USS Pensions: Time for Agreement ; Michael Bromwich

Michael Bromwich, the author

The 2020 valuation of this Scheme with a deficit of £14bn led to sweeping cuts in benefits and a substantial strengthening of the financial backing (additional covenant support) provided by employers to the revised Scheme which commenced on 1 April 2022. USS’s more recent monitorings of the Scheme indicate much more favourable environments reflecting major increases in the value of the Scheme’s investments in February and March 2022 relative to that of March 2020 with deficits of £2.0bn and £ 1.6bn respectively with the cuts and a strong covenant. If sustained this environment would allow some 60% of the cuts in benefits to be restored.

Writing recently in this blog (AgeWage) both Henry Tapper and Professor Mike Otsuka say if sustained these results could lead to favourable changes to benefits at the next valuation or even before this though USS and Universities UK (UUK, the employers’ organisation) say that contributions could be reduced.  This note   compares the contributions required for the benefits reigning prior to the 2020 valuation (labelled existing benefits by USS) in the new market environment without cuts with the those required for the reduced benefits incorporating the cuts provided by the 2020 valuation (new benefits), both with additional covenant support.   The focus in this note is on the savings in contributions due to the cuts rather than pension losses. Such savings can also be viewed as the costs of restoring some or all the cuts in existing benefits.

Between actuarial valuations, the USS monitors using a dashboard how the Scheme is progressing against USS’s Financial Management Plan. Since September 2021 this monitoring has been based the 2020 valuation benefits focusing on new benefits with the UUK’s required covenant support. Additionally, the results of maintaining the pre 2020 (old) benefits with and without any covenant support are presented. These results  were published in February 2022. The latest available dashboard is for March 2022.

Paying the contributions required by the 2020 valuation and currently being paid generates an overpayment relative to the cuts and allows restoration of some cuts if employees and employers continued to pay their existing contributions (employees 9.8%, of annual salaries, employers 21.6% and total 31.4).  The employers say this is the maximum they can afford, their usual response to suggested increases.

The Scope for Bargaining

The latest monitoring report of March 2022 gives as key numbers for new benefits from April 2022: total contributions of between 24.4% and 26.2%, a deficit of £1.6bn, a deficit recovery contribution (DRC) of either zero or 1.5% depending on assumptions made about the length of the recovery period and a future service contribution (FSC) of 24.7 %.

Generally, the USS provides far less information about the results with existing benefits. The February monitor gives substantial information in dashboard form but the March monitoring exercise gave only limited results for existing benefits with covenant support. Total contributions required for existing benefits are 36.7% with a deficit £3.1billion and (DRC) of 0.3% and a FSC of 36.4%. They also give a DRC of 2.9% with different assumptions about the length of the recovery period. Unfortunately, these assumptions differ from those used with the new benefits Scheme but I have not adjusted for this[1].

Looking at the predicted results in the first year of the new benefits Scheme means that the deficit and DRCs are unaffected by the new benefits assumptions except for the   changes in discount rate assumptions. The results of the new benefits Scheme are all concentrated in the changes in FSC, see Table 1.

Table 1. The key results of the new benefits and of the existing benefits monitoring both with additional covenant support.

Comparing the total contributions for old benefits of 36.7% and those for new benefits of 24.4% indicates that the introduction of new benefits saves total contributions of 12.3% per year. The reduction of contributions flowing from the cuts is over a billion pounds per year. I leave it to others to say whether this level of cuts in contributions can justify the resulting reductions in pensions. Currently the required total contributions until the next valuation of 31.4% for new benefits are greater than needed to pay total contributions for new benefits of 24.4% especially given the level of prudence baked into the Scheme.  This margin is sufficient if wished to reduce (restore the benefits) the cuts in contributions by over 60% and would cover some 71% of the total cuts of 12.3%.  The current excess payments could also be seen as buffer for the volatility of the DB element of the Scheme. This still exists with new benefits but at a reduced scale.

To help discussion of the possible levels of benefits the next section seeks to estimate the cuts in total contributions per year for each of the major changes in pension benefits assuming that the recent improvement in the Scheme’s is sustained and the existing contributions are maintained. This would allow consideration of which individual benefits could be considered for either full restoration or as part of a portfolio of revisions in benefits.

The Contributions Required for Major Individual Benefits

Table 2 analyses the reductions in the total contributions with the existing benefits with a strong covenant for each of the major individual cuts in the contributions with the new benefits.

There are three major cuts in benefits, each of which reduce the contributions required with new benefits. These cuts are I) Lowering the DC threshold from   salaries of £60k to £40k, 2) Introducing a hard cap on inflation with a cap of 2.5% rather than a soft cap which provided full protection for inflation up to 5% plus half protection above 5% to 10% and no cap at all for long serving members and most pensioners and 3) Reducing the annual accrual rate from 1/75 to 1/85 per year worked.

Table 2 gives my estimates of the reduction of contributions consequent on each of these changes. I use USS published information as far as I can but do have to make some estimates of the sensitivity of the contributions to the changes using historical USS information. The results therefore are meant to be only ballpark figures suggesting indicative themes. USS could produce definitive numbers which would better help the ongoing discussion.

Table 2. Reduction in Required Contributions for Major Cuts to Existing Benefits with Covenant Support

Major changes in contributions


Amount of contributions reductions, % of annual salaries
Lower DC threshold  3.00%
CPI protection 5.50%
Change in accrual rates 3.00%
Changes in total contributions explained 11.50%


More information would help here but the results seem consistent with other related studies. USS said in February 2022 that the cost of restoring the inflation protection offered with existing benefits would be 5% or 6%.  Most of the significant variances in Table 1 seem to be explained. CPI protection will become more significant with the current predictions of further major increases in inflation

Currently the full soft cap could be restored from current excess contributions. This type of information would aid the discussion of the indexation of inflation protection. Alternatively, the other two major changes   in contributions could be restored.  A portfolio of   partial changes to all three contributions could be considered.

Assuming the current favourable conditions are sustained there is space for bargaining towards an improved pension.  This objective requires no red lines from either employers or the union. Unyielding demands for major reductions in contributions or ’no detriment’ in benefits can only lead to further industrial conflict.

[1]  In July 2022 the USS   issued a briefing note on the results   of the Trustee’s Accelerated Year-end Review 2022 which will form part of the required actuarial report for 2022. This involves a more detailed review of progress than the usual monitoring. The results are very similar to the March monitoring with a slightly higher deficit and total contributions.  It does strike a more optimistic note than the 2020 valuation and therefore takes a less prudent approach. However as it focuses on new benefits and just reiterates the earlier existing benefits results I will continue use the monitoring data.




About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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