Why we should focus on contribution rates

The SWG: It was a blast

For the last two years (May 23–May 25) I was elected by Congress to serve on the UCU Superannuation Working Group (the SWG) first as an alternate negotiator on the Joint Negotiating Committee (JNC), and then as a full negotiator. Although I am no longer on SWG, this was work I enjoyed and like to think I was actually pretty good at. It was a real privilege to be allowed to do this on behalf of UCU members and all USS members and to work alongside the Excel-ent graph, modelling, and valuation wizard Jackie Grant. Liking pensions, as I do, discussing ideas with extremely knowledgeable actuaries and USS staff, has been genuine fun.

Negotiators on both sides worked extremely hard. At times the conversations were tough but nonetheless open and thanks to the leverage that the willingness of UCU members to fight for their pensions gave us, they have resulted in agreements that both sides could sign up to and wins we can all be pleased with. It was a very satisfying task to be involved in and given the skills and experience of the other negotiators, Deepa, Donna, Jackie, Marion, Mark, Vicky, and Dooley, a real education.

In addition to attending JNC, and negotiating on restoration and recovery of benefits which UCU members fought extremely hard to protect, I was also on a number of working groups that report to JNC, including the Stability Working Group (StWG) and its subgroup examining Conditional Indexation (CISG).

Given that the interim report on Conditional Indexation (CI) is out, and this has prompted an article by Henry Tapper, and a response by Dooley Harte UCU Pensions Official, I thought I would chuck some thoughts of my own out there not just on CI but on what this means for the next valuation.

What follows assumes the reader is familiar with the fundamentals of CI. For a longer read on Conditional Indexation I wrote another thing here a while ago and/or the background on CI is included in the interim report.

Cui bono?

Employers have a reason to want Conditional Indexation as a potential route to a lower and capped employer contribution rate (CR) — that is the money they pay towards our retirement or, from a worker’s perspective, our deferred wages. The scheme Trustee has a reason to want access to the lever that CI provides because the ability to vary indexation, not only for active and deferred members but also for pensioner members, allows them greater flexibility to ride out fluctuations in the schemes fortunes. At the moment the Trustee sets a price for our pensions that includes Deficit Recovery Contributions (if there’s a deficit) and Future Service Costs. The FSC prices in the estimated cost of guaranteeing indexation on pensions accrued in future — the mechanism for the indexation of pensions already accrued not being able to be altered.

Altering the level of guaranteed indexation changes the FSC. Guarantees are expensive. Because CI allows indexation to be turned on and off for all members it reduces that the size of the buffer the scheme requires: if the valuation says the scheme cannot afford full indexation that year it doesn’t have to pay it or could pay a only proportion of it (the lever).

While the employers and the Trustee may be motivated to move to CI, as yet the case for why members — who are the ones who would be impacted by this — would want to accept indexation that is conditional on scheme performance has yet to be made.

Unlike employers and the Trustee, CI is not inherently of benefit to members and because it transfers risk to members, UCU as the representatives of all USS scheme members, must be wary of having our choices around CI reduced.

Therefore, I am going to argue, not only should we *not welcome* any cut to employer and member contribution rates at the next valuation but *actively oppose it* to avoid potentially being forced into accepting not only CI but a poor version of CI in future.

It is D, defined, It is I, indexation, It is S, superannuation
It is C, Conditional, It is O, Ontario-oh-oh

Conditional Indexation is already used for some Canadian pension schemes (including several in Ontario — sorry that’s Ottowa not Ottawan) as well as some in the Netherlands. Part of the work of exploring CI as per UCU policy, involved discussions with Canadian schemes and union representatives of scheme members. These revealed that our situation differs from that which prompted them to move to CI. In most cases they moved because of an adverse funding position that threatened the future of the scheme.

Although USS has in the very recent past had adverse valuations that resulted in a threat to defined benefits and then cuts to benefits – UCU members fought off the former and reversed the latter — the scheme is not at present in deficit. In fact USS is reporting a 10bn surplus, see USS quarterly FMPs. There is much arguing that has been done and to be done about why previous valuations produced such high costs in the first place.

Given that we are not imminently being threatened with reduced or altered pensions, in order to persuade USS members that they should accept a significant transfer of risk, something fairly significant beyond: ‘maybe in a good year you get to keep what you already have’ would have to be on offer.

There is potential scope to design Conditional Indexation with lots of protections, better governance, catch up, shared downsides to disincentivise reducing indexation, with better underlying benefits. However, there are equally lots of options where members are gambling what benefits they currently have, a scenario that is only appealing to members if the alternative is worse (no DB) — we are not in that situation and should do everything we can to avoid ending up there.

…but Ottawan are not Canadian and nor are we

The Canadian schemes, while they do fairly reliably provide some or full indexation, only have the possibility of downside or neutral, there is no above inflation benefit. However, they arguably started with and are, therefore, using CI to protect and retain better benefits — final salary and higher accrual – than we currently enjoy. Another point to note, being final salary means they do not have indexation, also known as revaluation, before retirement as it is assumed their wages go up with inflation (doubly blessed compared to us then). As USS is no longer final salary, any conditional indexation would affect both pre and post retirement — although it can do so differently. Examining Canadian schemes gives us clues but not a direct comparison to model.

For now there is nothing concrete on the table and no real motivation for USS scheme members and UCU as their representative to embrace a change that employers and probably also the trustee would like us to accept.

Unless a situation arises or can be brought about where there is an incentive that might coerce us into wanting it.

Why it’s, nonetheless, vital for UCU to be in these meetings

It is Congress policy to explore CI (with ‘sceptical’ added at Congress 2025). By being in the USS CI Sub Group with UCEA, our negotiators can see what is being discussed and what is possible — could members have a better pension? If so, how could that be protected as much as possible? From having access to modelling and to the experience of other schemes, to see both the best and the worst possible scenarios — with the key being: the difference between those two is much bigger for members than for employers, even if employers have an incentive to provide an attractive pension. UCU needs to be in the room to see what employers hope to gain and the arguments they might make to get there as well as the trade offs, and to keep the transfer of risk from employers to members, that would come with any move to CI, constantly in focus. But it is equally important for this to be part of a rounded view of their overall position for the coming valuation.

Why we must resist a cut to contribution rates

There are ways other than CI to bring stability to the scheme. UCU, via the SWG, have repeatedly made a very strong case that stability is a separate issue from CI and that CI is *not* itself the route to stability. UCU via the Stability Working Group and the JNC is pushing for changes to valuation (currently a source of volatility) that if agreed would make it less opaque and would provide a foundation for bringing greater stability to the scheme, including reducing the previous excessive prudence at periods of low gilt yield.

However, there are also ways to undermine the stability and sustainability of the scheme one of which is to lower the CRs to an unrealistically low level instead of taking a steadier course using minimal/infrequent adjustments.

As employers pay a larger proportion of the contributions they get a larger proportion of any reduction and any saving to members is offset by tax. Therefore, employers have a larger incentive than members to want Conditional Indexation and to want a reduced contribution rate.

That is why it is particularly important to be vigilant right now. Even if the next valuation shows the scheme is in surplus and/or the estimated cost of buying more pension promises — the Future Service Cost (FSC) has fallen, we should not let employers use this to push through further fair weather cuts to the contribution rate that become a long term ceiling for them. In the employers’ ideal world contributions can go down but they do not go back up.

I am wary that UCEA, acting on behalf of employers, will use every opportunity to not only call for a reduction in the overall contribution rate but to argue it is good for scheme members because a reduction in our contributions saves us money and a reduction in theirs reduces the threat to jobs with no guarantee given that reduced pension cost will save a single job or be spent on staff. Nonetheless, they will try to get a reduced rate and they will try to sell it to scheme members a a win for all.

The contribution rate was reduced at the last valuation, from a total of 24.5% to 20.6%. Another cut may eventually make CI not an option but a necessity if / when the economic weather changes.

One way of looking at CI is it is a mechanism to release and distribute surplus and avoid or recover deficit. There might even be a sublime form of CI where surplus comes to members in the form of better baseline benefits with a high chance of indexation, possibly even beyond inflation, and catch up in subsequent years when we don’t get inflation. With employers willing to accept these increased benefits in return for nothing more than a steady contribution rate and reduced reliance on covenant as long as the scheme is well funded. However, even if we were to be convinced by the modelling on CI that such a dream solution can be found, any cut to contribution rates now is likely to put that out of reach.

These reasons are close, those are far away but none of them is small

It is generally accepted that any move to CI, were it to happen, would take a while. If the theoretical surplus (if the deficit is not real is the surplus?), is used up in the meantime and minimal CRs mean that no more accumulates and the investment strategy remains the same (cautious) in the intervening years, then by the time CI came (if it were agreed) there would be nothing to distribute but risk.

Any cut to CR is a win — win for employers – cheaper pensions in the short term and an increased likelihood they can make CI a forced option on their terms further down the road.

Whereas for members, with or without CI in our future, we are better off maintaining contribution rates with a floor where they are now, 20.6%, and the possibility to increase them if needed to protect benefits.

Even if we get the improved valuation methodology on which UCU has done so much excellent work, we need to see that running over a few valuations and assess the true health of the scheme before any further potentially unsustainable cuts to CR that disproportionately benefits employers are agreed.

Ultimately it is members who should decide if there is anything of merit in CI but it has to be a voluntary choice on our terms and not a last resort to save the pension because we have been cornered.

We need to keep our options open, not least the ability to say no.