The Universities Superannuation Scheme (USS) has launched a consultation with Universities UK (UUK) on the proposed methodology for the scheme’s 2023 actuarial valuation, with a further consultation on plans to restore benefits to pre-April 2022 levels expected in late September.

The indicative results of the valuation, based on the trustee’s proposals, revealed a “significant improvement” in the scheme’s funding position compared to the 2020 valuation, estimating a £7.4bn surplus on a technical provisions basis, compared to a £14.1bn deficit in 2020.

In addition to this, the update revealed that estimates for the future service contribution rate for current benefits had fallen to 16.2 per cent, down from 25.2 per cent in 2020.

The trustee also priced benefits at pre-April 2022 levels, revealing that, based on the trustee’s funding assumptions for the 2023 valuation, this would require a future service contribution rate of 20.6 per cent of salaries.

Both of these figures are below the current 31.4 per cent contribution rate, with members currently paying 9.8 per cent of salary, while employers contribute 21.6 per cent.

However, the USS trustee clarified that whilst it will set the overall contribution rate, the decision as to how the reduction in overall contribution rate is addressed will be made by the Joint Negotiating Committee (JNC) as part of the ‘cost-share’ process following the consultation.

The consultation is seeking views on the scheme's proposed funding assumptions and its Statement of Funding Principles, with UUK to consult the scheme’s 331 participating employers and provide its response to the trustee towards the end of September.

Commenting on the consultation, USSL Trustee Board chair, Kate Barker, stated: “Mindful of the pace of change we’ve seen in financial conditions – it is important we do what we can to ensure the scheme is more resilient than in the past should some of the challenges experienced over the past decade emerge again in future.

“Most private DB schemes in the UK are now closed. USS is one of the relatively few still open to accrual and new members – and we very much want that to continue.

“The emergence of a provisional surplus could provide a platform for greater stability in terms of the scheme’s funding position, contribution rates and benefit structure – and we look forward to supporting University and College Union (UCU) and UUK’s discussions on this.”

When asked during a briefing whether the USS should have taken a different approach to the 2020 valuation, particularly given concerns that the valuation and subsequent cuts were overly conservative, Barker said that whilst the benefit of hindsight could result in changes, the "enormous shifts" in gilt yields that prompted funding improvements could not have been foreseen.

"[The 2020 valuation] coincided with Covid-19, with a good deal of uncertainty, a good deal of unrest in financial markets and it was a very difficult time to make judgments," she continued.

"It's also worth remembering that actually even before Covid, at the end of 2019, things were looking worse than they had in 2018.

"Given the regulations on valuations, I don't think we had any choice but to call the valuation for March 2020. I don't look back at that and think it was a mistake, but I'm obviously pleased today that financial conditions have improved and we're able to produce so much more favourable set of numbers."

A step closer to restoring pension benefits

In addition to the consultation on the 2023 valuation, the USS has confirmed plans for a statutory employer consultation with affected employees and their representatives on plans to restore benefits to pre-April 2022 levels, for accrual from 1 April 2024.

In anticipation of the JNC formally proposing these changes, the USS chief scheme strategy and stakeholder officer, Mel Duffield, confirmed that preparations are underway, and have been “for a number of weeks”, with a consultation on these changes expected to launch from late September.

The trustee would need a final decision from the JNC in December if any benefit changes are to be introduced from 1 April 2024.

Duffield also confirmed that the JNC could initiate discussion on the use of the wider surplus in parallel with this, for example, further enhancements to benefits or changes to contribution levels.

However, Duffield confirmed that the trustee would then need to consider whether there are any potential equality concerns, particularly around intergenerational fairness.

When pressed by Pensions Age on the potential uses of the surplus being considered, Barker revealed that that, in addition to plans to restore benefits to pre-April 2022 levels, the USS trustee is expecting to undertake further work to look at the potential for a “retrospective change” to improve the benefits that people were accruing from April 2022 to April 2024.

Speaking at a brief ahead of the consultation, Barker explained that "exactly how that is best done isn't easy", noting that the changes involved a shift between defined contribution (DC) and defined benefit (DB) benefits, emphasising that "it's not easy to think of a good way in which to exactly and fairly make up that gap".

"So there is some work going on on that and we don't quite know when that will be completed because we don't want to end up with something that's that's completely fair, but administratively terribly difficult," she added.

Looking beyond that, Barker said that this is an area that will be “up to the stakeholders”, noting that this will be first chance for stakeholders to see the firm numbers being put forward by the USS, noting that there will be further discussions as to what they want to do.

However, Barker noted that stability and protections for the next valuation are also a consideration, explaining that if the surplus that the scheme currently holds is retained, the next valuation is more likely to be one in which in which nothing needs to happen.

Barker also clarified that the scheme is at "a very early stage" in discussing stability more broadly, with work around this to be a key consideration for the scheme's stability working group, which has started meeting.

Maintaining stability

A focus on stability was also highlighted by UUK chief executive, Vivienne Stern, who emphasised the need to "end such volatility between valuations".

Stern stated: “Figures today from the USS trustee on the 2023 valuation point towards union and employer representatives being able to take forward their agreement on creating stability, lowering contributions, and improving benefits.

"This will make a big difference to staff in this cost-of-living crisis and to USS employers faced with significant budget pressures.

“We also want to end such volatility between valuations. UUK has been exploring alternative scheme designs such as conditional indexation, which could provide added stability, as far as is possible with DB, along the lines successfully implemented in Canada over the last decade.

“The scheme should offer more flexible options, for example to encourage younger members facing many other cost pressures to save for a pension with a valuable employer contribution.

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

UCU also highlighted the consultation as "yet another step towards the restoration of our members pensions".

UCU general secretary, Jo Grady, added: “I have lost count of the times we were told it would never happen, we were often mocked by pensions ‘experts’ who maintained that our campaign and actions were pointless.

"This is a lesson, not only to UCU members, but workers in general - if you are prepared to fight for something then there is always a chance.

"We will now use the coming months to ensure the employers fulfil their obligations and we see this through to full restoration. At that moment, our members will go down in history."

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