USS Briefing July 2014 Geraldine Egan National Pension

USS Briefing: July 2014 Geraldine Egan National Pension Official

2008 to 2011 � 2008 Employers’ contributions up from 14% to 16% �Final salary protected for existing staff (but changes to inflation capping) �New career-average revalued benefits (CRB) scheme for new entrants implemented by the USS board �Flexible retirement �Removal of right for an unreduced pension if made redundant �Dispute and industrial action �Agree ongoing review and extension of right to unreduced pension (stops this October)

HOW IS THE FUND VALUED? �Projected cost of future benefits (liabilities) compared to existing assets + expected contributions + investment return �USS use a Gilts+ method to calculate the discount rate (projected return from investment) �Desire to de-risk (t. PR pressure, contribution volatility) �UCU have challenged the method used/promoting use of an internal rate of return, rather than Gilts as a proxy �USS asset base – c. 20% in gilts �More accurate to use our suggested method

FUND VALUATIONS March 2011 2012 (Triennial) March 2013 Assets £ 32. 4 bn £ 33. 9 bn £ 38. 6 bn June 2013 March update 2014 (Triennial) Provision al £ 37. 9 bn £ 39. 1 bn Value of liabilities £ 35. 3 bn £ 43. 7 bn £ 50. 1 bn £ 45. 8 bn £ 46. 6 bn Deficit £ 2. 9 bn £ 9. 8 bn £ 11. 5 bn £ 7. 9 bn £ 7. 5 bn Funding ratio 92% 77% 83% 85%

USS FINANCIAL MANAGEMENT PLAN �Requested by The Pension Regulator (t. PR) �Comprehensive approach �Independent review of employers’ covenant �Approach to deficit recovery and investment strategy (de-risking) �Ernst and Young report on ability to pay increased contributions �Employer bands – up to 21%; 23% to 25% �Employers’ response is to dispute findings but also to accept contributions from 16% to 18%

THREE COMPONENTS �Past service deficit �Future service costs �De-risking assumptions USS BOARD’S GUIDING PRINCIPLES �Reliance of the scheme on the sector �Stability of contributions �Investment risk and tail risk CONTRACTING OUT CHANGES Employers pay 3. 4% more NI and employees 1. 2% more

WHAT CHANGES ARE UNDER DISCUSSION? UCU proposal: Teachers’ Pension Scheme (TPS) for all � 1/57 th accrual rate �No automatic lump sum (commutation at 12: 1) �Revaluation at CPI + 1. 6% �Recognition of incremental approach Employers’ consultation based on a Hybrid � Redefine the way that the salary link for past service is worked out from a link to the individual members’ final salary to CPI; � All future service (for all members) to be based on a; �Core defined benefit scheme modelled on the current careeraverage scheme for new starters up to a cap (the example given is £ 40 k); �Above the cap, members and employers could contribute to a defined contribution scheme; � Employers would pay increased contributions of 18% to take account of the current deficit and if the funding situation improved would agree not to reduce their contribution rate below 16%, with any additional funds used to enhance scheme benefits.

USS CRB section Date Earnings 1/80 th CPI +3. 1% CPI +5. 2% CPI +2. 7% 2011 £ 44, 166 £ 552 £ 569 £ 599 £ 612 £ 629 2012 £ 44, 607 £ 558 £ 587 £ 560 £ 575 2013 £ 45, 053 £ 563 £ 575 £ 591 2014 £ 45, 954 £ 575 Total £ 590 £ 2, 385

WHAT WOULD BE THE LIKELY EFFECT ON THE SCHEME? �Approximate costing (technical provisions/assumptions still under discussion) �Current contributions: Employer = 16%; FS = 7. 5%; CRB = 6. 5%; Blended = 23. 4% Scheme Status quo FS/FS indexations CRB for new TPS for all No change to accrued FS indexation Hybrid CPI indexation for past service Past service deficit 10. 9% spread over 15 years 4. 3% spread over 15 years Future service Total Note 26. 7% FS 19. 1% CRB Blended 25. 85% 33. 0% 36. 75% With de-risking 43. 9% With de-risking <21. 5% (cap) time Reduced derisking?

POSSIBLE TIMETABLE Event UCU branch briefings in Manchester, Glasgow, London, Birmingham Date 18 to 25 July Note Special pre-92 branch decisionmaking conference USS Board Fri 19 th. September To discuss SWG/negotiators’ report and decide on next action. Important valuation assumptions and tech provisions for consultation Ballot period (if necessary) Ballot closes Wed 1 to Mon 20 October USS JNC 22 October USS JNC 13 November USS Board 20 November USS Board Jan 2015 USS Board Mar 2015 24 September Action could start on Oct/beg of Nov Proposed scheme design formally tabled USS will want scheme design settled? Finalise technical provisions, agree terms formal consultations (60 days) on changes Refinements following consultations Final/implement