Employers look to modify USS proposals in light of inflation

That valuation — which saw the USS deficit quadruple to more than £14bn — led the USS trustee, advised by the Pensions Regulator, to lay out three illustrative scenarios for rate increases, with the most favourable showing a rise in contribution rates to between 30.7 per cent and 42.1 per cent of payroll. 

Under the least favourable scenario, that figure would be as high as 56.2 per cent.

UUK then put forward an alternative set of proposals, pledging a 20-year moratorium on scheme exits and greater covenant support measures, themselves bolstered by the announcement of even more generous proposals in July.

The USS trustee agreed to its alternative course, but employers have since been locked in a dispute with the University and College Union, which argued that UUK’s proposals amounted to a cut of 35 per cent to guaranteed retirement income for an average member. 

UUK has repeatedly disputed the figures and calculations used by the UCU, but the union successfully balloted for strike action, another round of which is due to take place in February.

The employer group argued that its proposals would enable contribution rates for employees and employers to remain at 9.8 per cent and 21.4 per cent respectively, staving off the “unaffordable” rate hikes initially proposed by the USS trustee.

However, after consulting its own members, it has now suggested amending its plan to address concerns raised about a suggested 2.5 per cent cap on inflationary increases for entitlements built up from April this year.

“Introducing this new cap, replacing the existing cap provisions which start to activate once [the consumer price index] exceeds 5 per cent, is of course hugely important in securing the necessary reductions in the value of the future benefit package — enabling member and employer contributions to remain at their current level,” UUK explained.

“However, it appears a very substantial concern of those being consulted that this change is being introduced especially at a time when inflation, as measured by CPI, is at relatively high levels.”

It said it had approached the USS trustee to explore the possibility of a “transitional measure”, which would “act as a bridge between the current benefit arrangements and the full activation of the proposed benefit package”.

The proposed “cap transition” would see the 2.5 per cent cap introduced in UUK’s original proposals “temporarily overridden” by the existing cap provisions, and not be introduced until after April 2024, at which point it is hoped that the current high level of inflation will have abated.

The suggested amendment would come at a cost, however. UUK explained that the USS trustee’s estimate of the total cost “is an extra 0.3 per cent of salary payable for the period from April 1 2022 to March 31 2024”.

Should the amendment be accepted by the Joint Negotiating Committee, the additional cost would be split between members and employers “in broadly the same proportions as apply under the scheme’s cost-sharing provisions”, it said.

This would amount to a 0.1 per cent rise in member contributions (to 9.9 per cent) and a 0.2 per cent rise in employer contributions (to 21.6 per cent).

UUK explained that there were still difficulties with this approach, which would constitute a “listed change” under the regulations and thereby require that members and employers be consulted for a minimum of 60 days, opening questions about what the interim arrangement would be.

It added that there was a second consideration, this being that responses to its last consultation showed members were already near their “limit of affordability and indeed sustainability of their contribution levels”.

UUK has therefore proposed to the USS trustee that the 0.3 per cent cost increase would be met by a 0.2 per cent rise in employer contributions, paid for two years, with the remaining 0.1 per cent met through “a modest extension to the recovery plan”.

The consultation closes at 5pm on February 10.