Improved finances hint at end to UK university pension battle

After prolonged industrial action, UK university employers and unions remain deadlocked over cuts to staff pensions.

But a financial update to the Universities Superanuation Scheme, the sector’s main pension provider with 420,000 members, showed the deficit that prompted the cuts had all but disappeared. This prompted University and College Union members to renew calls for the pension cuts to be reversed.

The Financial Times assess whether an end to the impasse is in sight.

Why were pensions cut — and by how much?

In April, the USS pensions structure changed so staff received lower benefits for their contributions.

The cuts were based on the results of a valuation of the USS finances that took place in March 2020, as global stock markets crashed owing to the impact of the Covid-19 pandemic. The valuation identified that a funding hole in the scheme had ballooned from £3.6bn in 2018 to £14bn-£18bn.

To address what the USS then described as the scheme’s “deteriorating” finances, employers proposed a number of benefit cuts to avoid the alternative of sharp increases in contributions to plug the deficit.

Changes included slowing the rate at which pensions accrued and reducing the salary threshold at which workers stopped receiving defined benefits from £60,000 to £40,000. They meant guaranteed future pensions for the average lecturer were cut by one-third, according to the union.

But staff criticised the decision to hold the valuation during a market crash which amplified the scheme’s deficit and funding challenges. Trustees had scope to hold another valuation a year later, but at the time USS said pushing on with the 2020 valuation was the most “measured choice”.

The UCU said the decision to implement cuts based on a valuation made while markets were crashing had given staff “no option” but to take industrial action.

What has changed since then?

In the past two years equities have delivered robust returns as markets bounced back and gilt yields have also improved, meaning much of the deficit that justified the pension cuts disappeared.

A monitoring report of the scheme’s health published this week showed that by the end of this March the funding hole had shrunk from £14bn to £1.6bn. The scheme’s assets had jumped in value by £22.3bn, more than outstripping a £9.8bn increase in liabilities. Rising interest rates in recent months had also reduced the cost of future pension promises.

The improved health of the USS has been reflected across the UK’s 5,000 corporate defined benefit pension schemes.

Could the cuts be reversed?

University staff responded furiously to the rosier funding update, arguing that the smaller deficit meant cuts to pensions had been unnecessary. Many lecturers took to Twitter to vent their anger at having being docked pay for strike action over the pension cuts and the disruption to learning that they say could have been avoided.

Employers, however, did not go so far, but suggested that some improvements to benefits could be possible if the financial outlook remained positive.

Universities UK, which represents employers, said the cuts to benefits had also been instrumental in closing the deficit gap. Without them, it would have become “unaffordable” for employers and many employees, it said.

Separately, USS estimated that contributions would have needed to be more than 36 per cent of members’ salaries compared to the current 31.4 per cent.

UUK added that market volatility meant the monitoring report, which is not a formal valuation, could not be taken as a reliable indicator of future financial health. It said it was “seeking clarification” from USS about what options might be on the table if the financial situation remained positive.

Some of the answer will be based on an interim assessment of monthly monitoring, which the USS will publish in July.

A “consistently better” performance up to the next scheduled valuation in March 2023 “could make a real difference and allow for improved benefits, lower contributions, or a combination of both”, UUK said.

What does this mean for the strikes?

After an academic year disrupted by weeks of strikes, UCU will discuss its next steps at a national congress this week. Staff at about 20 institutions are currently taking part in a marking boycott, but members privately acknowledge it has had limited success.

The union will discuss new ways to put pressure on employers, including additional marking boycotts, more strikes, or even working with other unions to further disrupt campuses.

Michael Otsuka, a London School of Economics academic who represents UCU on the committee that negotiates pensions with UUK, said industrial action could be halted if universities backed a new plan that restored benefits.

“My hope is that employers are willing and able to get USS to issue a new recovery plan and to improve benefits,” he said. “If they succeed in pushing . . . I can see a lot of members agreeing to suspend industrial action over USS.” 

Jo Grady, UCU general secretary, said that ahead of the March valuation “there must now also be urgent steps taken to harness this much improved position, preventing any more damage being done to our members’ hard earned pensions”.