University of Southampton UCU General Meeting – Proposed changes to USS pensions USS Governance WHO IS INVOLVED IN SHAPING THE USS SCHEME? There are four key actors with a considerable influence on the shaping of our pension scheme: The USS Corporate Trustee (the USS Board) The Employers UCU The Pensions Regulator (tPR)

University of Southampton UCU General Meeting – Proposed changes to USS pensions Changes to USS in 2011 Prior to 2011, the USS pension scheme was organised as follows: All pensions were Final Salary Pensions. Your pension was your final salary times the number of years you were in it divided by 80, so for 40 years you got ½ of your final salary, plus 3 times that as lump-sum. Once you’ve retired your USS pension was increased with the RPI inflation index On 10 May 2011, detrimental changes were finally forced through the USS Joint Negotiating Committee (JNC) against UCU’s wishes. Although we were successful in defending the position of the final salary scheme for existing members, there were some changes.

University of Southampton UCU General Meeting – Proposed changes to USS pensions Changes to USS in 2011, continued... The changes introduced were: Existing members stayed in the Final Salary section, but contributions increased from 6.35% to 7.5% of salary. Removal of the right of members over 55 made redundant to be able to retire with an unreduced pension. New members went into the Career-average (CRB) section and contribute 6.5% of salary. Each year of salary is re-valued by the cumulative CPI inflation index from that year to the year of your retirement (except for any years when CPI is >5%) before the average is calculated, and your pension is that average times the number of years divided by 80. For both sections, once you retire your pension gets increased with CPI instead of RPI, a decrease of typically 0.8% per year, and only if CPI<5%. The lump sum of 3 times pension exists in both sections.

University of Southampton UCU General Meeting – Proposed changes to USS pensions Why are further changes proposed? The deficit or surplus of a pension scheme is the difference between its assets and its liabilities. The UK Pensions Regulator requires each pension fund to perform a formal valuation every three years and agree a recovery plan within 15 months of the valuation date if it indicates a deficit. In the last few valuations, the USS pensions scheme has been in deficit. March 2011 (Triennial) March 2013March 2014 (Provisional Triennial) Assets£32.4bn£38.6bn£39.1bn Liabilities£35.3bn£50.1bn£46.1bn Deficit£2.9bn£11.5bn£7.5bn Funding Ratio 92%77%85%

University of Southampton UCU General Meeting – Proposed changes to USS pensions Why are further changes proposed? The current practice in USS is to use the current market value of the assets, and to calculate the liabilities from the current yield on government bonds (“gilts”) and assumptions based on that. The problem is not in the assets but in the liabilities. The increase in liabilities is mainly due to the drop in the gilts rate, which was 4.4% in March 2011 and 3.1% In March 2013 (which was actually below the derived inflation estimate). That difference may seem small but it becomes large when compounded over the decades relevant to a pension fund. UCU representatives continue to challenge the method and assumptions behind these figures. However, they do influence the approach adopted by the Pension Regulator, USS (both Executive and Board) and the employers. In addition, UCU continues to challenge the de-risking approach of USS.

University of Southampton UCU General Meeting – Proposed changes to USS pensions What are the proposed changes? Existing Final Salary members move to Career Average (CRB) for further accruals, so all members are in CRB except those who have already retired. Employees’ CRB contribution rates rise to 7.6%, employers’ 18%. Past accruals for Final Salary members are converted to use the salary in the year of the change instead of the salary at retirement (or maybe the current best 3 out of previous 13 years rule is applied), re-valued with CPI from the change to the year of retirement. We believe that this could result in considerable losses for current members of the scheme. For future accruals CRB applies only to salary up to a cap, suggested at £40k. Contributions for salary amounts above the cap go into a defined contribution scheme. In the longer term, UCU is concerned that this could result in all pensions moving to considerably less generous defined benefit arrangements.

University of Southampton UCU General Meeting – Proposed changes to USS pensions Modelled Example of changes Assuming an annual pay settlement 1.8% above CPI, which is what was assumed in the 2011 USS valuation, and using one particular quote for an annuity, I’ve modelled the pensions of various types for an example academic career path. This is based on an academic who starts at grade 4, point 29 at age 25, increments annually until reaching the top of grade 6, point 52 at age 48, and retires at 65. Please note that the final line is italicised to indicate that this estimate is highly uncertain. Pension Type USS Pension State Pension Total% of final salary Final Salary £29,957£5,881£35,83860% CRB on full salary £18,787£5,881£24,66841% CRB to £40K £14,088£5,881£19,96933% CRB to £40K + DC as annuity £16,742£5,881£22,62338%

University of Southampton UCU General Meeting – Proposed changes to USS pensions Timetable for Further Talks UCU Decision making conference Friday 19 SeptemberTo discuss report from UCU negotiators and decide next action USS Board 24 SeptemberImportant Valuation assumptions and technical provision for consultations USS JNC 22 OctoberProposed scheme design formally tabled USS JNC 13 NovemberUSS likely to want scheme design settled USS Board 20 NovemberFinalise technical provisions and agree terms of consultation

University of Southampton UCU General Meeting – Proposed changes to USS pensions UCU proposed negotiation position UCU has been running a consultation process, and as a result have proposed the following principles: a. Recognises that the funding situation will require an increase in employer contributions and that pension provision should be set at a level which is affordable for the institutions in the long term; b. Considers it vital to maintain a defined benefit scheme; c. Acceptance that there could be a limited increase in employee contributions in return for benefit improvements to the CRB section; d. Considers that any changes to the benefit structure should provide for inter- generational fairness and benefit the vast majority of members in the future; e. Requires any improvements in the funding position to be used to improve defined benefits.

University of Southampton UCU General Meeting – Proposed changes to USS pensions UCU Conference on USS On 19 September, UCU branches will be asked to consider: Authorising a ballot for industrial action to take place between 1 to 20 October Authorising a ballot for action short of a strike between 1 to 20 October The primary purpose of seeking an early ballot is to ensure that our negotiators can demonstrate the strength of UCU members resolve to defend their pensions when they enter negotiations on 22 October. Any industrial action, or action short of a strike, should be staged and responsive to the speed of the imposition to any changes to the pension scheme. That if necessary, action should commence with implementing an assessment and examination boycott in the Autumn term. That UCU should publicly challenge the valuation methodology adopted by USS, which justifies the employers proposed changes

University of Southampton UCU General Meeting – Proposed changes to USS pensions UCU response to USS changes Southampton UCU representatives will be attending the UCU decision making conference in Manchester on 19 September. Southampton UCU representatives will seek to reflect the views of our members at University of Southampton. Questions? Comments?