Conditional indexation could represent a “promising structure” for Universities Superannuation Scheme (USS) stakeholders to explore with the aim of delivering greater stability between valuations in future, an update from Universities UK (UUK) has suggested.

The group confirmed that it has been working with its advisers and the USS trustee on exploring possible approaches to greater sustainability in the pension scheme, with conditional indexation being a “leading consideration”.

UUK is also currently seeking the views of USS employers on the initial conditional indexation work and to gauge the level of support for further detailed analysis to be undertaken at the appropriate time.

Conditional indexation is a defined benefit (DB) pension scheme design where some or all of the future increases (also known as indexation) applied to benefits earned in future would be conditional on the scheme’s funding position.

However, the pension rights that have been already built-up by members would remain fully protected.

Aon senior partner, John Coulthard, explained that the early modelling suggested that it is possible to deliver higher benefits with conditional indexation for a similar cost in most scenarios, when compared with the current benefits.

"Broadly, this is because conditional indexation provides a mechanism for members to benefit in most scenarios from investment returns being higher than the prudent assumptions adopted for the actuarial valuation," he continued.

"With the trustees having an additional lever, it becomes justifiable for the trustees to employ less prudence in their approach."

Adding to this, UUK chief executive, Vivienne Stern, stated: “The 2023 valuation of the USS scheme is underway.

"In preparation for this, we have been working with the UCU, representing scheme members, to agree a way forward which is designed to create long-term stability and increase confidence in the scheme as part of a package which could also include lower contribution levels and improved benefits.

“In this context, UUK has been exploring alternative scheme designs such as conditional indexation. This could provide added stability, as far as is possible with defined benefits, along the lines successfully implemented in Canada over the last decade.

“We want to build further trust with UCU through greater transparency and by unlocking member flexibilities to stop so many younger members being priced out of the scheme.

“We also hope to progress an independent governance review of USS, with involvement from UCU, which could be crucial to improving how the scheme is run and managed, and to the success of stability measures such as conditional indexation or other alternative scheme designs.”

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