Updates for staff from the President and the Provost

Many of the staff who work at Imperial are in the USS pension scheme, which is currently the focus of a national dispute.

In fact if you are a member of Imperial staff employed in roles in the Academic & Research job family and Professional, Operational and Technical grades 4-7, it is highly likely you are a member of the USS scheme because it is the College’s automatic enrolment pension scheme for staff in these roles.

The USS is just one of the organisations involved in the current dispute affecting 400,000 pensions of staff in more than 350 institutions. The USS, or the Universities Superannuation Scheme, is the independent body which runs the pension. Its Trustees are legally responsible for ensuring the pension fund is financially sustainable.

The Pensions Regulator (TPR) is the public body, sponsored by the Department for Work and Pensions (DWP), which sets the rules for all workplace pension schemes, including the USS, that the Trustees have to follow. TPR is required by law to reduce the risk of shortfalls in pension schemes having to be funded by the taxpayer. You can read more about the purpose and role of the USS Trustees and of the Pensions Regulator.

Also involved are the University and College Union (UCU), the trades union which represents many university employees, and Universities UK (UUK), the membership body which represents the university and other institutional employers whose staff are in the USS scheme. More details about all the organisations involved are included in the FAQs below.

At the national level, there is a disagreement about the plan to tackle the current projected gap (“the deficit”) between the projected value of the pension fund (“its assets”) and the amount it would need to pay pensions in the future (“its liabilities”).

The current plan by the USS, which is supported by UUK, would from April 2019 change the Defined Benefits pension earned on salaries below £55,550 to Defined Contributions. These changes would not affect any pension earned up to April 2019 and there is the option to reintroduce Defined Benefits at a later date if circumstances allow. The USS is due to consult nationally on these proposals.

UCU has put forward an alternative proposal, and is now involved in talks with UUK at ACAS (the Advisory, Conciliation and Arbitration Service). 

At Imperial, President Alice Gast and its Provost James Stirling have made a number of statements about the dispute, which you can read here in the section on Community Messages. They have listened to staff concerns, and understand the intensity of feeling around this very challenging and sensitive issue.

They have asked Professor Richard Craster of Imperial’s Mathematics Department to work with colleagues to understand more about the financial assumptions which lie behind the current dispute. Richard and his team’s report can be read here.

Alice and James have also called upon UUK and the USS jointly to convene an expert group, including their advisers and leading academic experts, to provide full transparency on the assumptions, data and modelling approach that has been used.

While this work is going on, and even if it goes on beyond the statutory deadline for changes to be introduced, the College will agree, if asked to do so, to carry its share of the risk of staying on the current scheme while the work is completed. They have written to TPR to explain the College’s position and request such an extension.

As well as this activity, the College is conducting its own review of pay and benefits and has provided a detailed information pack  posing a number of questions around the key issues. The feedback from this review will then be used to inform discussions for our financial planning round.

The FAQs below, arranged into subject areas, seek to capture as much as possible the most common questions being received from staff, with the answers reflecting the best possible information which the College has at this present time. The FAQs are being updated as the dispute continues, more decisions are made, and as the College responds to these and to staff concerns.

As well as these regularly updated FAQs, Louise Lindsay, Director of HR, is making herself available to departments to help offer more explanations to staff if they feel that would be helpful. Requests should be made to her directly at l.lindsay@imperial.ac.uk

General questions about the USS pension

What is the USS?

The Universities Superannuation Scheme or USS is an occupational pension scheme, which is offered by all pre-1992 universities and related institutions and a number of other research and educational bodies.

If you are a member of Imperial staff employed in roles in the Academic & Research job family and Professional, Operational and Technical grades 4-7, it is highly likely you are a member of the USS scheme because it is the College’s automatic enrolment pension for staff in these roles.

Currently, USS members at Imperial pay an amount equal to 8% of their salary towards the USS every year, and the College pays 18%. If you are a member, then your member contributions will be deducted from gross earnings, meaning that tax is not paid on pension contributions subject to certain limits and allowances. You can see this on your pay slip.

The USS is a hybrid scheme, meaning that it is partly a Defined Benefit scheme and partly a Defined Contribution scheme. Members currently earn a Defined Benefit pension on salary up to £55,550 and Defined Contribution benefits on salaries above this threshold. The USS is one of the largest private pension schemes in the UK that currently still allows new Defined Benefits to be built up.

The USS is also a private pension scheme. This means that the scheme is not underwritten by the government, and is supported instead by over 350 sponsoring employers. This support from employers is often referred to as the employer covenant.

The scheme has investments assets currently worth c. £60 billion. The returns from these assets are intended to fund members’ future pensions as well as the USS’s running costs. These assets are generated by past and present contributions from employers and members, plus investment returns.

What is the difference between a Defined Benefit and a Defined Contribution pension scheme?

In a Defined Benefit scheme, the employer agrees to provide a specified, fixed, annual pension payment and/or lump sum at retirement, which is calculated through a formula based on a member’s salary and length of service. The amount usually increases with inflation and is guaranteed until death.

In a Defined Contribution scheme, members have individual saving pots that both they and their employer pay into. At retirement, members draw their pension savings from this fund, which consists of all the employer and employee contributions paid in over the years, plus investment returns that have been earned by investing the scheme in, for example, stocks and shares.

In this kind of scheme, employees can choose whether they wish to take out all their retirement savings as a lump sum, or to opt for alternative options such as an annuity or drawdown. An annuity is a fixed sum of money paid to someone each year, typically for the rest of his or her life. The annuity option provides a guaranteed regular retirement income from your individual saving pot. Drawdown involves keeping your individual saving pot invested but regularly drawing an income from it rather than purchasing an annuity.

What is the dispute about?

The current dispute centres on the management of the USS scheme itself. Some valuations have said that the fund, one of the largest in the UK, has a deficit of between £6-7 billion. Others have disputed those claims and valuations.

The USS has to put a plan in place according to rules set by the Regulator to reduce this deficit so that the pension fund stays financially sustainable.

The current plan will mean changing in some way either the contributions, or the benefits, or both, made by the employers, as represented by Universities UK (UUK), and the staff who pay into the scheme, as represented by the University and College Union (UCU). These two organisations do not agree what those changes should be and are engaged in talks to seek to resolve their differences.

More information about the industrial action taken as a result of this disagreement can be seen here.

Which are the organisations involved in the dispute?

  • The USS – this is the name of the pension scheme. The USS is overseen by a board of trustees. Universities College Union (UCU, see below) nominates three of the twelve people on the USS trustee board, Universities UK (UUK, see below) nominates four, and there are five independent trustees. More information on the trustee board and its committees can be found on the USS website.
  • Universities UK (UUK) – this is the membership organisation representing the more than 350 educational and research institutions whose staff are part of the USS scheme.
  • The University and College Union (UCU) – this is the trades union representing all employees eligible for USS membership, whether or not they are members of the union itself.
  • The Pensions Regulator (TPR) – TPR is the public body that protects workplace pensions in the UK. It works with employers and those running pensions so that people can save safely for their retirement. TPR’s main role is to minimise the risk of pension liabilities falling on the tax payer; in other words, ensuring that the size of a pension fund is large enough to pay out the pensions which it owes to scheme members. TPR works with a scheme’s trustees to agree a valuation and recovery plan where required, but it does have enforcement powers and must sign off the valuation for each scheme.
  • The Joint Negotiating Committee (JNC) – the Joint Negotiating Committee has been set up to allow Member and employer representatives to propose and negotiate changes to the USS scheme rules. The JNC brings together an equal number of representatives from UUK and the UCU. It has an independent chair that oversees discussions between employer and member representatives, and can choose to cast a deciding vote if agreement between both parties cannot be reached. Both UUK and the UCU have to agree to the appointment of the independent chair.

These are the bodies referred to in subsequent FAQs by their relevant acronyms.

What are the proposed changes?

The current proposals put forward by the JNC are as follows:

  • Employers will continue to pay a contribution of 18% of salaries towards the USS, and it is proposed that this important commitment is extended from March 2020 to March 2023.
  • Employees will continue to pay a contribution of 8% of salaries towards the USS.
  • A new option is being proposed which would allow members to pay less (4% is proposed), whilst still benefitting from the full employer contribution of 18%.
  • The JNC proposal is to change the USS so that members earn Defined Contribution (DC) benefits on all of their salary from April 2019. Currently DC benefits are only earned on salary over £55,550, with Defined Benefits (DB) earned on salary below the threshold.
  • The employers’ DC are proposed to be 13.25% of salaries. This is almost double the median employer contribution rate to DC savings by employers generally in the private sector.
  • The employers would fully subsidise investment charges – meaning that more money is invested to grow pension savings.
  • There would be much greater freedom and choice for members on how they might use their pension savings, and when these savings can be drawn.
  • Death and incapacity benefits will not be changed. They will continue to be awarded on a defined basis to provide certainty to members and their families in the most challenging of circumstances.
  • Defined benefits, or alternative scheme structures, could be re-introduced in future if the scheme’s funding situation improved.

The full proposal‌ can be seen here.

What is UCU’s view of these proposals?

UCU put forward an alternative proposal on 27 February. The USS have not said publicly whether they consider this proposal financially sustainable in line with the rules set by the Regulator. The UCU proposal is:

  • Employers’ contributions would increase by 2.7% (from 18% to 20.7% of salaries).
  • Employees’ contributions would increase by 1.4% (from 8% to 9.4% of salaries).
  • The salary cap for Defined Benefits would remain unchanged at £55,550 (linked to rises in inflation) while the accrual rate would be reduced from 1/75th to 1/80th.

These measures would be accompanied by:

  • A review of the competitiveness of USS benefits, compared to those of school teachers and academics in the Teachers' Pension Scheme.
  • A joint approach to government and other political partners with a view to them underwriting the USS scheme.
  • A review of valuation methods.
  • A study of alternative ways of providing pension benefits, such as collective defined contribution scheme.

What would these changes mean for me?

The USS needs to consult with its members nationwide on any proposals, driven in part by the deadline set by The Pensions Regulator, which has said an agreement needs to be reached by 30 June 2018.

UUK commissioned AON to model the proposed changes to member pensions based on a comparison of keeping the current design but paying higher contributions as opposed to making the proposed changes. This can be seen here.

The USS will put out further information about how any proposal might affect individuals when it consults on this nationally.

It is worth noting that pension already accrued by you is protected by law and cannot be changed retrospectively. Potential pension reform will only affect pensions saved after an agreed implementation date.

Is this a new pension scheme being introduced?

The current scheme is a mix of defined benefit (income builder) and defined contribution (investment builder). The income builder section is currently available for salaries up to £55,550 and the investment builder for all salaries above this rate.

The proposed changes mean that all contributions will be on an investment builder basis until further review. This is not a new pension scheme but a change to the existing arrangements. The investment builder is an established product with good returns on contributions - 14% last year in the default fund – more information can be found here.

Will my contributions increase?

Under UUK proposals they will not increase.

What happens to the pension I have built up already? Will that be affected?

No. Pension you have earned through past service is protected by law and cannot be changed retrospectively. The pension changes will therefore not affect the pension that you have earned up to an agreed implementation date (expected to be 1 April 2019).

Is the USS at risk of going bust, like BHS or Carillion?

No. The USS is supported on a collective basis by over 350 employers that are committed to the scheme. The scheme is designed so that the risk being run by the USS is monitored, and does not exceed the risk capacity of the sponsoring employers.

However, it is clear that the risk the USS is running in the current economic environment is very high and that action must be taken to put scheme funding back onto a sustainable footing.

Is the USS like the Teachers’ Pension Scheme and NHS pension scheme?

Academics at some universities (particularly post-1992 universities) are in the Teachers’ Pension Scheme (TPS) rather than the USS. If you are medical staff working in the NHS you may be in the NHS pensions scheme rather than the USS. These two schemes are very different from the USS.

TPS and NHS are public sector unfunded schemes backed by the UK taxpayer. In contrast, the USS is a private sector scheme directly backed by higher education institutions with a fund set aside (from employer and member contributions, plus investment return) to pay pensions. This means that USS employers carry the risk if the fund is insufficient to deliver the agreed pensions, whereas TPS and NHS pensions are ultimately underwritten by HM Treasury. Unlike the USS, TPS and NHS are not reliant on investment performance, and are not subject to the same regulations that the USS must follow. Although these schemes do still offer a defined benefit pension, the cost to employees in the scheme is higher than those paying into the current USS scheme.

NHS Contribution rates

TPS Contribution rates

Can I join another pension scheme like the NHS, TPS, or SAUL?

If you are currently a USS member, then you cannot change to a different pension scheme because of the exclusivity rules set by the USS.

Can the College pay a contribution into a private pension scheme?

No, the College is not able to pay contributions into private pension schemes as it has an exclusive agreement with the USS that only allows us to offer this scheme to our eligible staff.

Could the College set up its own pension scheme to provide a better solution and better benefits to staff?

This would not be affordable for the College. Under its current agreement with the USS, the College has to put USS eligible staff into the scheme. If we wanted to opt out of the scheme, we would have to buy our way out by paying our share of the debt. On top of this would be the cost of setting up a new scheme, which would not benefit from the economies of scale and risk sharing which we have with a collective scheme like the USS. 

Why don’t the employers just pay more?

The College, along with all other USS employers, already pays 18% of salaries towards the USS – a high level of employer contribution. Over the past three valuations, employer contributions to the USS have risen by almost 30% – from 14% in 2009 to 18% currently.

Any increase in contributions would need to be agreed with all universities that offer the scheme.

Why can’t I just pay more?

Member contributions only cover a proportion of the cost of current pensions. Whilst it is possible to pay more into your Defined Contribution scheme, Defined Benefits have to be supported by all participants in the scheme, employers and staff.

Can't we wait until the next valuation to see if the situation has improved, e.g. with better interest rates, bond yields, and investment returns?

The USS is required to sign off the valuation and submit its report to TPR within 15 months of the valuation date (i.e. by 30 June 2018). The valuation report must include how the USS plans to tackle any deficit, and must also set the contribution rate for future pensions. The USS is responsible for setting the contributions required for current pensions and has concluded that contributions would have to rise substantially in order to keep the current pension structure.

Could the USS just run on a money-in, money-out basis, without the need for change?

No, the contributions themselves are not sufficient to pay the pensions of the future. What matters is the balance between, on the one hand, the assets which will be available, which includes assumed gains in the value of investments, and on the other the liabilities to pay pensions in future.  Liabilities have recently been increasing faster than assets, hence the need for action on the deficit.

Are students at Imperial able to claim repayments for missed lectures or classes due to the USS dispute?

We recognise that our students invest significantly in their education and are focused on helping them achieve their potential, including minimising the impact of the current national dispute, which so far has varied widely across the College. We have said that students will not be disadvantaged academically and so where we do know of any impact, we are making every effort to mitigate this, for example delivering content through alternative means or attempting to recover lost teaching at a later date. Assessment deadlines may be extended and exam boards can be given instructions to ensure that students are not penalised.

In terms of the question of repayment, the fees paid by students cover all aspects of their time at Imperial, and are based on the delivery of overall outcomes, rather than being payments for specific contact hours. Through our mitigation plans, we are aiming to ensure the impact of the current dispute on these outcomes for students is kept to a minimum. However we will keep this under review.

In the meantime, we are taking forward plans set out in previous messages from the President and Provost, which include the leading of a College-funded research project by our academics, drawing on experts from across the country, to develop a more thoughtful and balanced approach to pension provision beyond the current simplistic split between Defined Benefit and Defined Contribution. 

Questions about the College's responses so far

Does the College support a Defined Benefit scheme or a Defined Contribution scheme?

It is unaffordable for the College to fund the additional requirements to maintain the Defined Benefit pension element of the USS at the moment when looking at all our other investment priorities including around staff recruitment, reward and retention. We therefore support the move to Defined Contribution only, at least temporarily. However, we also recognise the value that staff place on a Defined Benefit pension and wish to maintain the option of reintroducing it in the future if the situation changes. We are consulting on the competing priorities for staff pay and benefits.

Shouldn’t you go back to The Pensions Regulator and convince them that their position is wrong?

We don’t believe TPR is wrong. Its role is to protect the taxpayer from the risk of the collapse of private sector pension schemes. The USS is a private sector scheme (unlike the NHS or TPS schemes). It is the biggest defined benefit private sector scheme in the country; its deficit is actually bigger than most other pension schemes. TPR has made clear to the USS what it considers an appropriate approach to risk in that context. However, we have written to TPR to ask that it gives the USS more time, beyond the statutory deadline for a response, if this is needed to explore alternative solutions to meet the deficit. 

Specific financial questions

What do you estimate to be the financial impact of these changes?

This is impossible to answer accurately given the large number of variables involved. UUK commissioned its own modelling from its advisor Aon, and this work suggests that under the proposals, and including standard state pension entitlements, current members should continue to receive retirement incomes equivalent to 80–90% of those that would, hypothetically, have been received under the current benefits. In addition, during the national USS consultation (starting 19 March) a benefit modeller will be available so that you can better understand how the changes may affect you individually.

Why has the College invested in much larger loan amounts for capital projects rather than pensions?

The College has recently benefited from loans totalling £471m. The USS deficit cost to the College has been put at £78m. 

The £77.7m in the accounts is the current estimate of the liability associated with our current defined-benefit commitments. We have no corresponding assets to back this liability, and this is in many ways the essence of the problem. The other loans are liabilities that have matching assets, that is, the cash we received. We may choose to use this cash to purchase other assets (e.g. buildings) if we calculate that these will be more valuable than cash. We are always very careful to ensure that we have more non-academic assets than total loans, i.e. will never be in the situation where we had to sell an academic asset to repay debts and we never use loans to fund operating expenses (of which pension contributions are an example).

Isn’t the £77.7m liability in the accounts based on an extremely improbable scenario?

No. This is based on accounting rules and is audited by our external auditors. More details can be found on page 59 of the College’s Annual Report and Accounts.

Why can’t Imperial pay more now?

Imperial paid in 18.55% to USS alongside all the other employers in USS for nearly 14 years between 1983 and 1997, at a time when surpluses were a much smaller percentage of income. 

18% is the minimum that Imperial will have to pay. In fact the current plan would see us committed to pay a further 7% in contingent payments (i.e. a total of 25%) if the situation worsens. Also the situation was very different previously, for instance around the level of government support to the university sector and long-term gilt yields. The amount paid by employers into the USS in 1997 represented what was then needed to fund the future liabilities of the scheme, in line with the legislative basis for making pension contributions at that time.

The 18% contribution includes 2.1% for belated past deficit reduction payments. Doesn’t this overstate the amount Imperial is contributing?

The 18% includes a contribution for belated past deficit reduction payments, but this is still a commitment the College has to meet. Of the 18% employers are contributing to the USS, in future the portion of this going into the individual defined pension funds of members will increase from 12% to 13.25%.

How can you say that the College has increased its share of pension payments by 30% given you were paying similar amounts in 1997?

The 30% increase refers to the last decade.

Is the USS deficit a result of employers taking a ‘contributions holiday’ in the past?

Some have suggested that employers have in the past taken a ‘contribution holiday’, and that this is a factor in the development of the scheme deficit. This is not correct.

The USS employer contribution rate of 18.55% payable for over a decade during the 1980s and 1990s was a special rate which not only met the cost of the future benefits then accruing, but also met the shortfall in funding terms relating to the way that rights in the USS’s predecessor scheme, known as FSSU, were counted in the USS. In effect, before the days of scheme deficits in the form introduced by the Pensions Act 2004, the employer contribution rate reflected catch-up contributions to make-good the funding for those rights which had been transferred to the USS when it was created.

So the 18.55% did include provision for the funding of earlier pension rights. In fact, far from taking a contribution holiday – which employers could reasonably have done – in the late 1990s, employers chose instead to utilise the then scheme surplus to further strengthen the assumptions underpinning the scheme, bolstering the security of members’ rights.

Despite many employers in private sector defined-benefit schemes taking contribution holidays at that time, USS employers carried on paying a substantial contribution of 14% of salaries – given that back-payments for earlier rights had now been funded – rather than take a contribution holiday, which can only have improved the funding position today compared to what it would otherwise have been.

Questions about the valuation and the College's working group

What is a valuation?

Every three years, the USS carries out a valuation to establish at a particular point in time whether it can reasonably expect to have enough money to pay the pensions that all members have already built up in the scheme, and how much is needed to continue to provide the current level of pensions in future for members still actively paying in.

As well as being a specific legal requirement, the valuation gives the USS, UUK and UCU representatives the opportunity to formally take stock and, through the JNC, consider whether the findings mean any adjustments need to be made to future contribution rates, to future benefits – or both.

The USS is required to sign off the valuation and submit its report to TPR within 15 months of the valuation date.

What did the 2014 valuation show and what actions were taken?

The 2014 valuation showed a funding deficit of £5.3bn and a rise in the cost of future defined benefits. UUK and UCU agreed a package of reforms to address these funding challenges. The plan at that time was to recover that deficit over a 17-year period.

As part of the reform, both members and employers agreed to pay more towards the USS and changes were introduced to pensions’ provision from April 2016. The USS became a hybrid scheme, offering defined benefits (currently on salary up to £55,550) through the USS Retirement Income Builder, and defined contribution-type benefits on salary above the threshold through the USS Investment Builder.

What did the 2017 valuation show?

The 2017 valuation showed that there was a £6.1bn deficit. Since the last valuation in 2014, economic conditions for defined benefit pensions have worsened. As a result, the position at the 2017 valuation is much worse than expected.

Is the current situation a result of poor management of the USS and poor investment decisions?

No. Relative to its performance benchmarks, the USS investment team added £1.1bn in value to the scheme over the last five years, making a substantial contribution to the funding position.

Is it just assuming the worst-case scenario to say there is a deficit?

The scheme is required by law to work on the basis of prudent assumptions for investment performance rather than best estimates. Where other factors are involved – for example – mortality forecasts, these reflect the most up to date actuarial data. Under pensions law, the scheme actuary has to sign off the basis of the valuation, which is not a “worst case scenario”, but does by law have to include an element of prudence. We understand that there is scepticism about the need to reform and we have called for greater transparency on the data and information leading to the valuation assumptions. 

What does the College think about the valuations of the scheme?

In October 2017, the College responded to some initial questions by UUK about the way the USS scheme had most recently been valued. This response was agreed by Provost’s Board members and was submitted to UUK on 6 October 2017. You can read this response online here.

Following this meeting, in November 2017, the College provided the UUK and USS actuarial reports, and UCU’s representations and the advice from their appointed actuary, to a specially convened academic working group on pensions, led by Professors Damiano Brigo and Richard Craster. 

Professor Craster presented the group’s report to Provosts Board on 26 January. Overall, the working group’s view at that stage was that the USS was a well-run pension scheme and that there had been some improvement in the methodology used by the USS in its 2017 valuation compared to the valuation conducted in 2014, although concerns and gaps remained. The working group said the scheme had still not provided a sufficient level of transparency for informed assessment on the assumptions being made and without this transparency they were unable to reach a conclusion, one way or another, about the approach to technical provisions being proposed by the USS.

The working group noted that although decisions on the technical provisions were ultimately for the USS rather than the employers or the Joint Negotiating Committee, a better level of transparency was available in some other schemes. The USS met with members of the Imperial’s working group on 24 November 2017 to discuss the assumptions in more detail and said they were willing to continue to provide more information.

The academic working group raised a specific comment on the merits of de-risking by moving from equities to bonds in the current market. This was seen to limit investment opportunity which could ‘lock-in’ the perceived or actual deficit and limit the opportunity for an earlier move to full funding of the scheme. This was discussed with Provost’s Board who also had sight of commentary from the USS on this point. The USS stated that although the opportunity for enhanced returns would potentially be reduced by the change in investment strategy, the priority was to address the risk of the deficit, either actual or perceived, from growing further. This change in investment portfolio was seen as appropriate by the USS given the size of their assumed deficit and noting that the USS currently ranked in the least prudent 10% of pension schemes according to TPR. The USS projected that the strategy did not prolong the timescale for recovery and shared a model of the revised forecast [PDF]

At its meeting on 26 January, members of Provost’s Board then confirmed their support for UUK proposals proposing changes to the USS scheme, given the results of the valuation.

Since this meeting, staff at Imperial have raised further concerns about the data and analysis behind the proposed changes to the scheme.

The College has responded to this by calling upon UUK and the USS to jointly convene an expert group, including both their advisers and leading academic experts, to provide full transparency on the assumptions, data and modelling approach that has been used. Imperial has offered to resource any of its staff who participate in that process.

The College has also said that if this work takes time and goes beyond the statutory deadline for changes to be introduced, it will agree to carry its share of the risk of staying on the current scheme, if asked to do so, while this work is completed and has written to TPR to this effect.