The progress of the Joint Expert Panel
It is now two months since the Terms of Reference for the Joint Expert Panel (JEP) on USS were agreed, and a month since the first meeting of the Panel on May 31st. A website has now been set up on which are published regular updates from the Chair of the JEP, Joanne Segars, and details of both the UCU and UUK nominees to the Panel. The UCU nominees – Saul Jacka, Deborah Mabbet, and Catherine Donnelly — are all academics with relevant fields of expertise, while UUK has nominated three figures with backgrounds in pensions consultancy and policy-making. Joanne Segars, a joint appointment as independent chair, is the chair of LGPS Central Ltd, which pools the investments of a number of Midlands-based local government pension schemes. She is also a previous Head of Pensions at the TUC.
The JEP has now met four times, and a number of things are becoming clear. The most important is that the JEP’s remit is restricted to the valuation of the USS scheme in a pretty narrow sense. In particular, the JEP will make no recommendations on future benefits or contribution rates for either employers or employees. These will be left to the (unreformed) Joint Negotiating Committee (JNC) to decide after the JEP reports. The initial work of the JEP will be limited to assessing, first, whether the existing assets and liabilities of USS are in surplus or deficit, and by how much; and, second, what total contribution rate would be required going forward to pay for specified levels and types of benefit promises. There will thus remain a great deal to be negotiated between UCU and UUK even if both sides accept the conclusions of the JEP.
There is not yet any indication of what those conclusions are likely to be. It is, however, clear that the JEP is asking at least some of the right questions, and of the right people. The Panel is considering, for example, how important the three “tests” of adequate scheme funding used by USS — in particular the notorious but obscure Test 1 — were to the outcome of the 2017 valuation; whether alternative approaches were wrongly neglected; how appropriate the high bar of “self-sufficiency” is for assessing the state of a pension fund in the uniquely robust HE sector; how the “discount rate” (which determines the present cost of future benefits) should be calculated; and whether the employer covenant and associated risk budget of the scheme were appropriately evaluated. Evidence on these questions has so far been taken from USS executives, the Scheme Actuary Ali Tayyebi, representatives of the Pensions Regulator, and the actuaries for both UCU (First Actuarial) and UUK (Aon). Submissions from members and other USS stakeholders are still invited, and should be sent to email@example.com.
Importantly, USS has committed “to provide the Panel with the information it needs” to satisfy its Terms of Reference, at least in the judgement of the JEP Chair. Evidence taken from First Actuarial, for UCU, and Aon, for UUK, has (unsurprisingly) produced a combination of shared and contrasting views on the valuation, but Joanne Segars notes that “there were a number of common points and views on certain key areas”. She thinks these will potentially be “helpful in developing the Panel’s assessment and recommendations”. Whether this is grounds for optimism or pessimism about what will emerge from the JEP when it reports, however, will only become clear in due course.
In the meantime, USS itself has (as promised) proceeded with the implementation of “cost sharing” under the terms of the November valuation, as is its statutory obligation now that the June 30 deadline for completion of the 2017 valuation has passed. Cost sharing is the process under the Scheme Rules whereby, in the absence of a negotiated agreement on contributions and benefits following a revaluation of the Scheme, the trustee alters the level and structure of employer and employee contributions so as to continue to fund current benefits, and to recover any deficit in the funding of past accrual. According to the November valuation, the combined employer-employee contribution rate required to fund the current benefit structure is 37.4% of total salaries, an increase of 11.4 percentage points on the status quo.
The Scheme Rules (§§76.4 – 76.8) provide for this increase to be covered in three stages if the JNC fails to agree an alternative (as it has). First, the employer “Match” contribution to individual DC pots (a DC contribution from the employer matching the first 1% of salary an employee pays into the Investment Builder) is removed, and the money redirected into the DB fund. This happens automatically under the rules. Second, employer contributions to members’ DC pots above the DB salary threshold may be reduced below the current 12% of salary, so that more of the total 18% employer contribution may be directed to the DB fund. Any such redirection must be agreed by the JNC and passed through a statutory consultation with employees. Neither has yet happened, so we do not yet know what reduction may be made. Finally, if these redirected contributions do not together cover the shortfall in funding of the DB scheme, the total contribution rate is increased, with employers paying 65% of the increase and employees the remaining 35%.
What now for USS?
USS members should therefore anticipate two things. The first is a consultation at some point in the next six months or so on a reduction in the employer contribution to members’ DC pots above the salary threshold. The second is an increase in the employee contribution rate from 1 April 2019. If no reduction in the employer DC contribution above the salary threshold is agreed through the JNC and the increase is introduced all at once, the increase will be from 8% of salary to 11.71%. (At the same time, the employer contribution would increase from 18% to 24.89%.) In practice, the increase may be somewhat less, and is likely to be introduced gradually. USS promises to update scheme members in late July on the balance between reductions in DC contributions and increases in the overall contribution rate which has been settled upon, and presumably also on the planned phasing of increases.
It is important to stress that these increases are not expected to remain in place for the full 2017-2020 valuation cycle. Rather, once the JEP has reported in September or October, negotiations will resume at the JNC over reforms to contribution rates and/or the benefit structure of USS in light of the JEP’s report. Since we do not yet know what the JEP will conclude about the existence or scale of the existing scheme deficit or the cost of providing benefits in future, it is pointless to speculate on what these reforms might look like. Once agreed, they would be implemented as quickly as possible, since neither UCU nor the employers have an interest in sustaining the large contribution increases due to be imposed under cost sharing. In practice, though, implementation is unlikely to be possible much before the end of 2019, or even before the start of the 2020 tax year on 1 April. There can be no question that the USS dispute still has a long way to run, and that there remain considerable hurdles to be crossed before UCU members can be confident of a satisfactory resolution.
– Sam James, CUCU Vice President