Employers in the Universities Superannuation Scheme (USS) have committed to providing even stronger levels of covenant support to the scheme in an effort to continue to deliver defined benefit (DB) pensions at affordable levels for scheme members and employers.

Whilst employers had previously backed Universities UK's (UUK's) proposed changes to the scheme, USS trustees argued that the indicative benefits would require further commitments for a covenant support package, prompting a second UUK consultation.

In response to this latest consultation, employers representing 94 per cent of scheme members agreed to go "even further" with their covenant support than previously agreed in the first consultation.

However, employers have also called for “immediate action” on longer-term reforms to explore the feasibility of conditional indexation, which would mean that annual increases to pension benefits may be dependent on scheme investment returns and not guaranteed.

This was alongside suggestions for the development of a more flexible and lower-cost option for members to help address the high opt-out rate, and to begin scoping a governance review of USS that would start after the current valuation.

A USS Employers spokesperson highlighted the responses as evidence of the "strong will of employers" to find an outcome to the 2020 valuation that keeps the DB element alive at an affordable level, warning that "this is no mean feat in the current economic and regulatory environment".

They continued: “By making even firmer commitments to USS on secured debt and by agreeing to an immediate and much longer moratorium on exiting the scheme, employers are taking on considerable additional costs and risk so they can offer members the best possible level of benefits at current contributions.

“Without changes to the scheme, members and employers are facing the harsh reality that the USS trustee will implement ruinous contribution increases of up to 56.2 per cent, meaning members paying 18.6 per cent of salaries and employers paying 37.6 per cent.”

“We will continue to ask the USS trustee to further consider the valuation assumptions so that the more affordable UUK proposal can be delivered at the current contribution rate of 30.7 per cent of salary.

“Employers also want to see rapid action on the longer-term future of the scheme, and we hope that University and College Union (UCU) and USS will join UUK to explore alternative scheme design, a lower contribution option for members, and a review of the scheme’s governance.”

However, USS Employers also acknowledged that making such strong covenant commitments to the scheme will have consequences for all employers and could restrict their ability to borrow money in future, as well as push up the cost of borrowing.

Commenting on the plans, Joint Negotiating Committee lead employer representative, Phil Harding, explained: “With the loss of government capital funding for higher education, institutions need to be able to borrow money to sustain their investment in the physical and digital infrastructure.

“This level of proposed employer covenant support will limit employers’ ability to borrow money in the future, lead to higher borrowing costs, and could be a barrier to improving courses, support and services to students and staff.

“It will be the financially weaker employers that will be most severely impacted, since they rely on secured borrowing the most and have the thinnest reserves, so increases in cost feed immediately through to cost-cutting.

“This covenant support can be considered in a similar way to increasing contributions – indeed that’s how USS trustee has valued it, saying that contribution levels would need to increase by 80 per cent without it.

“This commitment to covenant support is on top of the increase of more than 50 per cent
in the rate of employer salary contributions to USS from 14 per cent in 2009 to 21.1 per cent from 2019.

“It is clear from employer feedback that the vast majority of institutions would not be able to pay more into pensions from an already high 21.1 per cent without having to find that money from elsewhere in their budgets – potentially having consequences on other employer activities, student experience or jobs.”

The Russel Group of Universities previously confirmed that it would back the enhanced covenant support measures for the scheme, although the group also emphasised the need for parties to work together "rapidly" to explore long-term solutions for the scheme.

However, support for the reforms has not been universal, with UCU having threatened industrial action amid the proposed changes to the scheme, branding UUK's first consultation as "merely a PR exercise to justify slashing pensions".

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