1. Why did the 2020 valuation go ahead when this was at the start of the pandemic?
As part of the 2018 valuation the USS Trustee agreed to a contribution schedule on the premise that a 31 March 2020 valuation were to take place. The valuation date of 31 March 2020 was a critical point of the pandemic and so The Pensions Regulator issued guidance which allowed schemes’ Trustees and companies to monitor the position over time, rather than just looking at a snapshot based on the market conditions and assets at that valuation date. The USS Trustee looked at the ongoing funding position throughout the valuation period, and then provided comments specifically on the 31 March 2021 update which reflected a mixed outlook compared to the 31 March 2020 valuation date.
Overall there were positive movements:
However, this coincided with negative movements:
Although this would have probably meant a smaller deficit, so a slightly better position in terms of the funding deficit, the actual cost of providing future benefits at that date would have been more expensive than at the 2020 valuation. The USS Trustee looked at the overall position and it was their view that doing a valuation at 31 March 2021 would not have led to a materially different outcome compared to the outcome of the 2020 valuation.
The 2020 valuation has been finalised and you can find more about the USS valuation on the USS website.
2. Can you explain what the difference is between a defined benefit (DB) and a defined contribution (DC) pension?
In a defined benefit (often referred to as DB or ‘final salary’) scheme, members are promised a set amount of pension benefits, based on their salary, time they have paid contributions into the scheme, and the scheme’s rate of building up future pension benefits (referred to as the ‘accrual rate’). These benefits are secured by employers and to some extent provide a level of protection against inflationary increases.
In a defined contribution (often referred to as DC) scheme, members are not promised a set amount of pension benefits. The total amount of benefits members receive will depend on how much they and their employers contribute, the level of charges applied, how the monies are invested and how well those investments perform.
The advantage of a DB benefit is that it can provide more certainty as to what your pension might be at retirement and the risks associated with that pension reside with the scheme. Whereas a DC benefit is a more uncertain but can provide more flexibility and choice particularly at retirement. However, the risks associated with the DC benefit reside with the individual member.
Please see the USS Employers glossary of key terms to help you understand more about the USS terminology used.
3. Do the new changes impact members' options at the point of retirement? If so what are they and when will they be implemented?
There are currently no proposals to change members' options at retirement. Currently you have the following options:
Defined Benefit (DB)
Defined contribution (DC)
4. What is the likelihood of the USS Scheme being closed to new joiners and/or current members of the scheme, and what would be the risk of doing that?
It is difficult to say, but currently there is no mention from any of the stakeholders about closing the scheme to future benefits being built up or closing the scheme to new members.
The changes implemented from Friday 1 April 2022 are there to help develop a sustainable scheme to carry on into the future.
5. Is the value of my pension secure and protected even if the deficit of the pension scheme grows even more?
There are a number of elements that help protect the benefits you have built up in the USS. These include:
6. When will the USS valuation be reviewed next?
The position will be reviewed again as part of a 31 March 2023 valuation and we understand at the moment there's no intention from the USS Trustee to look at anything earlier than that.
7. How does this pension plan compare with FTSE 100 companies?
*Source USS announcement 7 Oct 2021
The benefits from 1 April 2022 still provide a good pension for staff at current contribution levels, with employers paying in more than two and half times the average contribution rate for FTSE 100 companies.
There are many good pension schemes being run by FTSE 100 companies, although they have not been immune to the same pressures being faced by USS – and in particular it has become increasingly expensive to deliver the certainty of a defined benefit (DB) pension promise (and this is why most private sector DB schemes are now closed to new entrants and in many cases to building up future DB pension benefits.).
In 2006, there were almost 3,500 DB schemes in the private sector open to new joiners. Now, there are less than 800 still accepting new members – and USS makes up a very substantial proportion of the active members who still have access to DB pension saving.
In terms of contribution levels, USS employers currently pay in 21.6% of salary to the scheme (of a total of 31.6% of salary). The average for other private sector schemes is around 13% for the employer and staff contributions combined.
8. Is there an option to be part of a pension scheme that is not USS, perhaps contribute to an individual Scheme? What happens to our contributions if an individual chooses to leave the USS scheme?
Under the terms of all employers’ participation in USS, the University is unable to establish, maintain or contribute to another pension scheme for a person who is eligible for USS (the same is true for all USS employers).
Details of what happens to contributions when you leave can be found on the USS website. However, in general where a member has two or more years in the scheme they have earned long-term rights to benefits at retirement. Where membership is less than two years, specific short-term benefits are payable, which include the option of a refund of member contributions (which generally puts a member back in the position they would have been had they not joined). Transfer values are available in both scenarios or (for those with less than two years) a special deferred benefit based on member and, now from 1 April 2022, employer contributions.
An individual who opts out of USS, or otherwise chooses not to be in the scheme, can take out their own individual private pension arrangement, but the University cannot contribute.
9. What information do we have on any lower cost flexible options in the USS?
There has been discussions between the various parties associated with the USS on some alternative benefits that could be considered as alternative lower cost, more flexible options.
We are awaiting further information on these options but the following has been discussed in the past:
10. Are there any other options in the scheme to help offset the benefit changes?
Members are able to pay more contributions into the DC section to build up a bigger pension pot in order to offset some of those benefit changes.
11. What is the impact on members’ benefits under the new structure from 1 April 2022, and how I can find out the impact on me?
The impact will be different for each member and will vary depending on some specific key factors that impact the reduction for members individually. The main factors are your age, the level of investment returns you could achieve on your defined contribution funds, your salary and how that compares to the new salary threshold and actual levels of inflation in the future.
Over a long period of time, the DC investment returns and the level of inflation can be much more volatile and that feeds into much more varied reductions in benefits. As an example, members who are closer to retirement are expected to have less of an impact on their total pension compared to younger members, as they're less susceptible to this volatility.
The USS pension modeller will give you the option to run through these various scenarios and pick up the specific points that relate to your individual circumstances, such as your age, retirement age, salary and what levels of benefits are going in and out of the DB and DC sections.
12. I understand the conditions for continuing my pension investment in USS are changing. Please can you tell me more about this?
Currently if you leave with less than two years’ service you can have:
For DC benefits:
From 1 April 2022 you will instead have the option to take a deferred DB benefit in the USS which includes the value of the employer contributions as well as your own.
13. What would happen to contributions if the benefit changes did not go ahead?
If the benefit changes didn't go through from 1 April 2022, contribution rates would rise significantly in step changes until October 2025, so there would be an increase to both members’ and employer contribution rates to be able to build up the same level of future benefits.
Further information on the contribution levels can be found on the USS website.
14. What is the CPI inflation cap and how does that work?
Under the current benefit structure your DB increases in line with CPI Inflation (matched for the first 5%; 50% of any increase over 5%, up to a maximum increase of 10%). For benefits built up from 1 April 2022 this will instead increase in line with CPI Inflation capped at 2.5%.
As an example, in the past where inflation might be say 4%, those inflationary increases wouldn't be capped so you’d get the full value of the 4% increase applied to your pension (before or after retirement). Under the new benefits structure that would now be capped at 2.5%. So in times where inflation is 4%, you now no longer get the 4% increase applied to the pension before or after retirement, and instead that would be capped at 2.5%. So you can see that in times of high inflation this has much more of an impact compared to, say, times of low inflation. Where inflation is below 2.5% then there wouldn't be a difference under the current or new benefit structures in terms of increases applied to the DB pension.
The Government's expectation of long-term rates of CPI inflation is currently 2% and it's been 2% for a while. There's been quite a lot of volatility around inflation in recent years reflecting the economic challenges with Brexit and the pandemic, and recent figures for CPI Inflation, have been quite high. The USS Trustee has also monitored this volatility, but consider the long-term expectation of inflation when assessing the USS liabilities.
It has been agreed to defer the new 2.5% cap to CPI increases on DB benefits until 1 April 2026.
The USS modeller gives you the ability to change views of inflation to help you understand how different levels of inflation could impact you under the current and new benefit structures.
15. Is there potential that the benefit changes would be reversed?
In the pensions market we have experienced a sustained period now of valuations of both USS and a number of private sector schemes where the position has continued to get worse over time, and in some cases reviews of pension provision have had to be made.
The USS position at the 2023 valuation could change and there could be an improvement in the financial assumptions underlying the liabilities and/or an improvement in the assets. Likewise though, there could also be a worsening in the position.
The decision to change future benefits from 1 April 2022 have not come lightly, and providers need to have long term, sustainable, affordable schemes for all members. The USS Trustee and the various associated parties have considered all the options available and had regular feedback with The Pensions Regulator, and feel that now is the time that changes need to be made for a sustainable and affordable scheme going forward.
Could benefit changes be made in the future? Yes, it is possible that if conditions move the right way over a sustained period of time, the position could be re-assessed. In the next valuation the Trustee will do the same thing, assess the funding position against current conditions, current asset values, the cost of benefits, and then come up with a proposed contribution rate. If there's a significant improvement, then there may be a possibility that benefits could revert in the future. Ultimately there will not be a desire to keep changing benefits at every valuation.
16. For those who already have a large number of years paid into final salary (DC) and DB with the expectation that in retirement that we would get annual increases in line with inflation - are we now not going to get that?
As set out on the USS consultation website the changes will only affect your future benefits built up from 1 April 2022. What you have already built up before then will not be affected.
17. What is the risk to existing members if the changes lead to mass opt out of the scheme?
The benefit changes from 1 April 2022 have been designed to help avoid a high proportion of members opting out. Without the benefit changes taking place there would be significant rises to current contributions for both members and employers. UUK and the JNC have considered this in detail as part of coming up with a new benefit structure and opt-out rates remains an important consideration for all parties.