The University of Cambridge and the University of Oxford, and their respective University College Union (UCU) branches, have called for the consideration of a new scheme design for the Universities Superannuation Scheme (USS) "as quickly as possible".

In a joint statement, representatives called for a fully-resourced team to be set up by USS, UCU and Universities UK (UUK) to look into alternative scheme designs, specifically around conditional indexation, and a progress report on emerging options to be shared in six months.

The representatives emphasised that a contribution rate of 25-30 per cent of salary should be sufficient to secure a good pension for members, arguing that conditional indexation is likely the best way to do this.

Under conditional indexation, the annual increases to pension benefits would be dependent on scheme investment returns and not guaranteed, although it could allow pensions to be provided for a lower overall contribution level.

The universities suggested that benefits would continue to accrue as now, estimating based on accrual rates currently in place in USS, that an employee earning £37,500 would receive a pension in retirement of £500 a year (1/75th) for each year worked and £1,500 lump sum on retirement.

The new approach would apply only to new benefit accrual, with benefits earned in USS to date to continue to increase with inflation according to the scheme’s existing rules.

University representatives argued that this would likely be the best approach given constraints of the current regulatory and actuarial approach, warning that these factors “make it difficult to obtain good value for money” for defined benefit (DB) schemes.

“Members see their benefits eroded on the basis that something bad – but ultimately unlikely – might happen (USS will not be able to make good on its future pension promises) but see little flexibility in the scheme to benefit from improved market conditions,” the statement explained.

“Absent a change to the current regulatory and actuarial approach, we believe this can only be achieved by redesigning the scheme.”

Indeed, the statement warned that until this happens, it is “difficult to see an end to the problems that USS, its members and employers, have experienced since at least 2016”, warning that the outcome of the 2020 valuation is likely to do little to address these underlying issues.

The letter continued: “Employers and members need to work together with a well-resourced and transparent USS management to optimise the scheme and find ways to manage risk that do not over-rely on the ‘gap to self-sufficiency’ measure.

“USS should focus on how the scheme would actually manage its risk in various downside scenarios. This should be overseen by a trustee board with expertise in maximising long-term returns.

“This approach to valuation is fundamentally different from the current scheme design and the recent UUK proposal. Under this alternative, scheme members would obtain better pensions in the vast majority of expected outcomes.”

Considering this, the universities’ emphasised the need to explore an alternative scheme design “as quickly as possible”.

Furthermore, whilst the universities acknowledged that a new scheme design is a complex process and the timeframe too short to implement for the 2020 valuation, they also argued that a team mobilised "rapidly" to explore the options could allow any benefit reductions/increased costs that flow from the current valuation process to be in place for the minimum amount of time.

Commenting in response, a USS spokesperson stated: "The purpose of the USS trustee is to work with employers to build a secure financial future for our members and their families.

"Conditional benefits could potentially help to align and optimise investment strategies and funding approaches to this end, against today’s very challenging economic backdrop.

"However, design and implementation of any such approach would be complex and would require all stakeholders to work constructively together.

"The USS trustee would be very keen to play its part, and has previously proposed this topic with stakeholders as one worth exploring. The immediate priority, however, is to complete the 2020 valuation."

The potential use of conditional indexation in the scheme was first raised in response to UUK's recent consultation on proposed changes to the schemes, as USS employers pledged further covenant support, whilst also emphasising that "immediate action" on longer-term reforms was needed.

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