The USS dispute – some facts you need before voting

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Adam Ozanne is a member of the NEC, the USS Advisory Committee and UCU’s Superannuation Working Group, and joint secretary of the UCU branch at the University of Manchester where he is a Senior Lecturer in the Economics Department. Alex Gunz is Lecturer in Marketing at Alliance Manchester Business School. Here they provide some background (and foreground) facts about where we are, and how we got here, and the choices now facing all members.

THE USS DISPUTE AND UUK OFFER OF FRIDAY 23rd MARCH

 CONTENTS AND SUMMARY:

  1. THE “DEFINED BENEFIT” PENSIONS PROMISE
  2. THE ALTERNATIVE – “DEFINED CONTRIBUTION” PENSIONS
  3. HOW THE CURRENT USS “HYBRID” SCHEME WORKS
  4. THE SEPTEMBER 2017 UUK CONSULTATION CHANGED ALL OF THIS
  5. WHAT UUK PROPOSED ON JANUARY 23rd AND SUBSEQUENT STRIKES
  6. WHAT HAPPENED NEXT
  7. FRIDAY 23rd MARCH OFFER
  8. TO BALLOT OR NOT TO BALLOT, THAT WAS THE QUESTION…
  9. WHAT WE CAN PROMISE YOU

 This briefing paper has the following aims:

  • Sections 1-3 provide a primer about pension schemes and, in particular, USS.
  • Sections 4-6 provide an overview of the current dispute and how we reached the latest offer from Universities UK (UUK), the employers’ representative body.
  • Sections 7-8 summarise the key elements of the latest UUK offer and the remaining uncertainties that the UCU Higher Education Committee (HEC) considered when arriving at its decision on March 28th to put the offer to a members’ ballot.
  • Section 9 expresses the commitment of those elected to lead UCU to listen to members’ views and, regardless of the final outcome of this dispute, continue campaigning to improve pay, pensions and terms and conditions of employment for UCU members.

Anybody who has been following the dispute’s twists and turns of the USS dispute over the past six months may want to jump straight to section 7.

What emerges from the account is that, purely as a result of the unprecedentedly prolonged industrial action by UCU members supported by students, politicians of all hues and the mainstream media (including, to our great surprise, the Tory press), employers have been forced to back down on their plans to get rid of defined benefit pensions. Fourteen days of strikes on a scale never before seen in UK universities were an expression of raw anger about the way university managements and UUK have failed to grasp how important guaranteed pensions are to USS members, how thoroughly unconvinced we are by USS’s valuation methodology and employers’ claims that neither they nor USS members can afford defined benefit pensions, and how little trust and confidence we have in the current crop of well-paid Vice-Chancellors and their senior leadership teams.

While UCU was united, UUK and employers have been in disarray, with more and more moderate Vice-Chancellors emboldened to speak out in opposition to their more hard-line and intransigent colleagues.

The result has been that, first, UUK was forced to attend negotiations with UCU facilitated by ACAS. These talks led to an offer on March 12th that was roundly rejected by UCU members despite the fact that the statutory 64 day USS member consultation, necessary to meet the Pension Regulator’s June 30th valuation deadline, was about to launch.

A further round of intensive lobbying of politicians, USS and the Pensions Regulator and negotiations with UUK then took place, resulting in an improved UUK offer on March 23rd. This offer was considered by a meeting of branch representatives on March 28th where a clear majority stated that their members thought it was now time to ask the whole membership whether the offer was good enough to accept or to reject it and continue industrial action after the Easter vacation and into the summer exam period in order to obtain further concessions from UUK.

 

THE USS DISPUTE AND UUK OFFER OF FRIDAY 23rd MARCH

There is a good deal of confusion around pensions and the negotiations. Some of this is because USS has been operating in a secretive and murky way, some of it is because pension rules are quite technical, and some of it is because when you have many people caring deeply about a confusing thing, it is easy for misunderstandings to circulate and multiply.

As we take a break from striking over Easter, and consider the new offer that has been made, here is a reminder that tries to fill in some details on what the dispute is about, what has happened, and where the new offer fits in this context:

First, we have to talk a little about how pensions work. However, if you have a strong understanding of this already and have followed the dispute’s twists and turns over the past six months, feel free to skip the next six sections and jump straight to section “7. FRIDAY 23rd MARCH OFFER”.

  1. THE “DEFINED BENEFIT” PENSIONS PROMISE

Employers and workers both contribute a percentage of each pay check into a pot of money that is invested into financial markets to grow. Those investments can be made more aggressively (to grow more) or more conservatively (to reduce the risk of ever shrinking). In a pure “defined benefit” (DB) scheme, employers promise employees/members an annual pension when they retire.

The promised pension can be based upon either your final salary in the year you retire (or the best of years near retirement) or your average salary over your career revalued to allow for inflation. The fraction of this salary you receive depends on how many years you worked and contributed to the plan (more on this below).

If it looks as if investments will not grow sufficiently to meet those promises, both sides can agree to either contribute more (as happened three years ago when employers agreed to raise their contributions from 14% to 18% and members from 6% to 8%), or to reduce the pension pay-outs promised in the future. However, past pensions promises have to be honoured. If there is a shortfall employers are required to pick up the tab, meaning they bear all of the risk, not members.

  1. THE ALTERNATIVE – “DEFINED CONTRIBUTION” PENSIONS

In these schemes, employers make no such promises. Employers and members contribute into the pot which is invested, as with DB, but on retirement members are allocated a share of the pot that depends on how much they’ve contributed and how well the investments have done. Thus, in these “defined contribution” or DC schemes, all the investment risk is borne by members, and none by employers.

In addition, DC faces members with a second wave of risk, because when they retire it is their responsibility to convert their individual pot of money into annual income. Typically they would do this by buying an “annuity” (money paid up front in return for a guaranteed stream of yearly payments), or leaving it invested and drawing down from the capital year by year, if the interest is insufficient to live on. Annuities last till you die and are regular and known but may or may not keep up with inflation. Further, annuity rates vary enormously over time (and are terrible at present) so what you get annually is something of a lottery. For example, people retiring in 1999 got three times as much as those who retired with the same (in “real”–inflation adjusted-terms) lump sum in 2012.  Drawdown may give you more initially because you can choose how much to take each year, but incurs longevity risk: you have to guess how long you will live so you don’t run out of money and end up with nothing to live on. Sadly this happens.

  1. HOW THE CURRENT USS “HYBRID” SCHEME WORKS

Until 2014, all USS was DB, either final salary or career average revalued earnings (CARE) as described above. However, in 2014 a hybrid scheme was set up whereby when you retire all salary up to £55,500 goes into a DB while any salary above this threshold goes into an supplementary DC pension. Since only around 21% of USS members earn over £55,500, this means around 80% of us were guaranteed a fully DB pension and only the top-earning 20% share any risk with employers.

For the DB element, each year you work counts towards your promised pension according to a fraction known as the “accrual rate”. Currently, this fraction is 1/75. That means that your annual pension is calculated as your career average salary (adjusted for inflation) multiplied by the number of years you worked, divided by 75. So if your (inflation adjusted) average career salary was, say, £50,000, over the span of a 38 year career, you would receive a DB retirement income of a just over £25k and also receive a DC lump sum of three times this amount, i.e. around 3x£25k = £75k. If your relevant salary was £40,000 over 20 years of work, your retirement income would be a bit under £11k with a lump sum a bit under £33k.

This part of your retirement income was guaranteed. If there wasn’t enough money in the pot to pay it, the universities would have been required (by their collective promise or “covenant”) to make good any shortfall by putting in more money.

This “defined benefit” covers the first £55,500 of your salary. Anything above that is put into an individual DC pot and given to you as a lump sum when you retire. At that point it’s up to you to choose between taking it as a lump sum, or buying an annuity with it, as described above – again, how much an annuity would pay depends heavily on your luck. It might be large or small depending on the market conditions when you happened to retire. However, under the 2014 hybrid scheme, this uncertainty only affected the portion of your income over £55,500 (if you even made that much in the first place). Everyone, though, knew that whatever happened with any additional lump sums, they at least had guaranteed yearly income from their DB pension to fall back on.

  1. THE SEPTEMBER 2017 UUK CONSULTATION CHANGED ALL OF THIS

We understand that USS was going to keep the hybrid scheme in its current form apart from, possibly, some fairly minor adjustments to the DB threshold level and deficit recovery payments. However, this changed after UUK initiated a “consultation” (not a vote) with its 68 employer members. We don’t know exactly what happened in this consultation, but UUK reported that 42% of the pre-1992 universities in USS said they did not like the amount of risk they were exposed to in the future if stock markets slowed down and they had to pay in extra to cover the pensions of their retirees. They wanted the plan to be changed to take on less risk in the future. This is important, because there are only two ways to make plans less risky: you can feed more money into their pot now, or you can promise less money to be paid-out from it as pensions later – or some combination of those two; you can also invest more of the fund in low-yielding gilts (government bonds), but this would have the perverse effect of reducing asset growth and increasing the purported deficit.

Admittedly, it is possible that for some universities risk may represent a genuine concern that they might be required to make payments in the future that would be so big they would go out of business. However, we have since discovered that the 42% figure included many individual Oxbridge colleges, some of them no bigger than individual Schools of the University of Manchester (but much richer!). Factoring this in, we believe that only around 30% of actual universities said they wanted lower risk.

We don’t know why UUK allowed this to happen, but it seems to have skewed the consultation in favour of those universities who wanted to shift risk away from themselves and onto their individual workers. Whatever the reasons, the September consultation lead to USS laying down new rules requiring less risk for the pot and, in turn, to UUK to proposing that the DB part of the scheme should be closed down – temporarily, they said, but few believed them.

It is important to note here that the USS Trustee Board is the body legally mandated to make this determination of acceptable risk. Once they do so, neither UUK nor UCU have the legal power to change it; all they can do is haggle over the balance between how much extra money goes in and how much less money will go out in payments to retirees.

  1. WHAT UUK PROPOSED ON JANUARY 23rd AND SUBSEQUENT STRIKES

So UUK hatched a new plan. The defined benefit portion would be got rid of (for at least the current three year valuation period). All of your contributions would go into a single individual DC pot, and when you retire you would get whatever happened to be in there, be it a lot or a little. The University would no longer carry any risk at all of a market slowdown; it would all be heaped onto the shoulders of individual, vulnerable retirees.

This was not acceptable to UCU. When UUK refused to negotiate we polled our members and then we marched out on strike.

Our strikes have been a huge success.

Our picket lines have been strong throughout, our students are supportive, so much so that employers were surprised by our strength and forced to take notice.

Our first victory was that we forced them to stop taking us for granted and come to the negotiating table for talks facilitated by ACAS, the Advisory, Conciliation and Arbitration. This is the independent public body mandated to help employers and trade unions resolve industrial disputes.

Our second victory was that we got a new offer out of them, on Monday 12th March. This represented a dramatic movement away from their extreme DC-only position and towards one that started to offer some protection for our retirees in the form of DB pensions – but at a lower £42k threshold and much lower 1/85 accrual rate.

In this offer, UUK also agreed to an independent review of the financial methodology for determining the health of the pension scheme. This was a big win for us as we have for years been strongly disputing the methods used by USS and its actuary (Mercers) use in their legally required triennial valuations of the fund.  This review would be completed in time for the next, 2020 USS valuation, except this time with an agreed on valuation and the employers aware that we are willing and able to call major strike actions if they tried to casually run us over again.

UUK also agreed to explore creative alternative ways of calculating pensions (for example, the “collective defined contribution” CDC model) that they had previously refused to consider, though a longer time line would be necessary to implement such a scheme since there are some legal obstacles that would need resolving. These plans still shift risk from employers to individual members, but offer slightly better individual protections than pure DC plans. A discussion of how they work is beyond the scope of the present primer.

However, this ACAS deal had to respect the rule USS had imposed over how much risk employers could bear, taking into account the views expressed in UUK’s September consultation. This, as noted above, is the decision of the USS Board: neither UUK nor, especially, UCU had the power to alter this.

Accordingly, the March 12th ACAS proposals entailed a number of compromises by both sides:

  1. UUK moved the threshold for Defined Benefits from £0.00 to £42,000 (though down from the old value of £55,000). For reference, that would still have covered the full eligible salary for around 58% of USS members.
  2. Employers and individual members would both increase their contributions (19.3% from them, 8.7% from us, up from 18% and 8% respectively) into the pension pot each year in order to ensure it did not run short.
  3. In return for the above, the DB accrual rate would decrease from 1/75 to 1/85. That means that you would receive a smaller guaranteed pension payment for the same number of years worked. Whereas lowering the DB threshold only affect salaries over £42k, this accrual rate reduction affect everyone including those on the lowest salaries.
  4. An inflation cap of 2.5% was imposed on the calculation of career-average income, and future DB pensions. This is potentially very damaging, because it means that we get an effective pay cut whenever inflation rises at even a modest rate.

The upshot is that a person with £50,000 in average lifetime income over a 38 year career would move from receiving a bit over £25k a year (under the current plan), to £0.00 in guaranteed income under USS’s plan, to a little under £19k in guaranteed income under the negotiated plan. That would cover the first £42k of their earnings. The remaining £8k would have resulted in some extra money being thrown into an individual pot that may or may have grown much, depending on the market conditions they were (un)lucky enough to have lived through. Also, if they lived through any period of moderate to high inflation, their retirement pay would shrink further in real terms, as it would no longer fully keep up with the cost of living. That was still a lot of risk piled onto aging shoulders, especially shoulders that had just given up work and could do nothing much about it.

The ACAS proposals also included a rather poorly explained part about rescheduling lectures that, unfortunately, failed to convey an (honourable) attempt by the UCU negotiators to protect TAs and other precarious staff from pay deductions. The intention was that where employers agreed not to deduct pay from these particularly vulnerable colleagues, others on higher salaries would in return do what they could to help students catch up by rescheduling classes if that were possible or in other ways.

Make no mistake, the ACAS deal was vastly better than the one that USS and UUK had tried to railroad us into. We forced this improvement by showing them that we would stand up together, for ourselves, and would not be intimidated into backing down.

While it was extremely gratifying, then, to see the employers finally begin to take us seriously, this deal was still not a fair one for our future vulnerable selves. That is why we rejected the ACAS deal.

  1. WHAT HAPPENED NEXT

Employers were taken aback by UCU branches and members’ resounding rejection of the deal. They were also clearly very worried by UCU’s plans for more strikes after Easter and into the summer exam period. It also seems that it suddenly dawned upon them, and the Government, that they have completely lost the trust and goodwill of a large proportion of staff in pre-1992 universities creating the prospect of further unrest, even worse ongoing industrial relations and consequent reputational and financial damage to the HE sector and wider UK economy.

This then, is what has led, after much work done by UCU’s leadership, talking with UUK and, no doubt, with the Pensions Regulator, Sam Gyimah, the Universities Minister, and the Labour Shadow Front Bench to the latest offer table on Friday 23rd March.

This is where we find ourselves now, and we must choose whether to accept or reject it.

  1. FRIDAY 23rd MARCH OFFER

The key elements of the UUK offer need to be placed in context to see how far we have come since January 23rd. This can be summarised as follows. If UCU members choose to accept the offer:

  1. UUK’s Jan 23rd Zero-DB/100% DC proposal, which sparked the January ballot and industrial action, would be dead. Employers have finally recognised how much staff value a guaranteed pension and abhor the wholly unjustified shifting of risk away from institutions with revenues in the hundreds of millions to individual employees.
  2. The status quo (i.e. not UCU’s January 23rd bargaining position but the current hybrid scheme) would continue until April 2019. In so far as no changes were planned before April 2019, this is the current situation; the difference is the 2017 valuation would effectively, be put on hold while an independent expert panel reviews USS’s valuation methodology and its claims that there is a deficit.
  3. That independent panel of experts would review USS’s valuation methodology in time to conduct a new valuation before April 2019. The panel will be made up of academics and pensions experts nominated in equal numbers by UUK and UCU and have no chair with a casting vote (so both sides must agree and neither can be bounced into a decision, as happened at the Joint Negotiating Committee, launching this entire debacle to start with.).
  4. UUK agree that any scheme implemented after April 2019 should be broadly comparable to the current DB scheme and to the Teachers Pension Scheme (TPS) our colleagues in post-1992 universities and schools benefit from.
  5. UUK and UCU would also agree to explore alternative ways of sharing risk, such as Collective Defined Contributions, or government underwriting as for TPS and other public sector pension schemes, with the aim of finding a way out of the current triennial valuation battles.

It would be disingenuous to suggest this is watertight or that we face no more uncertainty over pensions.

In the short-term, USS must be persuaded to, in effect, postpone the 2017 valuation and throw away all the statutory member consultation paperwork it has prepared, sitting in university pensions offices ready to go out last month, and start over again; the Pensions Regulator and Government will almost certainly have to agree that a way can be found around the June 30th statutory deadline for the 2017 valuation, and the 12 USS Trustee Directors assured they will not face fines (of up to £50,000 each) for failing in their legal obligations.

It is little if any exaggeration to say that if we pull this off (and it still is if) we will have thrown the pensions rule book out of the window – something few if anybody anticipated three weeks ago when the ACAS offer was rejected.

In the longer term we have to have confidence that UCU’s arguments regarding the flaws in the current USS valuation methods win the support of the independent panel, and that “broadly comparable” means very close to the status quo we have all fought to keep.

The independent expert panel would review pension valuation methodology, not conduct a new valuation itself, and the USS Board would remain and set the key assumptions regarding fund growth, risk, mortality etc. We have to be clear that it is possible the panel might conclude the USS valuation approach is not, after all we have been through, flawed and we’d have to swallow our disappointment and accept i’s use in 2019; we could not insist the panel reaches a pre-determined outcome we will like anymore than we would allow UUK to do so. However, the key gains are that: (a) the panel would scrutinize USS’s valuation methodology and make it more transparent, (b) the panel would not be controlled by USS and their actuary, Mercers, and (c) the omission of an independent chair means a casting vote could not sway the decision of the panel as has happened at JNC over the past three valuations.

Thus, there are uncertainties still and we need to decide whether or not to accept this latest offer. However, whatever we collectively decide, we should not underestimate how much we have won by standing together – against managements who thought they could steamroller us – and fighting for fair pensions not just for ourselves but for future generations too.

  1. TO BALLOT OR NOT TO BALLOT, THAT WAS THE QUESTION…

There was a good deal of discussion in branches and at the branch briefing and HEC meetings on March 28th regarding whether the March 23rd offer is good enough to be put to a ballot of all UCU members or if our negotiators should have been sent back to get more. Questions remain about what the final outcome from this new proposal might be in a year’s time, but there are three main reasons why we believe the time is right to go to members and ask them if they wish to accept the proposed deal:‎

  1. It is through the efforts of members that we have got to where we are today and, without the firm knowledge that we continue to have wide member support, calls to further action after the Easter break are meaningless. Members have the right to be asked whether they believe the proposal is the basis of an acceptable agreement or if they wish to embark on more action after Easter to gain more.
  2. The Easter break has forced an interruption to strikes, so consulting members would not mean any loss of momentum if members reject the new proposals. And, ‎if members do reject them, we can be confident of their backing when strikes resume.‎
  3. Looking at the balance of power between UCU and employers, we may not be in as strong a position starting 19 days of strikes on April 16th as we were when beginning 14 days of strikes on February 22nd: as they have, albeit reluctantly, participated in negotiations and made concessions, it will no longer be so easy for UCU to portray UCU and employers as the intransigent party; continued student, public and media support cannot be taken for granted through the critical summer exam period leading to the graduation of final year students; a further 19 days loss of pay will pose a significant financial strain on UCU members, especially those on low pay and fixed-term contracts, and on the capacity of UCU’s Hardship Fund to support the latter.
  4. Last but not least, our original ballot and mandate for industrial action in January were based on the employers imposing 100% DC.  This is now, with the March 23rd proposal, off the table and members need to be consulted about the next steps.

Although the points above were not discussed at the branches meeting at Carlow Street, they may explain why somewhere between 55-60% of branches reported that their members were in favour of balloting members on the March 23rd offer while 35-40% voted not to ballot but to charge the UCU negotiators to “revise and resubmit” a UCU counter proposal. (Some branch reports were ambiguous, and some expressed no clear view either way, so accounts of the meeting vary slightly, but – despite what some, including some who were not there, are claiming on social media – it is irrefutable that a clear majority favoured balloting members.)

It is now up to UCU members of USS to decide. Both acceptance and rejection of the offer incur risk; the questions we need to ask ourselves when we vote are: (a) which carries greater risk, acceptance or rejection, and (b) is this the moment to bank the gains we have in hand and move on, or do we fight on for more right now?

Whatever members decide, those of us elected to lead UCU promise you the following.

  1. WHAT WE CAN PROMISE YOU

Two things (and with apologies for the bellicose language):

First, that UCU will fight as hard as it can for its members. That fight doesn’t end with the current USS valuation and round of strikes. This is one battle, not the entire war. It took our forerunners in the Association of University Teachers 16 years from 1958 to 1974 to win over resistant employers to a defined benefit plan that lasted for 40 years. The history of labour relations is a history of winning concessions over a period of time: you fight, you extract concessions, you make deals to lock them in, and when the time comes you fight again. This is how child labour was ended – by a series of increases to the minimum working age. This is how minimum wages were won – one increase at a time. We may not get a pension scheme now that lasts another 40 years, but we can get closer.

Second, the timing of member ballots – which run the risk of slowing the momentum of a campaign down and conceding too much, too early to employers – is terribly important. On March 13th branch representatives and the union’s Higher Education Committee agreed the ACAS offer was not good enough to warrant suspending strike action and balloting members. However, member participation and democracy is equally important. Those elected to lead UCU promise to always do our best to weigh these factors and consult with branch members so opportunities are not lost and they have a say in key decisions. As in this document, we will do our best to provide as much context as we can on how and why particular offers have been arrived at. We will then allow as much time as is practically possible for members to digest and debate offers, hold meetings and make use of online polls to allow all of our members to vote in an informed way on whether they would like to accept them or not.

Regardless of the outcome of this dispute, our show of strength in the current strike has been a huge success.

We forced employers to meet us at the negotiating table and deal with us as equals. However the current phase of the dispute ends, we have shown them that they cannot run over us in future disputes. In future they will know that we are not bluffing when we make our needs clear to them. If we stay united, this will help us win in future battles over not just pay and pensions but also if managements have further plans for restructuring and redundancies, and it will help us, our fellow trade unionists in Unite and Unison and, indeed, those who are not in a trade union but who believe in collegiality and quietly agree with much we say, to reverse the failed top-down managerialism prevalent through much of Higher Education and thereby improve the governance of universities through changing the way their Senates, Courts, Councils, Boards of Governors, faculty and departmental boards operate.

 

FINALLY, PLEASE VOTE!

It is vitally important that all members of UCU participate in the ballot. The branch and national leadership need to know whether you believe the latest offer from UUK is good enough, despite the remaining uncertainties, to accept or whether it should be rejected and strikes continue after the Easter vacation and into the summer exam period.  Trade unions are only as strong as their members are willing to participate fully and stand together.

So please, regardless of whether you wish UCU to accept the offer or reject it and continue industrial action into the summer exam period in order to obtain further concessions from UUK, USS and the Pensions Regulator, please vote!