USS Briefing JULY 2014

Geraldine EganNational Pension OfficialUSS Briefing: July 20142008 to 20112008 Employers contributions up from 14% to 16%Final salary protected for existing staff (but changes to inflation capping)New career-average revalued benefits (CRB) scheme for new entrants implemented by the USS boardFlexible retirementRemoval of right for an unreduced pension if made redundantDispute and industrial actionAgree ongoing review and extension of right to unreduced pension (stops this October)

HOW IS THE FUND VALUED?Projected cost of future benefits (liabilities) compared to existing assets + expected contributions + investment returnUSS use a Gilts+ method to calculate the discount rate (projected return from investment)Desire to de-risk (tPR pressure, contribution volatility)UCU have challenged the method used/promoting use of an internal rate of return, rather than Gilts as a proxyUSS asset base c.20% in giltsMore accurate to use our suggested methodImpact of Quantitative Easing

FUND VALUATIONSMarch 2011(Triennial)March 2012March 2013June 2013updateMarch 2014(Triennial)ProvisionalAssets32.4bn33.9bn38.6bn37.9bn39.1bnValue of liabilities35.3bn43.7bn50.1bn45.8bn46.6bnDeficit2.9bn9.8bn11.5bn7.9bn7.5bnFunding ratio92%77%77%83%85%USS FINANCIAL MANAGEMENT PLANRequested by The Pension Regulator (tPR)Comprehensive approachIndependent review of employers covenantApproach to deficit recovery and investment strategy (de-risking)Ernst and Young report on ability to pay increased contributionsEmployer bands up to 21%; 23% to 25%Employers response is to dispute findings but also to accept contributions from 16% to 18%

THREE COMPONENTSPast service deficitFuture service costsDe-risking assumptionsUSS BOARDS GUIDING PRINCIPLESReliance of the scheme on the sectorStability of contributionsInvestment risk and tail riskCONTRACTING OUT CHANGESEmployers pay 3.4% more NI and employees 1.2% more

WHAT CHANGES ARE UNDER DISCUSSION?UCU proposal: Teachers Pension Scheme (TPS) for all1/57th accrual rateNo automatic lump sum (commutation at 12:1)Revaluation at CPI + 1.6%Recognition of incremental approachEmployers consultation based on a HybridRedefine the way that the salary link for past service is worked out from a link to the individual members final salary to CPI;All future service (for all members) to be based on a;Core defined benefit scheme modelled on the current career-average scheme for new starters up to a cap (the example given is 40k);Above the cap, members and employers could contribute to a defined contribution scheme;Employers would pay increased contributions of 18% to take account of the current deficit and if the funding situation improved would agree not to reduce their contribution rate below 16%, with any additional funds used to enhance scheme benefits.

USS CRB sectionDateEarnings1/80thCPI+3.1%CPI+5.2%CPI+2.2%CPI+2.7%201144,166552569599612629201244,607558587560575201345,053563575591201445,954575590Total2,385WHAT WOULD BE THE LIKELY EFFECT ON THE SCHEME?Approximate costing (technical provisions/assumptions still under discussion)Current contributions: Employer = 16%; FS = 7.5%; CRB = 6.5%; Blended = 23.4%SchemePast service deficitFuture serviceTotalNoteStatus quoFS/FS indexationsCRB for new10.9% spread over 15 years26.7% FS19.1% CRBBlended25.85%36.75%With de-risking TPS for allNo change to accrued FS indexation 10.9% spread over 15 years33.0% 43.9%With de-riskingHybridCPI indexation for past service

4.3% spread over 15 years