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 • • • • • 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 14 13 12 11 10 9 8 7 6 5 4 3 2 1 £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 1 26/11/2014 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 • Final Salary Members (joined before Oct 2011) Move from Final Salary to Career Revalued Benefits (CRB) FS accrued benefits increase by CPI • Employees who joined from Oct 2011 are already in CRB Section • All members can choose to pay into extra DC savings • CRB salary threshold at £50,000 (to be increased annually with CPI) • 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% • Employer Contributions increase from 16% to 18% • 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. 2 26/11/2014 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 • 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/ 3