The Universities Superannuation Scheme (USS) was set up in 1975, replacing a stocks-and-shares Defined Contribution scheme called FSSU.
For forty-four years, from 1975 to 2011, USS paid out a Final Salary pension based on a 1/80 accrual rate. This meant that if you paid in for forty years you would retire on half your annual salary. Far from being unaffordable, the scheme grew. Only in 2011 did we begin to see the introduction of ‘Career Average Revalued Earnings’ (CARE) replacing Final Salary. Contributions for employees until 1997 were 8%, on the basis of covering historic problems created by the FSSU, reduced to 6.35% from 1997. Employer contributions fluctuated over the time period (10% initially, rising to 18.55% in 1983, 14% from 1997, 16% from 2009).
But for over forty years the scheme was essentially very stable. As a ‘last man standing’ multi-employer scheme in a growing HE sector funded by government spending, the risk of default was considered to be very very low.
In 2011 we began to see the beginning of ‘reforms’ that have increased income to USS and, apparently paradoxically, led to ever increasing claims of deficits. These included closing Final Salary to new entrants (but increasing costs to 7.5%), dividing the workforce and increasing the retirement age from 60 to 65. At the time, these changes were justified on a number of grounds: the 2008 recession had hit pension assets, staff were living longer, etc. As we know, 2011 was not the end of the ‘reform’ programme but the start of the dismantling of USS Final Salary and now Defined Benefit.
Our first response to the alleged ‘crisis’ in USS funding has to be, why was it that USS was able to pay out a higher-value Final Salary pension scheme for 44 years? How can this be possible when we are told that a lower-value CARE scheme — with a higher 8% employee contribution — is now ‘unaffordable’ and destined for deficits?
What has changed?
First Actuarial’s analysis, Progressing the valuation of USS (Salt and Benstead 2017) projected forwards to show that the shared 8%/18% contribution rates were sufficient for the scheme to pay pensioners for the next thirty years without touching the assets (£60bn by that point). So in fact, in its own terms, USS should be in a steady-state, its assets growing through investments returning levels of 5-10% pa, well in excess of CPI inflation at around 3%. Not only is there no deficit, but the scheme has a healthy working balance — on most recent official figures, £67.5bn in 2019!
Made in Westminster
The central assumption underpinning the health of the pension scheme – the very low risk of default – has been undermined by Central Government. The chaotic expansion and competition of the tuition fee market ‘reforms’ launched in 2011 with the £9k undergraduate fee have been devastating for the sector. But it has also undermined USS. Continue reading