Analysis: Could the UK’s largest pension scheme close… and re-open?
The largest pension scheme in the UK could become the first defined benefit (DB) scheme in the country to re-open, if a proposal from its sponsoring employers is taken up.
Late last week, Universities UK (UUK) – which represents 136 higher education establishments across the country – published its proposal to close the Universities Superannuation Scheme’s (USS) DB section to future accrual.
Employees would instead accrue all their benefits through USS’ Investment Builder defined contribution (DC) scheme, with a combined contribution rate of 26% of salary – the same as the current level.
However, the unique nature of USS’ benefit structure means that the closure of the DB scheme need only be temporary.
Reforms to USS’ structure implemented last year saw the scheme shift from a traditional DB scheme to a hybrid. Members can earn a guaranteed DB pension on any salary up to £55,550 (€62,000) in the scheme’s Retirement Income Builder section. Any benefits on top of this are invested in the Investment Builder section under non-guaranteed DC rules.
The existence of the £55,550 threshold has given UUK a unique bargaining chip in its negotiations with the union.
A spokesman for the organisation told IPE that UUK had essentially proposed lowering this threshold to zero with no changes to contribution rates (currently 18% of salary from the employer and 8% from the employee), meaning all pensionable earnings would go into the DC scheme.
This would mean that the DB section is not legally closed – it is just accruing no new liabilities.
“Our proposal has been constructed in order to offer a range of options (including the possible reintroduction of DB benefits) if scheme funding improves at future valuations,” the spokesman said.
In addition, the proposal says employers would continue to provide death and incapacity benefits “so that employers continue to carry the risk in the most difficult of circumstances”, he added.
In future, UUK argues, the threshold could be raised again to restore DB benefits in some form if the scheme’s funding level improves. Whether this happens, only time will tell.
The union’s view
The Universities and Colleges Union (UCU), which represents lecturers and other staff, has not taken kindly to the innovative approach.
UCU general secretary Sally Hunt claimed the plans were “a bolt from the blue and would effectively destroy the USS scheme”.
“It is categorically the worst proposal I have received from universities on any issue in 20 years of representing university staff,” she added.
UCU also pointed to a section of USS’ actuarial valuation report, published earlier this year:
“Any increase in contributions would be more manageable if implemented over a two-to-four year period. Most employers could afford an increase in contributions from the current 18% of pensionable salary to 21%, albeit not without changes to business plans and/or prioritisation of pension contributions.
“Many would also be able to afford up to 25%; however, coming at a time when many employers are trying to increase investment and offset falling grant funding, this would impact investment opportunities to varying degrees and require significant strategic change.
“It is important to emphasise that this affordability analysis reflects the assessment of the sponsoring employers’ ability to pay increased contributions, not the willingness to make the required trade-offs to do so.”
However, USS also argued that increasing contributions now would reduce the universities’ ability to make emergency contributions in the future.
The investment side
USS has taken a conservative view on the future returns it is likely to generate. In addition, a poll of employers by UUK found very little appetite for the scheme to take more risk.
The pension scheme is three years into an investment strategy that is set to de-risk the portfolio over the course of the next 20 years. Its investment track record is strong, but it has failed to keep pace with liabilities:
USS is a good scheme and has been bedevilled by monetary policy experiment which has ignored dangerous side effects. This pension scheme has controlled risk carefully and managed assets well but current environment is stacked against it.— Ros Altmann, former UK pensions minister (@rosaltmann) November 18, 2017
Former UK pensions minister Ros Altmann comments on the USS proposal
USS itself is a bystander at this stage, only providing data and information on the current situation and the options available to the two negotiating parties.
The union has threatened strike action and will ballot for such a move from 27 November. “If universities continue to pursue this action, they will face disruption on campus of a kind never seen before,” UCU’s Hunt said.
UUK wants a more constructive approach, describing the strike threat as “premature and disappointing”. There are a series of talks planned between the two parties in the coming weeks.