UCU CONGRESS 2009
BRIEFING PAPER ON USS

1.	USS is the UK’s second largest private pension scheme underpinned by a multi-billion assets’ fund and with a very healthy positive cash flow. In essence having a positive cash flow means that the combination of earnings on investments and the pension contributions paid by active members exceed payments made to pensioners, which means that there is no requirement to liquidate any scheme assets to pay pensions. It is likely that this will be the case for a considerable number of years.
2.	At the most recent valuation in 2008, the scheme was fully funded on its ‘technical provisions’ - instruments of assessment set by the Pensions’ Regulator which are scheme-specific and which relate to past service – but it was determined by USS that the contribution rate for future service, paid by the employers, would have to increase from 14% to 16% in Autumn 2009 to account primarily for the improved longevity of scheme members and higher than anticipated salary increases.
3.	However, like all defined benefit pension schemes USS is experiencing a number of problems and a joint UUK/UCU group, operating as a working party of the USSJNC, has been set up to analyse the issues, address the difficulties and make concrete proposals designed to ensure that USS remains an attractive and affordable pension scheme.
4.	The major issues which have to be addressed by this group are the following:                                             
•	LONGEVITY    The good news is we are all living longer, but what for us is good news is bad news for pension scheme actuaries. Assumptions have been historically set assuming a certain life expectancy and if that increases funding to cover this increase has to be found. As already stated, part of the employers’ contribution increase from this autumn is caused by this element but it should be anticipated that future increases are also likely to be triggered going forward.
•	SALARY INCREASES   In the recent past, salary increases for scheme members have exceeded the actuary’s built in scheme assumptions. Part of this is caused by the effect of the implementation of the Framework Agreement but a major element of the increase is caused by the explosion of the numbers of staff, i.e. professorial and others, whose salary is determined locally within institutions. In fact, and it is painful to admit it, salary negotiated nationally by UCU comes out slightly below the actuarial assumption, which is RPI + 1%.  However it arises, if the trend continues and it is being closely monitored by the group, the cost to the scheme will have to be addressed. There are a number of ways this could be done, but identifying correct mechanisms will depend on agreement on the causes and beneficiaries of the increases. 
•	INVESTMENT    This is the biggest and most difficult issue going forward in the future management of the scheme. The USS pension fund is invested heavily in equities, although there have been some readjustments to this in the recent past. Given recent, and not so recent, stock market behaviour this introduces a level of volatility to the scheme, which in the past could be ignored because of the scheme’s strong cash flow position.  However, in an age of the Pensions’ Regulator and associated regulatory regime it is becoming increasingly difficult to adopt such a long-term view because if, for example, at the next valuation in 2011 the scheme was found not to be fully funded on its technical provisions, this would require agreement of a recovery plan with the Pensions’ Regulator and trigger extra employer contributions. 
5.	However, if you were to try to remove this volatility by investing in gilts, you face the immediate problem that the current investment environment is not the best time to be selling assets and, even if it were, under the current USS investment regime you can assume legitimately that equities will out perform gilts, but if you remove your equity component you can no longer make this assumption, and this would trigger an immediate increase in the future service contribution rate and costs would quickly begin to spiral out of control.
6.	Pension schemes do not welcome volatility and we have it in the three areas that have been highlighted. There are ways in which this can be addressed and over the next few months the Review Group will be examining the issues and possible solutions. However, despite these problems we have in USS a strong, well-funded pension scheme. Members of AUT were heavily involved in working to bring USS into existence. It now falls on the successor union, UCU, to ensure that USS continues to provide the pension provision that members legitimately expect.