You’ll have heard a lot about the 2020 valuation in our communications, but we wanted to give you a back to basics of what it’s about and how it impacts you.
Why do we have valuations?
We have valuations because you’re in a defined benefit (DB) scheme known as the Retirement Income Builder. A DB scheme promises you a set income for life when you retire, so we have to ensure we have enough money to pay this promise both now and in the future. To do this we carry out regular valuations as a financial health check of the scheme.
What does the valuation look at?
It looks at the scheme’s funding as it was on a certain date, for our 2020 valuation, that date is 31 March 2020. As part of the valuation, the Scheme Actuary looks at the total investments that the scheme holds and weighs that against a complex calculation of the money we’ll need to pay current and future pensions. The valuation also sets out the assumptions used to carry out that calculation, such as how long the pensions will need to be paid out for, future investment returns, rates of inflation, and the level of support employers are able to give decades into the future.
What is the latest valuation showing?
The valuation is showing two things in particular:
- We need more money to pay the benefits that members have already built up. Like the last valuation, we have a funding gap, called a ‘deficit’, where the projected cost of funding the pensions that need to be paid in the future, is greater than the value of our assets.
- If we continue with members building the same level of benefits in the future, we’ll need employers and members to contribute more than they do now. The increasing costs of providing future benefits is a significant driver of the increasing contribution rates required at this valuation.
While the benefits you’ve already built up are secure and protected by law, long-term we need to develop a solution to address these funding issues.
Why is more money needed?
Fulfilling the promise of a DB pension, a guaranteed income for life, has become increasingly expensive. This is down to a number of long-term trends, from members living longer and needing those pension payments for longer, to a poorer long-term outlook for future investment growth.
The spiralling cost of DB schemes has led to almost all UK employers in the private sector switching to defined contribution (DC) schemes instead, where the pension income members get isn’t a specified amount based on their salary and length of service but on how much they have paid in and how well their investments have performed.
There are just over one million people actively building up a pension in a private sector, defined benefit (DB) scheme, and of that one million, USS members represent a fifth.*
What’s the latest news on the valuation?
On behalf of employers, Universities UK is proposing a change to the structure of future benefits along with a package of additional support from employers for the scheme. This aims to avoid the large increase in contributions that the valuation shows would otherwise be needed. If the proposals were to go ahead, the changes would lead to a reduction in how much members build up in their Retirement Income Builder in the future. The changes would also mean many members will increase how much they save in the Investment Builder.
UCU may also bring proposals to the Joint Negotiating Committee (JNC) to consider.
The JNC which makes decisions on changes to benefits and how contributions are split between employers and members, have committed to deciding on a course of action before the end of August.
Are my contributions still going up in October?
After the 2018 valuation measures were put in place for a series of phased contribution increases for both you and your employer to tackle a funding shortfall in the scheme.
The final increases are still scheduled to go ahead on 1 October this year. This will see your contributions rise from 9.6% of salary to 11% and your employer’s contribution increase from 21.1% to 23.7%.
However, this may depend on what proposals are decided upon to address the 2020 valuation. You can find out more about this in our recent article.
What should I do?
If changes are agreed by the JNC , which impact how you build benefits or what you need to contribute, your employer will need to consult with you on these changes. If a consultation does happen, based on an August JNC decision, it’s likely to take place in November and December, and you can let your employer know what you think of any changes that are proposed.
As the trustee of the scheme, our members are our number one priority and we’ll keep you informed on the latest developments, as they progress.
For the latest update on the valuation visit our 2020 valuation page. You can also read our FAQs which covers the latest developments on the valuation.
You can also visit our member article section where we have regular updates on the valuation. Simply click on the topic tab / valuation, to see all the valuation articles.
Finally, to find out more about the JNC and how decisions are made in the valuation our JNC page.
*Purple book 2020, page 14.
Published: 27 July 2021