26/11/2014
Purpose of briefing
Proposed Changes to
USS
Employee Briefings
November/December 2014
• To explain the reasons why changes to USS are
being proposed and the timetable for change
• To explain the employers’ current proposals
• To summarise the concerns expressed by UCU
and to explain the UCU’s proposals
Outline of briefing
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Final Salary? CRB? DC? Help Me!
• Final Salary Benefits
Pension at retirement is 1/80th for each year of pensionable service x final
pensionable salary (often pensionable salary in last 12 months of service*)
PLUS a Lump Sum of 3 x annual pension
* Full definition for Final Pensionable Salary can be found on the USS web site
If you joined USS before October 2011 you will be in the Final Salary
Section
• CRB – Career Revalued Benefits
Pension of 1/80th of each year’s pensionable salary
• Each year of pension is calculated and ‘banked’. The following year you add
the pension you banked in the previous year to 1/80th of that year’s salary
and so-on.
• The value of your ‘banked’ pension is revalued each year in line with the
rise in official pensions up to 5%
• Final pension is total of all banked revalued amounts
PLUS Lump Sum of 3 x annual pension
If you joined USS from October 2011 you will be in the CRB Section
Different types of pension schemes
Why change is necessary
Employers’ proposals
UCU’s proposals
Questions at end please
Final Salary? CRB? DC? Help Me!
• DC – Defined Contribution
Annual amount contributed from Employee and Employer is invested in funds
(“pension pot”).
The pension pot grows over time as a consequence of these investments.
At retirement, the pension post is used to purchase a pension (annuity) and/or
taken as a cash sum (new legislation April 2015)
• State Retirement Pension
The full Basic State Pension is currently £113.10 a week. The amount of State
Pension you get depends on your National Insurance contributions.
From April 2016, the full new State Pension will be no less than £148.40 per
week. The actual amount will be set in autumn 2015. You will usually need 10
qualifying years to get any new State Pension.
Assets – Liabilities = Deficit
Why is change necessary?
Liabilities exceed assets – significant deficit
Investment Strategy – where you invest LIABILITIES
(Gilts – Equities)
Longevity
Investment Performance
Pay increases
‐ Expected rate of return on investments
(general increases, increments, regrading
and promotions)
Inflation
Leavers and joiners
Financial Principles and Assumptions
are set by the Trustee and the Scheme Actuary to calculate Liabilities and Assets
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£13.1B
£12.3B
£11.5B
£9.8B
2014 Valuation Data and
Assumptions
Future contributions
2011 Valuation
Data and
Assumptions
ASSETS
Mar-14
Mar-14
£7.2B
£2.9B
Mar-11
Mar-12
Mar-13
Sep-13
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How can this be resolved?
UUK Objectives
• Universities UK, on behalf of all USS employers, is
seeking to ensure that the USS remains a sustainable,
attractive and affordable pension scheme for all
members, both current and future.
• The employers have carefully considered a wide range
of possible options.
• The changes proposed are designed both to address the
substantial deficit in the USS and to mitigate the risk that
contribution rates will become unaffordable for both
employees and employers.
• UUK are committed to seeking a joint proposal for
reform and are open to other possible solutions as to
how we can address the substantial deficit yet secure a
sustainable, flexible and affordable pension scheme.
Employer contributions will not be reduced
USS TRUSTEE
Consultation on Financial Assumptions, Recovery Plan • Increased contributions
o From 16% employer + 6.5%/7.5% employee
o To 27.5% employer + 12.7%/11.7% employee
AND/OR
• Reduce cost of benefits
AND/OR
• Revise the Financial Principles and Assumptions
AND/OR
• Lengthen the Recovery Period (currently 10
years)
Who makes decisions?
PENSION
REGULATOR
ACTUARY TO USS
TRUSTEE
USS JOINT NEGOTIATING COMMITTEE
(agrees changes to benefit structure)
UNIVERSITIES UK
EMPLOYERS
UNIVERSITY AND
COLLEGE UNION
EXETER
UUK Proposals
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Final Salary Members (joined before Oct 2011)
 Move from Final Salary to Career Revalued Benefits (CRB)
 FS accrued benefits increase by CPI
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Employees who joined from Oct 2011 are already in CRB Section
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All members can choose to pay into extra DC savings
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CRB salary threshold at £50,000 (to be increased annually with CPI)
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DC for pensionable pay above £50,000
 1% (EE) & 1% (ER) on all pensionable pay
 DC Savings of 12% employer + 6.5% employee (18.5%) – or 13% +
7.5% (20.5%) if choose to pay extra 1%
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Employer Contributions increase from 16% to 18%
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Employee Contributions will be 6.5%
 FS members currently pay 7.5%, CRB already pay 6.5%
 Employers’ proposals are seeking to avoid increase in employee
contributions
Employer contributions will not be reduced
• Employer will pay more
 Current employer contribution of 16%
 Future employer contribution of 18%
• For pensionable salary above £50,000, employer
will contribute 18%
 12% of this will go into the employee’s DC “pension pot”
(with 6.5% from employee = 18.5% DC savings for salary
over £50,000)
 if employee opts to pay extra 1% DC savings, this will be
matched by employer for all their pensionable salary
 the balance will fund the deficit, death in service benefits
etc
• Employer NIC contributions will increase in April
2016 following abolition of contracting out.
• Nearly all employers have stated that 18% is the
maximum contribution without impacting other
spending commitments, which will damage the
student experience and competitiveness.
• Proposals made by UUK are intended to:
o reduce volatility
o reduce risk of contributions increasing again in
future.
• UUK proposals can only be afforded with an 18%
employer contribution rate if the Pension Regulator
agrees to extend the recovery period to 20 years.
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6.5% Employee Contribution
18% Employer Contribution
Optional 1% DC Employee Contribution
Income from Investments
WHERE THE
MONEY
COMES FROM
DC SAVINGS FOR PAY OVER £50K (12%+6.5%)
WHERE THE
MONEY GOES
UCU Proposals
UCU are concerned that the financial assumptions are overly prudent, leading to an
over calculation of the deficit.
While we do not accept USS’ approach to valuation and de-risking, we note that
significant other actors consider there is a case for change.
1. All future service on the basis of CRB 1/70th with an automatic lump sum (3x) and
CPI revaluation. Employer contribution increases to 22.4% (15 year recovery) or
20.9% (20 year recovery)
2. In order to fund these changes, UCU are willing to enter negotiations around:
a) No DC element in the scheme
b) Final salary link to be replaced by another index
c) Movement in employee contributions, possibly on a 2:1 ratio (i.e. 18%:9%)
d) Money intended by employers for the DC element to be used to enhance DB
pensions for the maximum number of members
e) The potential for an absolute cap on pensionable salary
f) Cap on the pensionable salary to be revalued according to the 85th percentile of
members earnings, so that for 85% of members all salary would be pensionable
in the DB scheme.
3. Should the funding position of the scheme improve then the employers agree not to
reduce their contributions below a floor of 18%. Further, that should scheme funding
improve, any additional funds are to be used to improve defined benefits and to
create a “buffer fund”.
BENEFITS TO BE ACCRUED IN THE FUTURE
BENEFITS ACCRUED TO DATE
PENSIONS BEING PAID TO PENSIONERS
OPTIONAL 1%+1%
DC SAVINGS
SCHEME ADMIN COSTS
At a Glance
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Issue
UUK
UCU
Significant Financial challenges – changes are necessary
Yes – deficit of £12.3B
Yes, but consider USS’ approach over‐calculates deficit
Final Salary Accrual
Closes
Closes
Final Salary Benefits revalued
CPI
Index to be agreed
Employer and employee contributions
Employer increase to 18% maximum; no increase for employee (6.5%)
Would consider 18% employer, 9% employee CRB Accrual
1/80th (as at present) with lump sum of 3 x pension
1/70th with lump sum of 3 x pension
CRB salary “cap”
£50,000, with DC savings above this limit
Would consider cap at 85th
percentile with no DC.
Timetable – What happens Next?
• 31 March 2014 – Triennial Valuation
• Autumn 2014 – Outcome of valuation
• Autumn 2014 onwards
o JNC to consider scheme changes
o 22 October – employers’ proposals tabled
o 7 November – UCU proposals tabled
o Ongoing meetings through November/December
o Decision in January 2015
o Agree Recovery Plan, including
o revised investment plan
o revised contribution rates
• Statutory consultation on scheme changes (minimum of 60 days)
• USS Trustee makes decision
• 30 June 2015 – deadline for submission of Recovery Plan to the
Pensions Regulator
QUESTIONS?
For more information go to
www.exeter.ac.uk/pensions/ussscheme/updates/
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