Why employers must pay for the £2.4 bn rise in the USS deficit
As USS makes clear, employers are collectively responsible for the increase in the deficit from £5.1 bn to £7.5 bn and the accompanying increase in deficit recovery contributions (DRCs) from 2.1% to up to 6% of salaries. They are collectively responsible because 42% of them, “including some of the very largest employers”, rejected the level of risk that USS proposed in the September consultation document. They instead declared, in answer to consultation question 3(a), that “My institution wants less risk to be taken, acknowledging the implications this might have for the benefits and/or costs”.
According to the ‘Pottery Barn rule’, you break it, you own it. Employers have broken the valuation. And they must own the consequences.
More specifically, employers should absorb any increase in DRC’s above the current 2.1%, through an increase in their contributions above the current 18%.
If employers instead insist on capping their contributions at 18%, then the increase in DRCs they have caused will reduce the amount of money available for future pensions contributions. In fairness to younger and future members of USS, those earning above the professorial minimum should bear the brunt of this reduction. They should do so because DRCs go entirely to the recovery of the deficit on DB pensions promises made in past years and decades, the majority of which are for the final salary DB scheme from which professors and other higher earners benefited most. These are promises to provide older and retired members with DB pensions that younger and future members will only be able to dream about on UUK’s proposed shift to 100% DC for future accrual. For the sake of intergenerational fairness, future contributions into DC pension pots should therefore be capped at the typical professorial minimum (roughly the top point 51 of the national salary scale, currently £60k). Employers would, however, still be required to pay 18% contributions on higher salaries, but all of this would go to the funding of the increase in DRCs they have caused. That will protect lower earners, who have benefited least from past DB accrual, by limiting the extent to which the rise in DRCs eats into future pensions contributions for them.
If neither an increase in their 18% contribution nor a targeting of higher earners is appealing to employers, then the 42% who have broken the valuation should publicly declare that they have reconsidered matters and now embrace the level of risk that USS proposed in September.
What, after all, is the risk that these 42% were trying to guard against? According to USS, “employers wished to reduce the chances of being required to pay higher contributions in future”. But, in pushing for a less risky valuation, employers have prompted USS to increase the level of their contributions today. As Marion Hersh, who is a JNC negotiator for UCU, has put it, “The trustee company is suggesting imposing a significant increase in contributions on the employers (and us) in the present in order to avoid the possibility of an increase in contributions by the employers at some point in the future. This is nonsense.”
The 42% broke it. They own it. They must clean up the mess they’ve made. Whether or not they are now willing to embrace the level of risk that USS proposed in September, the 42% should publicly stand behind their response to the consultation and take ownership of the consequences. They should release their answers to the consultation in response to the Freedom of Information request they’ve received.
Mike Otsuka ; Professor, Dept. of Philosophy, Logic & Scientific Method, and UCU Pensions Representative, LSE