The Universities Superannuation Scheme (USS) has launched a consultation on its 2020 valuation and ‘technical provisions’ laying out options to reduce its expanding deficit.
The consultation - which was delayed due to the government's controversial approach to A-level grading recently - shows UK universities and staff are set to face a vast hike in their annual pension costs under the proposals set out to plug a deficit in the sector's main retirement scheme.
The consultation - launched today (7 September) with its employer representative Universities UK (UUK) - covers the proposed methodology and assumptions to be used in setting the scheme's ‘technical provisions'.
The consultation proposes an increase of pension contributions paid by university employers and thousands of scheme members up to 68% of salaries from the current 30.7%.
Contributions are currently due to increase to 34.7% of payroll from 1 October 2021, shared 11% for members and 23.7% for employers. However, this valuation is likely to affect that scheduled increase.
This could result in UK universities' pension bills more than doubling from the current £1.7bn a year, with staff paying potentially thousands more a year for the same benefits.
The document covers a wide range of potential outcomes, reflecting issues still to be resolved on employer support to the pension scheme, and uncertainties for the higher education sector and financial markets.
The £67bn scheme's deficit was £3.6bn in 2018.
USS revealed that based on the proposals put forward for the consultation and depending on the extent to which employers are able and committed to supporting the scheme, the fund's deficit at 31 March 2020 could range from £9.8bn to £17.9bn.
USS group chief executive Bill Galvin said: "Employers promise our members retirement benefits regardless of what happens to the economy in the future. These promises are highly valued by our members, and our responsibility is to ensure that a USS pension remains a valued promise of security in retirement.
"The hard reality is that persistent low interest rates and greater uncertainty of future investment returns have created an environment where such promises have become increasingly expensive. With the higher education sector already facing considerable challenges, we are acutely aware of just how unwelcome the prospect of paying more for pensions will be.
"We fully recognise that the contribution rates we've illustrated are unlikely to be considered affordable or sustainable by either employers or our members. We are committed to working with our stakeholders, UUK and the University and College Union (UCU), as they consider how to respond to these challenges, and to working with stakeholders to ensure USS is a sustainable scheme."
A UUK spokesperson added: "These deficit figures from USS show the significant financial challenges facing the scheme at this time.
"Over recent months, we have worked closely with the UCU, which represents staff who are members of the scheme, and with USS to bring about important changes to the scheme. This has led to a new valuation methodology in line with the Joint Expert Panel's (JEP) recommendation, and the removal of the Test 1 measure of employers' risk appetite, which the union has campaigned for. Additionally, a scheme purpose and shared valuation principles have been agreed alongside a commitment from all involved to greater levels of transparency.
"We want to continue a positive dialogue with UCU and USS throughout this valuation, and to work with members and employers to secure an attractive and sustainable scheme through these economically challenging times. We should collectively explore potential ways of making it more appealing and inclusive, including the possibility of allowing members to opt to reduce their contributions in return for different benefits, rather than leave the scheme.
"Employers are acutely aware that the current employee contribution levels are leading to high levels of opt-out by younger and less well-paid staff, leaving them without any employer contributions to their pension provision. Now, more than ever, members need choice over contribution levels."
UCU revealed it was not supportive of the methodology laid out by USS in the consultation.
Head of higher education Paul Bridge said: "We have no confidence in the needlessly cautious methodology applied by USS. We are also disappointed USS has cherry-picked from the recommendations made by the JEP. UCU members are well informed and expect to see better evidence behind the judgements USS has made.
"We want USS to take account of the strong long-term outlook for the scheme. Members are leaving the scheme because of its high cost - calling for unnecessarily large reductions in benefits and increased member contributions is not the way forward. Universities need to start demanding more from USS and push back against this approach."
The consultation closes to responses on 30 October, with UUK expected to provide a response by 11 November.
Pressure over university pension obligations comes as the sector faces huge challenges in the wake of the Covid-19 pandemic, which has affected the number of overseas students as well as disrupted the 2020 intake of A-level students.
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