HE email briefing     27 Feb 07
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             DEVELOPMENTS IN USS

Early Retirement

At the end of last year, following consultations with employing institutions, USS announced new arrangements which would shift the actuarial cost of early retirements before age 60 from the Scheme to the employer. The change does not require any amendment to the USS rules, which would have to be agreed by UCU representatives on the USSJNC, but USS said at the time that they would prefer to codify the position in the form of a rule. In January a draft rule change was produced, but it covered not only retirements of existing members before the age of 60 but also referred to new members joining after 1 March 2007 retiring before the age of 65. This in effect would have raised the normal retirement age under the scheme to 65 for new entrants. (See more below)

The situation now is that employers have been asked to notify USS of all early retirements of staff between the ages of 50 and 60 that were agreed by 7 December 2006, and these will be processed with the actuarial cost borne by the scheme. The actuarial cost of retirements agreed after that date must be met by the institution. Before this change, typical provision for early retirement meant that the scheme bore the actuarial cost and employers enhanced the pension by purchasing added years as part of a package. The increased cost to the employers will make such early retirements less likely. Under the rules of the scheme, employers must meet the actuarial cost if they seek to terminate employment by reasons of redundancy or if it is at the employer’s request. 

UCU pointed out the difficulties that this change is likely to create and it may well result in employers pursuing dismissal where early retirement is not an option because of the financial cost.  Some employers are claiming that they did not realise that the change would mean that they would have to pay the actuarial cost in the event of redundancy, but this was clearly always going to be the case.

 Proposed new USS Retirement Age 

In August of last year, UCU members in the Teachers’ Pension Scheme (TPS) voted to accept changes to that scheme. The key changes applicable to new members were to increase the normal retirement age from 60 to 65 years and to raise the accrual rate of 1/80th per year of service to 1/60th. There were further changes in respect of ill-health benefits and for new members the option to commute up to 25% of annual pension to provide a lump sum at a rate of £12 for each £1 of pension given up. The changes have also included increases in contributions rates for employees from 6.0% to 6.4% and for employers from 13.5% to 14.1 %.

Discussions have been underway in USS also looking at changes. The scheme is under pressure, in part due to its current level of funding – at the 2005 actuarial valuation the scheme was 77% funded - as well as government policy to raise retirement ages generally in the light of increasing longevity. The scheme wishes, as a result of the consultation exercise referred to above, to introduce a retirement age of 65 for all new entrants. At present, USS rules are confusing because, while they do state a retirement age of 65, they provide also for full accrued benefits to be drawn from age 60 when the employer consents. So, in practice, members have expected to have the right to retire at 60; where contractual retirement age is higher than 60 employers have never been known to refuse staff who wish to retire once they have reached the age of 60. 

USS has also indicated that it is prepared to consider the introduction of flexible retirement arrangements where members could take partial retirement drawing a reduced salary and accessing part of their pension and continuing to contribute, while still in employment, into USS. Previously the USS pension could only be drawn down when the member had retired. The UCU representatives on the USS Joint Negotiating Committee have made it very clear that they could only agree to the rule change necessary to introduce a 65 retirement date for new entrants if there were satisfactory flexible retirement arrangements agreed. It should be noted that flexible retirement arrangements have been agreed within the TPS.

It is difficult to make exact comparisons between the two pension schemes and it would be wrong not to acknowledge the pressures that USS is currently subject to. However, UCU cannot accept a situation where members may have the prospect of two schemes where one is demonstrably less favourable than the other. A further meeting of the USS JNC is taking place on 7 March and members will be informed of the outcome.

Salary Sacrifice 

Under a salary sacrifice scheme, the employer and the employee can make a contractual arrangement under which the employee agrees to give up the right to receive part of his/her contractual pay in return for the employer’s agreement to provide some form of non-cash benefit.

The purpose of such schemes is to take advantage of the national insurance and tax exemption on the non-cash benefits provided (see below).

USS has now agreed arrangements which enable salary sacrifice to operate without detriment to USS benefits.  From 1st April 2007, the proposal is to allow employees to enter into arrangements with their local employer, if the local employer has entered into a supplemental deed of accession on this matter with USS on salary sacrifice. The employee can then opt into a covenant with the employer to take a non-cash benefit (salary sacrifice), which is deducted prior to national insurance, income tax and pension contributions. However, the employer is required to make sure that the full pension contributions are paid to USS, by paying additional contributions under USS rule 8.4(d), as the employee’s contributions are based on earnings after the sacrifice. The non-cash benefits include:

•	Employer provided childcare arrangements
•	Workplace parking
•	Employer-provided cycles and cycle safety equipment

These arrangements do not affect the individual’s pension position as the full contribution rate is paid against the full salary rate.

These arrangements will generate national insurance savings, and it will be for local negotiation to establish the sharing of these benefits. UCU would expect local associations/branches to negotiate at least a 50:50 spilt. Salary sacrifice is likely to be open by the employers to their staff and provide extra cash in the sector. Local associations/Branches should establish with their employers whether they are considering establishing a salary sacrifice scheme, and if they are, should negotiate how the savings will be allocated. Remember that for any employee to enter the scheme they must positively agree. Savings could be used to offset the cost of those benefits which give rise to the sacrifice or they could be applied elsewhere, and we should press employers to seek our agreement about how this is done. 

Other Implications

Any UCU member considering entering into a salary sacrifice arrangement should also be aware of the possible implications for entitlement to other benefits including contributory or earnings-related benefits such as:

•	statutory sick pay, statutory maternity pay, maternity allowance and incapacity benefit; and
•	Tax credits such as Working Tax Credit and Child Tax Credit.

It is unlikely that any UCU members would be affected by these implications for other benefits, unless they were working on a part-time basis for a rate of pay close to the NI Lower Earnings Limit.