USS looks to scrap final salary over deficit concerns

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One of UK’s largest pensions fund, the Universities Superannuation Scheme (USS), is looking to close the doors to its final salary plan for active members following serious concerns over a substantial deficit.

In March last year, the scheme revealed a deficit of £11.5bn, but its actual deficit to date will not be known until later this year when it completes its triennial valuation.

Although USS was unable to give any further indication on just how much the funding black hole would be, it said the trustees expected to report a “continuing, substantial funding deficit later this year”.

To help tackle this deficit, a potential closure of the final salary plan for active members could be on the table.

USS said it will decide in June next year on whether the final salary scheme will close and insisted that at this stage it was just an option and not a proposal.

The closure of the final salary scheme would could affect around two-thirds of the 150,000 member base, and see them shifted into a career average revalued earnings (CARE) scheme, in line with the remaining third.

This would also fall in line with other public sector schemes in the UK, such as the Local Government Pension Scheme (LGPS), which became career-average from April this year.

CARE schemes are still defined benefit models, but calculate payable pension based on the member’s average salary, rather than the final amount.

The majority of UK companies and organisations in the UK have been forced to ditch their ‘gold-plated’ final scheme over the last few years to help tackle costs associated with people living longer and poor market performance.

Career-average or defined contributions plans have been put in place instead for pension provision to remain sustainable.

“The trustee is working with employer and member representatives to consider the options available to respond to the ongoing funding position.

“However, at this stage of the process it is premature to discuss any specific proposals,” USS said in statement.

The Employers Pensions Forum, which represents Universities UK, Guild HE, and the Universities and College Employers Association, said there could be changes to pension benefits for future service and changes to contribution rates for both employers and members.

It said negotiations, discussions and consultations will take place in the coming months with a Joint Negotiating Committee (JNC), which consists of eleven members - five appointed by Universities UK representing the employers, five appointed by UCU representing individual members and an independent Chair, Andrew Cubie.

Michael MacNeil, head of bargaining, at the University and College Union, said: “The deficit valuation should not come as much of a surprise to anybody involved with the scheme.

“Although disappointing, it is also no surprise that closing the final salary scheme is one proposal. However, we will be speaking with the employers a lot more over the coming weeks and we hope that the USS Board and the employers recognise that any changes ensure the scheme remains sustainable and attractive.”

The changes must be agreed by the JNC before being put forward to the trustee.

Readers' comments (2)

  • I wonder what the UCU - which bought the line that it was a cash-in-cash-out scheme - make of this. And what Dennis Leech, in particular, thinks.

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  • The funding level all depends on how you do the calculations.

    It is highly misleading to write: "The majority of UK companies and organisations in the UK have been forced to ditch their ‘gold-plated’ final scheme over the last few years to help tackle costs associated with people living longer and poor market performance."

    The effect of people living longer is a significant factor but relatively small in fact.

    And it is very misleading to say that the deficits are due to poor market performance. They are mainly due to the way pension liabilities are calculated - which have absolutely nothing to do with market performance. Liabilities are calculated using discount rates - so called risk-free rates which are in fact nothing of the sort and are highly variable - based on gilts. As we all know gilt rates currently are very low indeed as a matter of Bank of England policy. That sends the calculated liabilities through the roof. That is not poor market performance.

    In fact the USS investment portfolio has performed very well last year.

    And remember that the actual liabilities are defined by the scheme rules and do not depend on markets.

    The problems of many pension schemes including the USS stem from the practice of actuaries and accountants - many of whom seem to be in a frenzy of neoliberalism - in insisting on using the FRS17 accounting rules which are based on unreal assumptions that are far too prudent to be practical.

    And there is nothing wrong with the cash-in-cash-out principle as part of a practical DB pension scheme. The objection to it seems to be purely ideological.

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