1. How will CI impact the pension I will get? Does it add uncertainty, without a way for the employees to have any say about it?
With any pension scheme there is always a degree of uncertainty around future benefits and cost – eg the benefit changes USS made in 2022 and the volatility we have seen around the employee and employer contribution rates since the scheme's inception. The intention of CI would be to have a mechanism in place to help control and limit this volatility. What this means in practice for a CI scheme is that, in years where specific tests are not met, then there would be the flexibility to apply lower indexation to benefits – ie the indexation is conditional (see also question 5).
How CI would impact your pension very much depends on the design adopted, should the project proceed. Changes to the scheme structure and design would be expected to go through a consultation with employers and members to provide feedback.
2. Will it be weighed down by underfunded liabilities from universities that go bust (administration, special measures or whatever the liquidation process will be called)?
Considerations of a CI benefit design are still at an early stage.
More generally, following the 2023 valuation the scheme was in a surplus, which is still expected to be the case based on current market conditions (December 2024). The USS trustees also undertake regular reviews of the covenant of the scheme employers and the sector as part of their risk monitoring framework, which helps inform any steps that might be necessary to manage risk to members' benefits.
3. A CI system passes investment risks to members, like a DC scheme. But excess gains don't go to members and there's no pot for family if the person dies early. It seems to provide the worst of DB and DC from member perspective. Am I missing something?
A DB pension guarantees a level of income for the whole length of retirement (as well as an attached pension for their dependant on death). Under a CI design there would be additional risk-sharing compared to the current USS benefit design.
CI is being considered to see if it can offer greater stability than the current scheme and whether it could also increase fairness and provide higher benefits – for example through passing on positive investment returns in the form of higher pension increases.
4. CI, like DC pensions, passes investment risk to members but without DC's upside benefits. Is the difference with DC that the risk is only partially transferred, meaning poor returns prevent inflation increases rather than cause a decrease (as with DC)
As noted in question 3, strong investment performance could be passed to members as above-inflationary increases in benefits or as benefit improvements. The scheme may also be able to invest at a greater degree of risk, increasing the scope for higher performing investments (see question 13).
5. This the first I have heard of 'Conditional Indexation'. USS members will understand this by another description concerning USS pension increases that match the CPI or up to 2.5%. What is the thinking in now referring to this as CI?
Currently pension built up in the scheme increases annually in line with CPI inflation (matched for the first 5%; 50% of any increase over 5%, up to a maximum increase of 10%). This is commonly referred to as indexation.
Under a CI design, the indexation of benefits would be conditional on certain tests being met.
6. Please clarify the status of the scheme's implementation for USS. It is unclear how the parameters for indexation will be agreed upon. What is the intended timescale for the scheme?
A workstream is underway involving representatives from UCEA, UCU and USS. This work is exploring CI scheme design and mechanisms for target-setting, and how these relate to the UK regulatory and legislative framework.
There would be a number of steps required to move from the current investigation stage to implementation, including consultation with affected members.
7. Where CI has been applied, what has been the impact on financial planning for the individuals?
One of the tasks being carried out by the workstream is a review of CI schemes from around the world to understand the different designs and how they were implemented to better inform how it might work in the UK.
CI has been applied successfully in Canada (where benefits have typically been at or above those anticipated). There have also been CI schemes in the Netherlands which could be viewed as being unsuccessful, as there have been challenges in awarding indexation.
As and when we get more information around how the structure and design would work we would be able to help members understand what the potential impact could be for their benefits.
8. In what circumstances would an increase greater than the 'full increase' be paid? It seems unlikely that USS would ever do this, given its history of trying to reduce defined benefits.
When the scheme is in a strong financial position (ie ahead of plan) then increases can be made that are greater than the current indexation promise (see question 5). This could be done to make up for any previous below-inflation increases, or to increase benefits for members above current levels.
9. CI is shown as helping 'stability'. But if a benefit is removed one year (2022) and reinstated the next (2023) that surely indicates the modelling is flawed? So shouldn't the priority be to sort out the core modelling?
The intention of CI would be to have a lever or mechanism in place to better deal with short term volatility/market fluctuations that could then (potentially) be simpler to make good any negative adjustments in the future.
10. You say 'Successful implementation in Netherlands (NL)' but I'm not sure that's so. NL pegged their funding test to their government bond yields and so are not successful, I think, now NL are moving CIs (unsuccessfully) to DCs. Can this be qualified?
Acknowledged; the target funding mechanism was linked to government bond yields and this led to non-inflationary increase for a number of years. The design of the mechanism is a fundamental consideration.
11. Will Conditional Indexation affect the Investment Builder – the defined contribution (DC) part of USS?
The investigations into CI are at an early stage. A new design has not yet been proposed.
12. What indexation scheme is there for USS, so what will conditional indexation replace?
Please see the answers to questions 1 and 5.
13. 'Better returns given a set of contributions achieved in Canada.' Isn’t this more to do with the asset class held by the scheme?
Continued question:
For example, more growth-oriented in Canada compared to USS – rather than Conditional Indexation? It seems most benefits of CI are actually tied with a shift in the type of asset class held and by the necessary(?) deregulation to implement CI (eg less regulated in Canada than UK).
Answer:
CI could allow a pension scheme to invest in a higher proportion of growth assets than a non-CI scheme under the same regulatory framework, because the pension liability may no longer be as closely linked to a defined benefit promise as per the current indexation and revaluation in the USS. The additional stability and reduced inflationary volatility in the scheme could allow more risk to be taken (subject to a suitable risk tolerance being achieved). This could allow the USS trustees to increase the current growth asset allocation, which would be expected to increase the annual expected return on assets.
14. Are other sectors and industries also exploring this option? If not, what is the likelihood of getting the necessary legislative changes through?
There is currently limited experience of CI being implemented in the UK. It is likely that USS would be a frontrunner in seeking any legislative changes in the UK.
