Increase to USS member pension contributions 'to meet deficit'

Out-Law News | 07 Aug 2018 | 4:04 pm | 2 min. read

Member contributions to the Universities Superannuation Scheme (USS) are to increase by 3.7 percentage points by 2020, in order to ensure that accrued benefits will be able to be paid in full.

Contributions would be increased on a phased basis, beginning on 1 April 2019, according to the USS proposal. Employer contributions would also increase. A 60-day statutory consultation period, during which the views of scheme members and sponsoring employers will be sought, will begin next month, according to the USS.

Pensions expert Nick Stones of Pinsent Masons, the law firm behind Out-Law.com, said that the proposal was "to some extent inevitable in the face of the increasing costs of providing the pension promise and an absence of any consensus between employers and workforce as to how to manage these costs".

"It is to be hoped that some agreement can be reached in the near term," he said.

"Interestingly, the public sector schemes have similar mechanisms to share material costs increases between employers and employees, although whether they would be used is more a matter of politics than economics," he said.

"There are higher education institutions both within the orbit of the USS and those outside in the LGPS/TPS environment which are thinking in a more radical manner as to how to shape themselves and the advantages that may flow from alternative legal structures such as the ability to offer a pension scheme in lieu of USS or the like. Whether this bears fruit and becomes the norm may depend on what is agreed in the coming months," he said.

USS is the principal pension scheme for academic and senior administrative staff at UK universities and other higher education and research institutions. The scheme, which manages more than £60 billion worth of pension assets on behalf of around 350 employers, is operating at a deficit of around £7.5 billion, meaning that it is 89% funded, according to its recently-published 2017 valuation exercise.

The scheme has proposed increasing both member and employer contributions based on a 35:65 'cost sharing' ratio. Member contributions would increase from the current 8% of salary to 8.8% on 1 April 2019, then to 10.4% on 1 October 2019 and 11.7% on 1 April 2020. Employer contributions would increase from 18% of salary to 19.5% on 1 April 2019, 22.5% on 1 October 2019 and 24.9% on 1 April 2020.

Without these increases, the scheme's deficit will increase by an estimated £900 million each year, putting accrued benefits at risk, the USS said. However, it said that it was "hopeful" that a joint negotiating council made up of university and staff union representatives would come up with their own proposals to ensure sustainability of the scheme.

Last year, the USS proposed closing the defined benefit (DB) section of the scheme to future accrual in order to address the scheme's growing deficit. The proposal, which prompted a series of strikes by university staff, has been put on hold pending a review by the joint committee, which is due to report on its findings next month.