Vice-Chancellor’s all-staff email – November 2017

Dear colleague

November has seen two long-awaited announcements. The Higher Education Funding Council for England revealed the rules for the next Research Excellence Framework, and the Department for Business, Energy and Industrial Strategy published its white paper on Industrial Strategy. These are both matters of great interest to us, but neither document contained any big surprises, and despite their importance, neither is immediately urgent, and so I will return to them on a future occasion. Rather, I want to say something about the other important development this month, which is the potential dispute between the Universities and Colleges Union (UCU) and the universities that subscribe to the Universities Superannuation Scheme (USS). I’m sorry if this does not affect you directly, but it is a matter of such critical importance not just to Cardiff University, but to the sector as a whole, that I feel I should address it in detail in this month’s email.

The fundamental question underlying this dispute is the financial sustainability of universities. Self-evidently, higher education is expensive, and two factors have fed the controversy which has increasingly surrounded university funding over the past decade. The first is the funding balance between the individual and the state. Broadly, what proportion of the costs of attending university should be borne by the individual who benefits directly, and what proportion should be borne by the state? The second is the hugely increased numbers of people who go to university. The stated aim of the Blair government was to increase the proportion of 17 to 30-year-olds who gain a university degree to 50%. This policy was founded on data from the Organisation for Economic Co-operation and Development (OECD) which indicate a correlation between the proportion of people in a given country with a higher degree and future prosperity. The whole issue was much contested, but gradually acquired broad acceptance with the ultimate result of the removal of student number controls, allowing as many people to go to university as could qualify for a place. This combination of massification and a shifting of the cost burden more towards the individual has sharpened the focus on the costs of delivery.

In practical terms, it raised the question of how much it costs universities to teach students and whether they are doing all they can to keep those costs down, especially in the light of higher fees. Certainly, in part, that is what is behind the ‘value for money’ review of higher education funding in England that the Prime Minister announced at the Conservative conference. And that, in essence, is what is behind the current disagreement over the Universities Superannuation Scheme. Most of the costs that universities incur relate to staffing. Generally these costs range between about 50% and 60% of total turnover (in Cardiff’s case we are now at about 57%, or £290m from a turnover of £505m). This means that any increases in the cost of employment have an immediate effect in terms of our capacity to deliver, and ultimately, of our financial sustainability.

The issue that we face is that USS is a so-called Defined Benefit scheme, which means that the final level of pension is calculated in relation to the employee’s average and/or final salary, rather than in relation to the contribution the employers and employees make over the years to fund that pension. This means that the amount the employers and employees must pay may need to increase in order to guarantee that future pensions will be funded. At the moment the employer (the University) pays 18% of the salary of USS employees into the scheme and the employees contribute 8% of their salary. Every three years the scheme is valued. That means an estimate is made of the future costs of the scheme overall and of whether there are sufficient assets to be able to fund future liabilities as people draw their pensions. Such a calculation is of course extremely complicated and involves making a number of assumptions that lie within a range of risk. It is the job of the USS Trustee to ensure that the future costs and risks are understood and the scheme sufficiently well funded to ensure that the beneficiaries are protected. The Trustee, to be clear, has a legal duty to act on behalf of the beneficiaries, and, as part of that, to assess the ability of the employers to fund the scheme. It is worth explaining that the USS Trustee is not a single person but a corporate trustee. The Trustee consists of a Board of Directors comprising four members appointed by Universities UK (UUK), three members appointed by UCU and five independent members. The Board (the Trustee) has a duty to direct the scheme to ensure that the promised benefits are paid to all beneficiaries in line with agreed timescales. The Trustee must not only be satisfied, but must be able to show that the level of contribution is sufficient to ensure those payments can be made into the future. The only alternative is for the scheme to be changed and the future benefits reduced (past benefits until the time the scheme changes are legally protected). In the case of USS, however, the Trustee does not have the power under the scheme rules to propose such changes. All it can do is to insist that employer contributions must rise. In so doing, it must have regard to the ability of employers to remain sustainable while making such payments (that is, it must be confident about the employers’ ‘covenant’). This is important: the Trustee cannot simply make the employers pay without regard to their ability to do so, and nor should the employers knowingly commit to a future funding regime that could destabilise their own institutions.

Changes to the rules of the scheme can, however, be made. The aim of such changes would be to make the scheme sustainable by reducing future benefits (as I mentioned above, past benefits are protected by law) such that the contributions required would not threaten the sustainability of institutions or demand ever higher payments from employees beyond the present rate of 8% of salary. Any changes must be proposed by the so-called Joint Negotiating Committee (JNC), which consists of five members nominated by UUK and five members nominated by UCU, with an independent chair. This, unfortunately, is where the disagreement arises. The first step in making changes to the scheme would be for the JNC to propose them. To do that it must be in agreement. No agreement on the future of the scheme has so far been reached.

I mentioned above that the Trustee needs to consider the valuation of the fund every three years and decide whether it is sufficiently well funded into the future to pay the necessary benefits to pensioners. How the scheme valuation is calculated is a contested area. UCU (and a number of expert academics) argue that the assumptions underlying the valuation are too cautious, and that some changes to the actuarial calculations would remove or massively reduce the problem. One of the issues is that people live much longer now than they did when the scheme was originally set up in the 1970s. How much longer will they live in the future? Another relates to the investment strategies pursued by the scheme. How risky versus cautious are they? These kinds of questions are not easy to resolve. They lie within the purview of the Trustee, but of course the UCU and others may challenge the responses. The JNC must first reach an agreement itself, and then persuade the Trustee — which has a fiduciary duty to protect the interests of the beneficiaries — to accept that agreement. The Trustee must be clear that whatever is proposed will not detrimentally affect the financial ability of the institutions in the scheme to honour the agreement into the far future.

That is complex enough, but there is another player in this arena. The Trustee in turn is regulated by the Pensions Regulator. This again is not a person but a regulating body. The Pensions Regulator is of the view that the most recent assessment made by the Trustee of the employers’ covenant, far from being too cautious, is not cautious enough. Irrespective of what the JNC proposes, and the response of the Trustee, if the Pensions Regulator does not consider the scheme capable of delivering the benefits to which the future pensioners are entitled, then it can intervene either to make sure that it is, or that the scheme adjusts its rules such that future entitlements are deliverable.

We must remember that it is not a simple matter of saying that employers should just put more money into the scheme. The effect of that could be to divert student fees into supporting staff pensions rather than their education, or research overheads to that purpose rather than supporting research infrastructure. And some institutions may simply be unable to make the payments required without jeopardising their financial stability. All universities in USS receive government funding: taxpayers, too, are wary of seeing their money going towards the support of pension schemes that the Pensions Regulator, the employers and/or the Trustee may see as unsustainable in their present form. Re-calculating the scheme’s liabilities by changing the underlying assumptions — in the short term a cost-free solution — would similarly have to pass the Pensions Regulator’s hurdle.

I hope the above goes to show that this is a complicated area we cannot easily solve. It is not a matter of greedy employers refusing to support their employees. Nor is it a matter of the union being awkward for the sake of it: the UCU has a duty to argue on behalf of all employees in USS, irrespective of whether they are members of UCU or not. All of us would prefer a position such as has pertained in the past, when the scheme was so well funded that neither employers nor employees had to make any contributions during a so-called ‘pensions holiday’. Sadly that is not the case now. Defined Benefit schemes have been reformed or replaced by Defined Contribution schemes in any number of other sectors, providing benefits that are less generous compared with what was possible previously. It is not a happy position to be in, and it is not new. This is the third time since I have been a vice-chancellor that we find ourselves at an impasse of this nature. My only plea is that we should recognise the complexity of the issues, do not deceive ourselves that there is an easy or universally palatable solution, and work together to find the least damaging way through.

With best wishes

Colin Riordan

Vice-Chancellor