Mike Otsuka’s extraordinary diligence in understanding the pension scheme he is a member of, is an example to us all. In this article he delves into the archives and uncovers some disturbing statements. They shed light on the current “unaffordability” of USS arose.
Scheme actuary declared 14% employer contribution rate insufficient to cover future service
Those who have been following USS are aware of the controversy regarding the claim that employers took a ‘contribution holiday’ between 1997 and 2009, during which period employer contributions went down from 18.55% to 14%. Universities UK denies that employers have ever taking a ‘contribution holiday’. But this denial appears to be based on the claim that they continued to pay 14% as opposed to taking a contribution-free holiday. Fair enough. So let’s substitute the phrase ‘contribution skiving’ for ‘contribution holiday’, where skiving is consistent with a reduction in contributions below what one ought to be paying, without necessarily going completely AWOL.
I believe that UUK would maintain that their reduction from 18.55% to 14% in 1997 was justified on the following grounds: Prior to 1997, employers paid 4.55% above and beyond their 14% regular contributions for ‘future service’ (i.e., pension accrual corresponding to a worker’s future years of employment). This 4.55% consisted of payments to make up for a past funding shortfall in the Federated Superannuation Systems for Universities (FSSU) that USS superseded when it was established in 1975. These payments were the equivalent, under older pensions legislation, of the deficit recovery contributions that are called for by current pensions legislation. By 1997, employers had completed the necessary payments to make good this funding shortfall. Hence, from 1997, employers simply carried on making the same 14% employer contributions that they had been making in previous years.
It may seem, therefore, that employers are beyond reproach for their decrease in contributions from 18.55% to 14%.
Not so fast, UUK!
I’ve stumbled upon the following in USS’s 31 March 1999 full actuarial (triennial) valuation.* The scheme actuary writes:
6.1.1. The method used [for this valuation] is known as the projected unit method. This is the same method as was adopted for the 1996 valuation and I consider it to be an appropriate method to adopt….
8.1.1. Under the projected unit method, the normal contribution rate required from the Institutions for future service benefits is 16.3 per cent of salaries. This compares with the normal rate at the 1996 valuation of 14.6 per cent.
10.2.1 Based on the method and assumptions described in this report it has been agreed that the Institution contribution rate will be maintained at 14.0 per cent of salaries. To fund the reduction of 2.3 per cent below the Institution contribution rate of 16.3 per cent of salaries for the next 11 years will require the use of £561.3m of the Main Section surplus….
In other words, the scheme actuary reported that 14% is now well below the amount necessary to fund future service but that it had been agreed to run down the scheme’s surplus by over half a billion pounds in order to keep regular employer contribution rate down to 14%. They ought instead to have kept this surplus untouched as a rainy day fund to get the scheme through difficult times.
[*] USS’s actuarial valuations prior to 2011 are no longer available on their website. The 1999 valuation to which I link above was one that I had previously downloaded from their website.