A list of FAQ's will be created/published relating to questions arising from the presentations.
With the potential increase being proposed what is the breakdown for increase for employees and increase for employers? I've only seen the total amount in documents
Currently member contributions are 9.6% of salary. They are planned to rise to 11% on 1 October 2021 as agreed following the 2018 valuation of USS. Based on the November 2020 proposed covenant improvements and no benefit reform the valuation results set out in the USS document here would require member contributions of 16.3% (scenario 2) and if a stronger level of covenant support were agreed then the results in the same document would suggest member contributions of 13.6% (scenario 3). Employer contributions are currently 21.1% rising to 23.7% on 1 October 2021. Under scenario 2 from the USS document they would rise to 33.3% or 28.5% (scenario 3).
What is the increase employees might have to be subject to (as opposed to the total)?
See Answer to Question 1
Can employees opt out of USS and choose to join one of the other schemes that Warwick offers?
Employees can opt out of USS if they wish. However USS contains provisions that prevent employers (Warwick included) from offering alternative pension provision to USS eligible roles. This is known as the exclusivity rule (see rule 45 in the USS rules available on their website).
Should a member opt out of USS they will no longer build up any further pension saving nor would they have death or incapacity benefits. Any pension built up in USS to the date of leaving will be “preserved” until retirement. This means that the defined benefit element will increase with inflation (as specified in the rules) and any defined contribution element will continue to grow with investment performance until retirement.
Further, should an employee opt out they would be periodically re-enrolled to USS to comply with automatic enrolment legislation
If we opt out of USS as the price of being a member is too high, what happens to our contributions to date AND what are our alternative options?
See Answer to Question 3
It has been suggested that the valuation is a self-fulfilling prophecy, in that the way it is being managed is leading USS to fail. To what extent is this true?
Whilst the valuation is a very complex exercise based on very many factors, in its simplest form it is a pricing exercise: to determine the “price” or value of pensions built up to the valuation date to compare with the current asset value and therefore to determine a deficit or surplus and the price of benefits being earned by members as they continue to work. If a high price is set (a very prudent valuation) then a larger deficit will be calculated which means as it is paid off, more assets will be held in USS to fund pensions built up. This will allow USS to take less investment risk and members benefits are more secure since the chances of future deficits are reduced. The downside of this approach is the price of benefits being built up is higher (making it less affordable) just at the time that larger deficit contributions are required which also reduces the affordability of benefits being built up. If too low a price is set then the assets set aside to pay for pensions built up are less, making is more likely there will be a deficit in the future (which if it is too large for employers to fund could lead to the failure of employers or benefits not being fully paid) but the price of benefits being built up is also reduced making it more affordable to continue in its current form. The Pensions Regulator says the Trustee’s key duty is to protect the pensions already built up.
I understand USS are moving all their investments to bonds which is affecting the valuation as it will mean the fund doesn't increase in line with inflation - is this correct?
USS invests in a wide range of assets as shown here. We do not believe that USS plans to move all its investments to bonds. However, there has been some discussion about increasing the proportion of assets held in bonds. Broadly speaking bonds are expected to generate a lower return than other assets like equities, commodities, and private market investments but they are expected to provide a better match to the liabilities of USS. In very simple terms investing in bonds means that the funding level is more predictable but as bonds are expected to return less than equities greater cash contributions are required to pay the benefits.
UUKi provided an alternative valuation which USS rejected. What was it and why was it rejected?
UUK provided a consultation response to USS on the valuation approach and has provided further views in March. We also note that UCU have also provided their views and the Valuation Methodology Discussion Forum has provided evidence. We are not party to USS’s decision making process so we cannot confirm the precise reasons why USS has decided on its approach in the light of the wide range of information presented. However, based on statements made here specifically on page 41. Our understanding is that the results presented within that report “represent the limit of what we understand TPR would regard as compliant – subject to the relevant covenant support measures being agreed and fully implemented” in other words should USS have presented a more favourable valuation position (relative to the covenant measures) it is likely that it would not be acceptable to the Pensions Regulator.
Why have USS rejected the alternative valuations?
See Answer to Question 7
What was UUKi's proposal and why have USS rejected that?
See Answer to Question 7
Is there a point where Warwick would consider leaving USS and using an alternative scheme?
In theory it is possible for each employer to consider leaving USS and use an alternative scheme, although there is a currently a temporary moratorium on this occurring. However Warwick remains committed to USS and to finding a solution to the issues presented by the USS 2020 valuation. As part of the commitments proposed by UUK (in November) there was a commitment that all employers would remain in USS for a minimum of 6 years from the valuation date. Although this commitment remains under discussion it appears that the outcome of the valuation could include a commitment of at least that length. Further, when an employer leaves a scheme like USS it is required to pay a deficit payment. As this is a one-off opportunity for a scheme to ensure that it has enough money to pay benefits it is calculated on a very cautious approach and is therefore typically very large. I would guess that most employers in USS are unable to afford this large termination deficit payment so leaving USS is simply not a practical option.
If this year's valuation is based on the current financial climate (interest rates low, growth slow, impact of global pandemic etc), and if the market recovers in time for the next valuation is there a chance that costs and contribution rates could go down?
The current valuation under discussion is based on market conditions at March 2020. If the valuation were carried out at a different date it is likely that different results would be obtained. Specifically, a different cost of benefits being earned (future service cost), a different deficit and different deficit recovery contributions (if any). As a result, the contribution requirements could be higher or lower than currently under discussion. Whilst the valuation takes into account very many factors the “headline” factor is the expected level of return from investments, particularly above future inflation. The higher this expected return is the better the valuation results are; the lower the expected return is, the worse the results are.
At present, based on current market conditions and the information made available publicly by USS I do not think that if the valuation were updated to the current date a lower contribution requirement would emerge. However in saying that I am not aware of the advice that USS has received that may influence how their valuation is updated over time and the latest Monitoring Dashboard publication on the USS website setting out the updated valuation at 28 February 2021, based on the 2018 methodology indicated a deterioration from early 2020. The USS trustee is best placed to provide a definitive update.
What are the chances that USS will eventually move to a defined contributions scheme only and what is your view on how such a transition would look like? Would you be able to discuss the implications for all stakeholders involved?
It is impossible for me to give a view on the chances of USS moving to a defined contribution scheme only as that depends at the very least on the outcome of the current valuation discussions and negotiations and future valuations. If USS were to move to a defined contribution scheme only then I expect a period of consultation and negotiation with all stakeholders. Turning to the implications: as we explained in our presentation, a defined benefit scheme, such as the USS income builder providers certainty to members about the level of benefit they may retire with. The risks of providing that benefit mean that contribution requirements are unpredictable. Under a defined contribution scheme such as USS Investment builder, contribution requirements are predictable but the level of benefits on retirement are uncertain.
The comparison of where the risk sits within this hybrid scheme is only one aspect. The other aspect is whether the scheme provides good value or not and this depends on how much you contribute and how much your employer contributes to benefits being built up within each section. These issues and implications will I am sure be explored in much more depth if proposals are advanced for USS to become a defined contribution scheme.
Would you be able to share your perspective on the UCU assessment of the 2020 valuation as discussed by Sam Marsh (UCU's USS negotiator)? It would be particularly helpful to learn about your perspective on the suggested discrepancy in the applied level of prudence when estimating the discount rate used in the valuation in terms of returns relative to gilts vs returns relative to CPI.
The level of prudence within the valuation is a matter of judgement rather than a formulaic approach: there is unfortunately no unique answer. It is therefore not surprising that different stakeholders and different advisors form different views on what the level of prudence in the valuation assumptions should be or is within any set of assumptions. UCU have presented their views on the level of prudence within the valuation assumptions. UUK has also presented their views on what might be an acceptable level of prudence in the assumptions, both in their consultation response in November 2020 but also in response to the March 2021 results published by USS. In addition, the JEP and VMDF have worked since the 2018 valuation on the valuation approach. All parties noted above have set out their views together with the underlying rationale and evidence for formulating their views. It is the USS Trustee that ultimately sets the assumptions and determines the valuation results in the context of all the feedback received including the Pensions Regulator. Further USS has said in its update on the 2020 valuation “Scenarios 2 and 3 in the 76.1 report represent the limit of what we understand TPR would regard as compliant – subject to the relevant covenant support measures being agreed and fully implemented.” The inference of this statement seems to be that using assumptions that produce a more favourable outcome (with reference to the relevant covenant support measures) would not be acceptable to the Pensions Regulator.
The suggested contribution rates seem extremely high. In your view, how close are these levels to a point where employers currently in the scheme would no longer be able to afford these levels and the scheme would unravel (e.g. as employees would withdraw from the scheme in large proportions in response to suggested reductions in the future accrued benefits likely proposed by USS in such a scenario? As a fairly new member of staff, I would appreciate a discussion on employers' ability to keep up with these demands as well as a better understanding of current employee enrolment rates (and possibly how they have reacted to past increases in member contribution rates).
It is impossible for me to judge how close the contributions are to the point where employers could not afford them. I think it is clear that some employers within USS can afford higher contribution levels than other employers who might not be able to. As the contribution requirement is the same for all employers this means that if a certain level of increase in contributions is applied it would be more problematic for some employers than others. As I described in response to an earlier question, if an employer wished to withdraw from USS (ignoring the current moratorium and potential commitments made by UUK) then UK pensions legislation requires that employer to pay its share of the deficit. This deficit assessment is made on a very cautious basis since there is no possibility in the Trustee asking for contributions at a later stage. It is my guess that most employers within USS could not afford such a deficit payment.
I agree a greater understanding on the level of enrolment and subsequent opt out rates would be useful for all parties. UK pensions legislation requires all employers to periodically enrol most employees into a pension scheme. Whilst that is clearly beneficial for most employees it is inevitable that some employees wish to opt out and they may do so for a variety of reasons. For example, they may struggle to afford the required levels of contributions, they may feel that the scheme does not represent good value for them despite their employers contribution, or they may be employed in a role where pension saving is not important to them at that stage in their career ( e.g. in a more temporary or ad hoc role where their main aim is short terms cash rather than providing a “career income” in which case they feel pension saving is not relevant). A greater understanding of the levels of opting out and the reasons behind members opting out would be useful for all stakeholders.
Is it correct to interpret your discussion of the balance that USS needs to strike on prudence as follows: past promises of benefits were mis-priced , i.e. overly optimistic benefits were promised relative to USS assumptions on the achievable returns moving forward. This past choice to effectively set too low a price led to the alleged deficit today which USS is now looking to recover by increasing the price paid today for future benefits. You mention that the pension regulator emphasises the need to protect accrued benefits which seems to favour this type of effective re-distribution from younger to older members. Does the legal framework also offer some mechanism to limit the scope for such transfers?
Past valuations were carried out in the light of the then prevailing market conditions and were based on predictions/assumptions about the future at the relevant valuation date. Unfortunately investment (and other) experience since those valuations has not been in line with those predictions/assumptions and USS has indicated they believe a deficit has emerged. It is only with the benefit of hindsight can we say those predictions/assumptions made at previous valuations were “wrong” and as a result the “wrong” price charged. This is how all defined benefit pension schemes work and is not something specific to USS. It is the reason why actuarial valuations are carried out periodically any prediction/assumptions are unlikely to be borne out in practice and the purpose of periodic valuations is to assess and adjust in the light of experience.
Because it is impossible to predict the future, legislation and the Pensions Regulator requires Trustees to use prudent assumptions. In other words a set of predictions/assumptions that are more likely than not to be exceeded in the future. In other words there is more than a 50% chance that future valuations are better than predicted by the valuation assumptions. The Pensions Regulator’s Code of Practice on funding defined benefit schemes says “The trustees’ key objective is to pay promised benefits as they fall due. They may also have additional aims: for example, …the preservation of ongoing benefit accrual”. Aside from this there is no specific guidance to the weight that can be given in terms of relative importance of protecting accrued benefits and preservation of future accrual. Therefore there is no specific limit or balance between protecting benefits built up and preserving future benefit accrual.