Image: copy of Figure 3 below, see section 3.2 for details and links to data and analysis.
Ahead of the UUK’s annual conference at the University of Manchester, 6-7 September, we have summarised Sussex and IDS UCU priorities on USS, presented with evidence, which we hope to see reflected in the Sussex and IDS institutional UUK consultation response.
We have consulted widely across the whole of the University of Sussex and Institute of Development Studies (IDS) to arrive at these views. We also welcome the recent constructive first meeting of the Sussex pensions working group and the ongoing dialogue with IDS.
In the spirit of building on our shared understanding following the many local joint statements, including Sussex and IDS, and the national UCU and UUK joint statements, our aim is also to inform the UUK debate on USS at this critical point. We hope that the short summary below is useful in preparation for the UUK conference.
Our priorities are listed in order: (1) full future restoration (2) recovery to make up for lost benefits 2022-2024 (3) stability (including contribution rates, gilt yield dependence, the self-sufficiency definition and improving the methodology) (4) bringing forward any contributions reductions ahead of April 2024 (5) the climate crisis, and (6) governance reform. We encourage other UCU branches to use and adapt any of these points.
Sussex and IDS UCU Pensions Working Group
Jackie Grant, Becky Faith, Mark Hindmarsh, Danny Millum, George Parisis, and Jo Pawlik.
1. Full future restoration
It is essential that full future USS benefits (at pre-2022 levels) are restored on 1 April 2024 as described in the USS 2023 timeline. So far progress is on schedule.
It is clear that full future restoration is easily affordable for all institutions based on the current costs presented by USS of 20.6% (USS consultation material includes data that presents costs of 20.6% as unstable over three years, and costs of 26% as stable - see section 3).
A drop in total cost from the current values of 31.4% (split 9.8% employee, 21.6% employer) to 26% (8%, 18%) is also clearly affordable and would collectively save employers £500 million per year. Sussex would save £4-5 million a year, and IDS £4-500k a year.
A drop from 31.4% (9.8%, 21.6%) to 20.6% (circa. 6.1%, 14.5%) would save employers £1 billion per year. Sussex would save £8-10 million a year, and IDS up to £1 million a year.
UCU and UUK local joint statements showed a majority of employers (weighted by USS contributions) support benefit restoration over contribution cuts. UUK has been explicit that they already consider that universities support this full future restoration.
From our engagement with employers over recent months, and soft consultation, we believe there is a broad consensus (although not universally shared) around a move to implement a change to future benefits – to put in place the same form of benefits as existed before 1 April 2022 – and this was reflected in our joint statements. [UUK TP consultation materials, 2023]
We are asking all universities to speak with one voice in unequivocally and publicly supporting full future restoration to pre-2022 levels of benefits so this can happen on 1 April 2024, and to do this in their public UUK TP Consultation responses.
It is anticipated that full future restoration will be agreed by the JNC in December 2023.
2. Lost benefits 2022-2024
It is essential that all universities support benefit improval to address the lower benefits accrued as a result of the cuts imposed from April 2022.
USS reports a technical surplus of £7.4bn for the March 2023 valuation. It has also provided some public estimates of costs to improve benefits to pre-2022 levels. UUK’s actuary AON has reported that the overpayments April 2023-March 2024 amount to £1.5bn and would appear to cover these costs.
Also, while this is a matter for the stakeholders, if it is decided to uplift benefits in recognition of the lower benefits accrued between 1 April 2022 to 31 March 2024, then it would appear that the cost of this could be met from these overpayments, rather than necessarily using up surplus at the valuation date. [UUK’s actuary AON views on the USS TP consultation 2023, p13]
The cuts imposed in 2022 were significant, yet the costs of improving benefits to address lost benefits 2022-2024 are considerably smaller than both the surplus and the potential savings to employers over the next three year cycle. If we are to do the work of collectively and visibly rebuilding a decade of erosion of trust and for the stability and the long term future of the scheme, universities must support improvement in benefits for all impacted members, including those who opted-out, for example due to the high costs, to address the reduction in benefits over the two years 2022-2024.
The UCU and UUK joint statement agreed to
…explore the options and costs of augmenting benefits in recognition of the lower benefits accrued between April 2022 and April 2024, within the 2023 valuation timetable.
The sooner this is agreed and operationalised the sooner we can move on and look forward. We see no valid arguments against immediately making public your support for improving benefits to address this loss.
3. Stability: contribution rates, gilt yield dependence and ‘self-sufficiency’
Feedback and discussions around future stability made clear that there is little faith in the USS data on stability projections so far available. USS members want to see more analysis with greater detail on assumptions.
USS members are extremely concerned that UUK will push through contribution reductions meaning employers will pay less than is needed over the medium to long term for members’ pensions.
Although collectively branch joint statements in 2022 indicated a weighted majority of USS employers support contribution rates of 25%-30% or prioritising benefit improvements over cutting contributions from 31.4% there was a view from branch members that employers could use the low (and unstable) USS costs of 20.6% to push down their contribution rates and then cut pensions at future valuations.
There was also a view from branch members that more analysis on potential corridor options was needed, and that a baseline of employer contributions of 18% for current benefits should be agreed.
Section 3.1 below first considers the costs and the split of costs and shows that 26% (8%, 18%) has been the historic average since 2011. Then section 3.2 considers stability in some detail.
3.1 Historical contribution data
We note that historically the average USS contributions for the Career Average Revaluation of Earnings (CARE) USS scheme, 2011-2022, has been 26.1% (split 7.9% employees and 18.2% employers).
The average contributions for the Final Salary USS scheme, 1975-2011, (before both the introduction of the current regulatory environment and impacts of quantitative easing from the 2008 Global Financial Crisis) was 22%, split 6.4% employees and 15.6% employers.
Following the change from Final Salary to Career Average in 2016 a baseline of 18% employer contribution was set from 2016 to 2020 for maintaining benefits over two valuation cycles.
Under the proposed changes [to take effect on 1 April 2016], the overall employer contribution rate to the scheme would increase from 16% to 18% of total salary. Up to 31 March 2020 the normal contribution rate of employers – of 18% – is to be a uniform minimum contribution rate and would continue to apply even if the future cost of the scheme decreased in the intervening period. [USS consultation 2015]
Figure 1: Split of contributions 1975-2011 (USS as Final Salary scheme open to new members) left top, 2011-2016 (USS as Final Salary scheme closing down) right top and 2011-2023 (USS as Career Average salary scheme) bottom. See linked excel sheet here for plots and further details on historic contribution rates 1975-2023.
It seems clear that 26% (split 8%, 18%) has been the average contribution for USS since 2011 and the start of the career average scheme. Also that the contribution rates have been split in the ratio 3:7 employees to employers since the scheme started.
3.2 USS stability data, gilt yield dependence and self-sufficiency including the funding test
USS monitoring 2020-2023 has swung from a £15bn deficit to £7bn surplus, with quoted costs for pre-2022 pensions dropping from over 40% of salary to around 20%.
The table below shows USS data on likelihood of needing to increase contributions in 3 years and 6 years time. It shows that a contribution rate of 20.6% (as costed by USS for the 2023 valuation) will most likely (57%-65%) lead to the need to increase contributions in 3 years’ time. A contribution rate of 26% will most likely not (18%-33%) lead to a need to increase contributions in 3 years’ time.
USS also presents the likelihood of needing to increase contributions to more than 25.2% if 20.6% is paid. This structure of payments seems to be, by definition, unstable.
USS recently published technical information on these projections. The paper is useful but lacks some details, in particular there is no information about gilt yield assumptions and no study of the sensitivity to changes in the gilt yield. For example, if the gilt yield were to return to the lows of 2020, it seems obvious that the stability projections would change significantly under the current valuation methodology and the methodology used since 2014.
Table 1: USS data for Year 3 and 6 from USS technical paper, Appendix 2 of the TP (page 29) and Supporting Information (page 11). The range in each cell represents variation in investment strategy with less or more growth assets.
USS was also clear in their webinar on 24 July that the gilt yield dependence has produced costs lower than they might have been just a few months earlier and that caution over how much to reduce contribution rates from their current values was an important question for stakeholders.
The costs of future USS pensions, as given in USS monitoring as Future Service Costs (FSCs), are almost perfectly predicted by the gilt yield. The costs are also highly sensitive, with a 1 percentage point reduction in the gilt yield increasing costs by approximated 6-7 percentage points of salary (a cost of over half a billion to the sector). This is the case for the USS monitoring since 2020, and USS data shows that this high predictability and high sensitivity of costs on gilt yield has been a feature of the methodology since 2014. It is remarkable that the costs are predicted from the gilt yield in this way given that the actual underlying liabilities (cashflows required to pay pensions accrued) are much more stable and the investment strategy is majority growth assets.
Looking closer at the data since 2014 we can use historic Bank of England (BofE) instantaneous nominal forward gilt yield curves 2014-2023, shown in Figure 2 below, and USS’s own data on FSCs since 2014 to produce estimated costs projections of USS pensions over the same period, shown in Figure 3 below. Although the BofE only presents instantaneous gilt yield and not the long-dated gilt yield that USS use, it is not unreasonable to use this data to demonstrate how remarkably unstable USS costs projections appear because of this high sensitivity. It is clear when considering this historic data that the current projection for USS costs is anomalously low.
Figure 2: Bank of England instantaneous nominal forward gilt yield curves 2014-2023, with current values (March 2023) shown in red dots.
Figure 3: Future service costs projections (using USS’s own data to determine dependence of pension costs on gilt yield), from Bank of England instantaneous nominal forward gilt yield curves 2014-2023 (shown in Figure 2). The current projection (March 2023) is shown in red dots. See linked Excel here for plots and data.
Although it has been suggested that this gilt yield sensitivity is a result of asset projections being influenced by gilt yields, this suggestion is not supported by the quarterly USS monitoring data where there is little correlation between USS asset projections and gilt yield.
Rather, it seems that the requirement of ‘... maintaining a high funding ratio’ in a 90% bond weighted portfolio, one of the conditions in the USS-specific self-sufficiency definition, is highly sensitive to gilt yield, and significantly underestimates ability to pay future pensions. This funding test condition (which was in place for the 2020 valuation) was detailed and explicitly stated as a separate condition for the first time on page 4 of the 2023 supporting information, where USS also stated that, for the 2023 valuation, it is the dominant condition and highly sensitive to input assumptions.
In summary, it is not clear why this funding ratio test (the second condition of the self-sufficiency definition constructed by USS) is necessary; it appears to be the cause of the strong and sensitive gilt yield dependence of the costs. The high sensitivity of the costs to the gilt yield has driven the unnecessarily high self-sufficiency liabilities and in turn the excessively prudent discount rates seen in recent valuations. This has served to inflate costs in the low interest rate environment of the last decade.
In addition the Pensions Regulator has explicitly stated that the value of the self-sufficiency liabilities (calculated by USS from their own specific definition of self-sufficiency) influences the regulator’s view of covenant strength and flexibility of discount rate.
The UCU and UUK joint statement agrees ‘…to develop and implement a robust and transparent mechanism for managing risk which can provide more sustainable benefits and contributions for future valuations’.
We urge employers to give serious attention to the use of the funding test condition in the second part of the self-sufficiency definition as part of the work to provide more sustainable benefits and contributions within a more stable valuation methodology. See technical note here for further details.
4. Early reduction in contributions
Consideration could be given to reducing contributions below the current levels of 31.4% (9.8%, 21.6%) before 1 April 2024 if, and only if full future restoration, recovery of lost benefits and agreements around stability and sustainability are first agreed and secured.
5. The climate crisis is now
The climate crisis is now. All universities, UUK and USS need to act now.
The UUK and UCU joint statement includes: ‘USS needs to examine the case more fully for divestment from fossil fuels and that a greater visibility of climate crisis action and mitigation should be a feature of long-term USS planning.’
The University of Sussex declared a climate emergency in 2019. In March 2022 Sussex joined a coalition of universities in asking USS asset managers to vote against directors of companies pursuing or backing new fossil fuel projects and to support all climate-linked shareholder resolutions, particularly those that call for an end to new fossil fuel projects. The full letter can be read here.
These positions, as a bare minimum, need to be adopted and implemented by UUK and USS now.
6. Governance reform
Governance reform of USS is needed, with UCU as equal partners in a review.
It is clear the Trustee was not taking the long term view in the 2020 and previous valuations. There needs to be governance reform with UCU as joint and equal partners in a review. This position is already supported by Sussex Council.
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With thanks to Sarah Joss (Joss), Heriot-Watt UCU President and USS SWG/alternate negotiator, for assistance with data visualisation and analysis.