ‘guaranteed’ pension outcomes, and that any reduction in such guarantees is unwelcome.
“But the detailed and lengthy analysis underpinning the 2020 valuation has confirmed that the price of such certainty – of a set, inflation-protected income for life in retirement paid no matter what happens to the economy or the HE sector in future – is much more expensive than in the past.
“That is as true for USS as it is for other DB schemes.
“The JNC’s decisions, made earlier this week, on benefit changes and on employers exiting the scheme look to respond to these funding challenges by putting the scheme on a much more sustainable footing for the long-term.
“Under the changes proposed, USS would still be among the few private DB pension schemes in the country open to new members, offering valuable guaranteed benefits to its members.
“We are committed to maintaining USS’s position as one of the UK’s best private pension schemes. So, looking beyond this valuation, we would welcome the opportunity to work with UUK and UCU to explore flexible options for members, alternative benefit arrangements such as conditional indexation, and how scheme governance can be improved.”
For more information view our valuation FAQs.