- Summary of Proposed Changes
- How the Scheme Works
- Why the JNC Recommended the Changes
- Key Dates
This consultation seeks comments from affected employees and their representatives on:
- the Joint Negotiating Committee (JNC)'s recommended package of benefit changes
- the alternative contribution rates which will take effect from 1 April 2022 if the changes recommended by the JNC (or an alternative set of changes) are not implemented before then.
This page has a summary of the proposals along with some background to this consultation.
To give your views, go to the Respond page by 17 January 2022.
All responses submitted during the consultation period will be considered before any final decision is made and implemented.
Summary of Proposed Changes
To address the scheme's funding position and the increased costs of providing future defined benefits (further details below), the Joint Negotiating Committee (JNC) has recommended the following changes. These changes would take effect from 1 April 2022 unless stated otherwise.
- Members will build up a pension in the USS Retirement Income Builder, the defined benefit section of USS, at a lower rate of 1/85 of salary, and a separate lump sum of 3/85 of salary, up to the Salary Threshold. Currently members earn a pension in the Retirement Income Builder which is based on a higher rate 1/75 of salary and a lump sum of 3/75 of salary up to the salary threshold.
- The Salary Threshold will reduce from £59,883.65 to £40,000. Whilst this reduces the amount built up in the USS Retirement Income Builder, it will mean that more is built up in the USS Investment Builder, the defined contribution section of USS, for members earning over the Salary Threshold.
- From 1 April 2023 the Salary Threshold will continue to increase annually in line with pensions paid to public sector employees (like teachers, civil servants or NHS employees). However rather than increasing by a maximum of 10% each year as it does currently, the increase will now be capped at a lower maximum of 2.5% a year (until 31 March 2025 or earlier if the amount of the Salary Threshold is changed following a review by the JNC before then).
- From 1 April 2022 the future benefits that you build up in the USS Retirement Income Builder will increase every year both before and after you retire in line with current USS pension increases but subject to a maximum increase of 2.5% rather than the current maximum of 10%.
- From 1 April 2022 there will be an improvement of benefits for those who are members of USS for a short period (with more than 3 months' but less than 2 years' service).
These proposed changes would not affect any benefits you build up before 1 April 2022. They will only affect future benefits earned from that date.
Members' contributions will remain at their current level of 9.8% of salary. Employers' contributions will remain at 21.4% of salary.
If the JNC recommended changes are not implemented, there is a proposed fall-back position which would see member and employer contribution rates increase in steps every six months from 1 April 2022 until 1 October 2025.
For more details about these proposals and what happens if they don't go ahead, go to the Proposals page.
How the Scheme Works
Here is some information about the JNC's role, and the two sections of the scheme:
- The USS Retirement Income Builder
- The USS Investment Builder
The Joint Negotiating Committee's Role
Under the USS rules, the Joint Negotiating Committee (JNC) is the body responsible for deciding there should be a change to future benefits to deal with the rising costs of the scheme. It also decides how increased contribution requirements should be shared between employers and members.
The JNC is made up of five representatives appointed by Universities UK which represents employers, five representatives appointed by the University and College Union which represents members, and an independent chairperson.
The current benefit structure
The USS Retirement Income Builder
When you join USS, you automatically join the Retirement Income Builder. This is the defined benefit section of USS. When you retire, it gives you a set level of retirement income, based on your salary up to a certain limit during each year of membership of the scheme and how long you've been a member.
Every year, you build up a retirement income worth 1/75th of your salary, up to the Salary Threshold. This threshold is currently £59,883.65. At the end of each year, your benefits are calculated and 'banked'. They are then increased broadly in line with inflation (subject to a cap) each year.
When you retire, you will also receive a tax-free lump sum. This is worth three times your annual USS Retirement Income Builder pension.
There may also be benefits payable to your spouse or civil partner/dependant(s)/child(ren) after you die.
The USS Investment Builder
If you earn above the Salary Threshold, have made additional contributions, or transferred in benefits from another pension arrangement since 1 October 2016, you are building up savings in the Investment Builder. This is the defined contribution section of the scheme and is a flexible way to save for the future. It allows you to invest in one or more funds offered by the trustee.
How much you build up in the Investment Builder depends on how much both you and your employer put into it. It also depends on how well your investments perform and minus any investment charges.
When you retire, you can use your Investment Builder savings in various ways. These include as a tax-free lump sum, investing in a drawdown product or buying an annuity that gives you a guaranteed income for life.
Any Investment Builder savings you have when you die will be paid to your beneficiaries as a lump sum. Currently, funds passed to your beneficiaries will be tax-free if you die before age 75 and they are paid out within a relevant 2-year period (or taxed at the recipient's marginal rate (if paid to a qualifying person such as an individual) if you die after age 75).
Why the JNC Recommended the Changes
The JNC's recommended changes are in response to the 2020 valuation, which showed the cost of future benefits had increased significantly and the gap between how much money the scheme has and how much it needed at that time had increased. Here's some information on what the 2020 valuation found, why, and what it means.
What a valuation is
A valuation assesses the scheme's funding position – that is, whether the scheme is expected to have enough assets to meet the future benefit payments due from the scheme (liabilities). As economic conditions, lifestyles and a number of other factors are constantly changing, the trustee is required by law to carry out a valuation at least every three years.
The USS Retirement Income Builder is funded by contributions from members and employers. These contributions are invested by the trustee, to provide your retirement benefits. The level of contributions needed to make sure the scheme has enough money to provide benefits depends on three main factors:
- The level and type of benefits offered;
- key member demographics (such as life expectancy and dependants); and
- the investment returns the scheme's assets can reasonably be expected to achieve.
At each valuation, the trustee reviews the scheme's assets and liabilities, and it estimates:
- whether the scheme's assets can fund the benefits that members have already built up in USS; and
- how much money employers and members need to pay into the scheme to continue to provide the current level of benefits being built up in the future.
Outcomes of the USS 2020 valuation
The 2020 valuation looked at the position of the scheme as at 31 March 2020. It reported:
- a funding deficit of between £14.1bn and £18.4bn, on what's known as a 'Technical Provisions' basis, which meant that USS is between 78% and 83% funded - in other words, it only had around 80% of the amount of money it needed at that time
- that the cost of building up future benefits in the defined benefit section of the scheme has increased significantly.
The JNC's proposed changes are intended to address these issues.
For more information see the 2020 valuation.
The cost of building up future USS benefits
The cost of funding 'guaranteed' defined benefits as a whole has increased significantly over the last decade. This is something that many private DB pensions schemes will have experienced.
There are a number of reasons for this which include record low interest rates and a poorer outlook for future investment returns.
To pay members' benefits, the scheme relies on employer and member contributions combined with future investment returns. However, the kind of returns available on investments most closely matched to the promises being made to USS members – inflation-linked incomes guaranteed no matter what happens to the economy in the future – are at record lows.
If returns on index-linked government bonds were like they were in the 1990s, you would only need to invest about £50,000 to guarantee receiving £100,000 (adjusted for inflation) in 20 years' time. Today, you would need to invest about £170,000 to get the same outcome.
The Trustee expects other options, like shares, to perform better than low-risk bonds over time – but, unlike the pensions being promised to USS members, there are no guarantees – particularly in terms of their performance against inflation. They are also more expensive to buy today than in the past, which has led to a widely held expectation that future returns will be lower.
More details on future investment outlook are available on the USS website.
Prudence and risk
The Trustee needs to protect against the risk that there will not be enough money to pay all the pensions already promised to members, which are due to be paid out over the course of the next 70-plus years.
It's the trustee's primary legal duty to protect the pensions promised to members. The trustee has to ensure there is a good degree of certainty that there is enough money to do this and a high degree of certainty that employers can be relied upon if there isn't enough money.
In an ideal world, to fulfil its primary duty, the USS trustee would be aiming for a very low-risk funding strategy. However, taking such a low-risk approach costs more. So instead the 2020 valuation takes a balanced approach by relying on riskier, uncertain future investment returns to mitigate the rising cost of relying on more certain investments like government bonds.
The trustee can only do this if it can rely on employers to bridge the gap if returns fall short. That's why a key part of the valuation was the commitment given by employers to provide long term support and financial information to the USS trustee – it allowed the USS trustee to take this balanced approach to risk which helped it place a lower cost on the scheme than it would have otherwise been able to do.
- From 18 October 2021
- Notice of consultation and where to find more information are provided to affected employees, elected representatives and recognised trade unions.
- From 25 October 2021
- Consultation website goes live.
- 1 November 2021
- Consultation start date.
- 17 January 2022
- Consultation end date.
- Responses submitted by affected employees, elected representatives and recognised trade unions during the consultation period will be considered by the Trustee, before a decision is taken as to whether or not to implement the final changes.
- From February 2022
- The final position will be communicated to affected employees elected representatives and recognised trade unions.
- 1 April 2022
- The earliest possible date that the any changes would be implemented.
Please note this information is a summary only, for general guidance. It is not a legal document and does not explain all situations or eventualities. USS is governed by a trust deed and rules and if there is any difference between this publication and the trust deed and rules the latter prevail.