It was only 8 years ago that the employer view was that USS could not stay open as it was too great a debt upon employers paying into it. There was a strike, an effort was made and despite not particularly good results from investments the scheme is now wondering with the money it has surplus to current needs.
Here is the report from Callum Conway taken from Pensions Age, yesterday. It explains the stage the Scheme (USS), the employers (UCEA) and the union (UCU) not mentioned but part of the Joint Negotiating Committee (JNC) – are at.
I end this long blog with some thoughts on the DC scheme that USS employers are paying into for the most highly paid staff. Now is a time for that to be reviewed, it is a loophole and could be better reorganised as a pension.
USS surplus more than doubles to £16.9bn in 2026 valuation
The results, published as USS launched a consultation with the Universities and Colleges Employers Association (UCEA), compared with a £7.4bn surplus and funding level of 111 per cent at the 2023 valuation.
USS’s assets increased by £6.7bn over the period to £79.8bn, while its technical provisions liabilities fell from £65.7bn to £62.9bn.
The scheme attributed the improvement to favourable financial market conditions, higher expected investment returns and strong performance from its growth assets relative to its liabilities.
The provisional valuation also put the future service cost of providing members’ current benefits at 16.4 per cent of salaries, below the existing overall contribution rate of 20.6 per cent.
USS said the strengthened funding position meant the scheme could support the continuation of current benefit and contribution levels, while also providing scope to consider other options.
These could include reducing contributions to the future service cost, or to a level between the current rate and that cost; using part of the surplus to subsidise contributions; increasing future service benefits; or using some of the surplus to improve previously accrued benefits.
However, USS stressed that the valuation results were provisional and that the overall contribution rate would be determined by the trustee after considering UCEA’s response and the scheme actuary’s advice.
The Joint Negotiating Committee (JNC) would then be responsible for deciding how any change should be reflected in member and employer contribution rates or benefits.
The scheme noted that maintaining the current contribution rate and investment strategy could increase the surplus by around £2.5bn a year, assuming expectations were borne out.
USS’s modelling estimated that, under the current investment strategy, the probability of a deficit emerging over six years would increase from 5 per cent under the current 20.6 per cent contribution rate to 7 per cent if contributions were reduced to 16.4 per cent.
The latest valuation is USS’s first under the new defined benefit funding regime, which applies to valuations with effective dates on or after 22 September 2024.
USS has consequently proposed changes to its valuation methodology, including a three-leg approach covering best-estimate results, technical provisions and contingency measures.
The scheme’s best-estimate position showed a surplus of £25.5bn and a funding ratio of 147 per cent, compared with £15.6bn and 127 per cent respectively at the previous valuation.
USS was also 113 per cent funded on its self-sufficiency measure, with a £9.1bn surplus, compared with a £5.1bn deficit and funding ratio of 93 per cent in 2023.
USS chair of the trustee board, Dame Kate Barker, said the sustained surplus provided an opportunity to consider the scheme’s future strategic direction.
“The current strong funding position presents an opportunity to put USS on a long-term stable footing, which would be consistent with what the sector said it wanted to achieve at the 2023 valuation,” she stated.
“This was also a major theme in early discussions on the 2026 valuation.
“But there are choices to be considered, so it is important the sector is clear about what it wants to achieve – and what it wants to avoid – at this valuation and over the long term.”
Time to end talk of contingent increases for the core DB scheme?
As an outsider I hope that the future of USS is progressive. The argument that the DB scheme should pay increases in retirement contingent on performance has been discussed and rejected in blogs I’ve published. The DB scheme is not moving towards CDC I suspect!
Contingent increases on what the scheme has to release are complicated by the surplus. Stabilising the employer contribution rate for the DB scheme is not on the agenda for the employers and members ; the union seems against it any time. Contingent pension increases for the DB scheme are only a step away from CDC.
Exchanging DB for CDC is not on the table for negotiation by the UCU, as far as my blogs indicate.
But time to end the DC top up as a tax- loophole for the highest paid?
DC is being used by highest paid staff as tax-free cash from the DB scheme. This is a loophole that rewards the rich and isn’t available to lower paid staff.
This is not progressive, it is simply an Exempt Exempt Exempt tax-break for the most wealthy – a loophole.
There is a strong argument for USS to offer a CDC plan instead of DC and for that to pay extra income and ensure that USS members focus on income rather than lining their pockets with tax-free wealth.
Were the whole scheme paying wages in retirement based on performance there would not be guarantees and the USS scheme would become CDC. But that is not going to happen for the core benefits (I am glad to say – that’s what UCU should ensure is preserved as the core benefit of USS).
USS is the only private scheme in the country which could become proprietor of an UMES CDC plan and it should for all its employers and for all members who qualify for the DC scheme today.
It would make it clear what the sector and its union wants to achieve. It should want a pension throughout. CDC should be considered now instead of DC – something that I hope would attract support from UCU.
“using some of the surplus to improve previously accrued benefits”: ho yuss, I’m all for that – for readily deducible reasons. But with a proviso: any such performance bonus must be temporary to allow for the fact that the good days never last forever and that paying that money with a promise of permanence could be ruinous in the long term.
How much to spread around? Dunno, but they could start by calculating how much they cost us pensioners by replacing RPI-linking by CPI-linking. That might be a place to start reasoning from. After all, their leaflets – and what little the Union had to say on the matter – had always spoken of RPI-linking.
So from 2011, suppose the difference is 1% p.a., ignore detailed effects out of sheer laziness, they owe me about 7.5% of the money they’ve already paid me. Suppose they started paying compensation at 2.5% p.a. while affordable. The “moral debt”, as some buffoon would doubtless dub it, would be cleared in about five years. Thereafter, so long as the good times last, they could pay RPI-linking without any further need to clear a backlog.
How about people who signed up for RPI-linking but were downrated to CPI-linking, and haven’t yet started drawing their pensions? Easy: just calculate the cost of extending the same privilege to them. Don’t overlook future widows.
Would such a policy be “unaffordable”? Then think again. Would reducing the 2.5% p.a. to 2%p.a. be affordable? If not, how about ignoring backlogs (which might save a fortune in potential legal costs) and just pay RPI-linking in future, to be reviewed – say – every three years?