Universities Superannuation Scheme – How potential changes could affect you
The Universities Superannuation Scheme (USS) is mainly a defined benefit (or final salary scheme) and one of the largest private pension schemes in the UK. The USS is the main scheme for academic staff in UK universities and other higher education and research institutions. There are over 350 employers, across the country, that actively participate in it.
The USS is also one of the more generous UK schemes to its’ members with employers contributing 18% of salary and members 8% of salary.
Issues with the USS
With defined benefits pension schemes, the amount of pension income, that members receive in retirement, is set using a formula based on average pensionable earnings during active membership. Given that the pension income benefits are guaranteed throughout the retirement of the member, this places financial pressure on the USS to keep the funding of the scheme at a sufficient level to match the benefits being paid to members.
When the USS used their independent actuary to value the scheme and to assess risk, the actuary estimated that the scheme had a large deficit of approximately £7.5 billion - with the cost of funding the current benefits, offered in the scheme, rising by at least 11%.
With the Pensions Regulator (in the UK), who have recently written to USS Trustees outlining their concerns, higher education employers are proposing changes to the USS in an attempt to address the scheme's deficit and the significant rise in the cost of future pensions. In making changes the employers are hoping both to avoid any increase in costs for members and also ensure that employer’s money is not diverted away from other core activities (such as research or teaching).
The proposal is that existing benefits are preserved with any future accrual being delivered by the USS Investment Builder section - which is a defined contribution (money purchase) scheme. A defined contribution scheme is a scheme where pension funds grow for the member until retirement but there is no guarantee (at retirement) of the level of income that this fund could ultimately provide.
It is hoped that this proposal would ease the scheme's financial deficit and rising future costs whilst, at the same time, continue to offer attractive pensions benefits to members. Furthermore, employers have made it clear that this proposal is not driven by a desire to cut their own costs by committing fully to maintaining their total contribution to the USS at 18% of employee salaries.
What this means for USS Members
It is a clear indicator that a scheme is tackling funding issues where there is a proposed solution, by employers, for member’s future pension funds to be accrued in a defined contribution (money purchase scheme) scheme rather than continue in the more attractive (but more expensive for the employer to maintain) defined benefits scheme. This is often a necessary first step for employers in order to preserve existing benefits for the members and keep the funding of the defined benefits scheme under control.
Discussions with the trustee and formal negotiations between employer and member representatives are expected to proceed through December 2017. Any agreed changes to member benefits or contributions will require a full consultation with scheme members and other affected employees in Spring 2018.
If you have already left the scheme and are deferred member of the USS (because you have moved overseas, for example) your existing benefits will remain in the defined benefit section of the USS. As a deferred member you may still want to consider your position, given the current funding levels of the USS.
If you are a current or deferred USS member and would like to know more about the options available or are concerned about the issues that you may face, please contact bdhSterling to speak to an adviser.