USS consults on assumptions that would lead to significantly lower contribution rates

USS has today launched a consultation with Universities UK (UUK) on the trustee’s proposed funding assumptions and methodology for the scheme’s 2023 actuarial valuation and on the Statement of Funding Principles.

UUK will, in turn, consult the scheme’s 331 participating employers and provide its response to the trustee towards the end of September.

The indicative results, based on the trustee’s proposals, show a significant improvement in the scheme’s funding position (when compared to the 2020 valuation):

• A future service contribution rate of 16.2% for the current benefits (2020: 25.2%)
• UUK and University and College Union (UCU) – both of which have equal representation on the scheme’s Joint Negotiating Committee (JNC) – have asked the trustee to price benefits at pre-April 2022 levels¹, for service from 1 April 2024. Based on the trustee’s funding assumptions for the 2023 valuation, this would require a future service contribution rate of 20.6% of salaries.

Members currently pay 9.8% of salary, while employers contribute 21.6% - giving an overall contribution rate of 31.4%. This includes 6.2% in deficit recovery contributions on top of the 25.2% future service rate. But under the trustee’s proposals for the 2023 valuation, there would be a potential surplus of £7.4bn on the Technical Provisions basis (2020: £14.1bn deficit).

The trustee is proposing to use broadly the same methodology as that used for the 2020 valuation. As such, the indicative results largely reflect significant changes in the economy since the 2020 valuation was finalised in the latter half of 2021.

More than 10 years of declining interest rates has reversed over the past 18 months – as policymakers have looked to tackle above-target inflation.

Dame Kate Barker, Chair of the USS Board, said: “Having wrestled with deficits and rising contribution rates for more than 12 years, UCU and UUK now find themselves in the very welcome territory of considering how to respond to very different circumstances.

“Mindful of the pace of change we’ve seen in financial conditions – it is important we do what we can to ensure the scheme is more resilient than in the past should some of the challenges experienced over the past decade emerge again in future.

Most private DB schemes in the UK are now closed². USS is one of the relatively few still open to accrual and new members – and we very much want that to continue.

“The emergence of a provisional surplus could provide a platform for greater stability in terms of the scheme’s funding position, contribution rates and benefit structure – and we look forward to supporting UCU and UUK’s discussions on this.”

Next steps

After considering UUK’s response to the consultation, the trustee will be in a position to confirm the overall contribution rate to the JNC. This will allow the JNC to make decisions in respect of any changes it chooses to make to benefits, and how the change to the required contribution rate will be split between members and employers.

In anticipation of the JNC deciding to make improvements to benefits, preparations are already being made for a statutory employer consultation with affected employees (and their representatives). This is scheduled to run from late September to late November 2023.

The trustee will need a final decision from the JNC in December if any benefit changes are to be introduced from 1 April 2024.

Key figures

Funding position:

Contribution rates:

• The JNC can determine how the required contribution is split. If the JNC does not reach a decision in the time allowed under the ‘cost-sharing process’ the default cost-share rule would apply requiring the decrease to the contribution rate to be split 35%:65% between members and employers respectively. The current contribution rates are 9.8% for members and 21.6% for employers and for illustration, cost-sharing applied to the above future service contribution rates would lead to rates for pre-April 2022 benefits of 6.1% for members and 14.5% for employers (or 4.5% and 11.7% member and employer contributions for existing benefits).

¹DB accrual rate = 1/75th, DB lump sum = 3/75ths, salary threshold (above which contributions go into the DC part of the scheme) = c.£66,400, if applied at 1 April 2023 and revalued in line with pre-April 2022 soft cap increases; inflationary benefit/salary threshold increases = full CPI up to 5% then half of any increase up to 15% (capped at 10% - the soft cap).

²According to the Pension Protection Fund, 90% of private DB schemes in the UK have closed to new members, while 53% have stopped offering DB pensions altogether. USS members account for almost a quarter of the 930,700 people in the UK who are still actively paying into private DB schemes. USS is in the 10% of schemes still open to new members.

³The contribution rates shown for the 2023 valuation do not include any potential adjustments which may in due course be considered in light of the surplus.