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Employer association Universities UK and the University and College Union have agreed to fully restore pension benefits to pre-April 2022 levels by 1 April 2024 if the bulk of the Universities Superannuation Scheme’s surplus is retained in the 2023 valuation. Academics could also see lower contribution rates as soon as January.
The agreement follows 69 days of strike action by academics since 2018 and comes after the Universities Superannuation Scheme saw its funding level improve significantly amid rising interest rates and gilt yields.
The UCU has claimed victory in the long-running dispute, having rejected changes to pensions for years.
“Four years ago, our members were told that winning back their pension was an impossible task,” said UCU general secretary Jo Grady. “69 days of strike action, years of campaigning, protesting and lobbying have brought us to this moment. Today is a historic victory for UCU members. It should also be motivation for every single worker in the UK who has seen their pension slashed.”
Grady added that this was only the beginning: “We have pension justice. We now move on to delivering justice on pay and job security.”
UUK chief executive Vivienne Stern said: “We are delighted to have been able to agree on an outcome for the 2023 USS valuation which will be good for all members of the UK’s largest private pension scheme, and which will bring down costs for both members and employers.”
She said the decision to revert to previous benefit levels was possible “largely as a result of dramatic changes in economic conditions since the last valuation, including high interest rates, combined with the commitment from employers for additional financial backing".
Stern added it was important to stabilise the scheme to avoid future fluctuations: “The projected surplus in the scheme is an important protection, but we need to continue to work, with renewed momentum, towards arrangements which will provide longer term stability.”
UUK and UCU will work together “to achieve a moderately prudent evidence-based valuation as a driver of stability in time for the next valuation, as well as investigating other approaches to ensure ongoing stability, such as an optimal investment strategy for an open, immature, and long-term scheme such as USS”, they said.
They will also explore options “to make mutually acceptable adjustments to scheme design to further enhance stability of the scheme whilst retaining a predominantly defined benefit scheme”.
Before changes to benefits are implemented, USS needs to finalise its valuation as at 31 March 2023. The statutory deadline for this is 30 June 2024, but the scheme said the 1 April target named by UUK and UCU “should be achievable” if employers and union have agreed changes by December “and any changes are based on the current structure (that is, contribution rates, accrual rates, the salary threshold, and indexation) that would be considered improvements for members”.
The scheme is understood to be in surplus since the rises in long-dated gilt yields of last year. In March 2022 – before the ‘Mini-Budget’ - its deficit had already reduced to £2.1bn from £14.1bn in March 2020, which was a low point for market valuations as Covid-19 started spreading. The £88.9bn scheme’s technical provisions funding was at 98% in March 2022.
USS notes that an increase to the salary threshold, as proposed by UUK and UCU, is likely to require a statutory consultation by employers with members before it can be implemented.
What is changing?
A consultation on restoring benefits had been announced in May this year, after a tense and long-lasting stand-off between universities and their staff. Launched on 25 September, it runs until 24 November.
Returning to pre-April 2022 benefit levels would mean:
a higher accrual rate for defined benefit pensions of 1/75th of salary and 3/75ths of salary for the retirement lump sum;
an increase in the DB salary threshold from £41,004 to within a range of £66,400 to £73,040 (depending on the September 2023 CPI rate); and
removing the 2.5% a year cap on pension increases, both before and after retirement, replacing it with the USS standard pension increase (soft-cap) that was in place before April 2022.
The measures are worth between £15bn and £17bn, UUK and UCU said.
It comes with an additional one-off pension payment of around £900m “to help make good the money members have lost since April 2022”.
UUK and UCU propose that scheme members with any service between 1 April 2022 and 31 March 2024 will, after consultation, receive a one-off DB pension augmentation of £215, with an associated £645 retirement lump sum for active and deferred members. Pensioner members would receive an additional DB pension augmentation of £26, they said, citing HMRC regulations concerning the payment of tax-free lump sums at retirement.
New contribution rates could be introduced from 1 January, splitting the lower 20.6% rate in line with scheme rules into 14.5% employer contribution and 6.1% member contribution, down from 9.8%. Employers and the UCU will make a formal request to the trustees, who are expected to come to a decision in November.
The two organisations said that “the trustee has shown it is sustainable to keep the new contribution rates and improved benefits for at least two valuation cycles” when the bulk of the surplus, as at March 2023, is retained for this valuation.
Should actuaries adjust valuations if there have been material changes since the valuation date?
