There has been much recent discussion in the UK about whether there are new ways of sharing pension risks. These might potentially give greater stability of outcome and cost than the current very distinct alternatives of either defined benefit (DB) or defined contribution (DC) pension schemes.
Much of this discussion has focused on collective defined contribution arrangements, where members are able to share risks. While employers bear limited or no risk, the pooling of longevity and investment risks will hopefully secure better outcomes for members.
Universities Superannuation Scheme is one of the relatively few private DB schemes in the UK still open to new members.
The past 18 months has seen significant changes in the global economy. More than 10 years of declining interest rates has reversed at an unprecedented pace. This has led to a remarkable turnaround in fortunes for many private DB schemes.
The pace of change we have seen clearly demonstrates how volatile market conditions can be. Things could, of course, change again just as rapidly.
Linked to this, Universities UK has been exploring conditional indexation (CI). This is a DB scheme design where the annual ‘cost of living’ increases, i.e., “indexation”, applied to the accruing benefits promised to members are conditional on the scheme’s funding position.
Our ‘proof of concept’ modelling shows a CI scheme could potentially deliver high value benefits on a more predictable basis at an affordable level and mitigate, or even avoid, the funding challenges that DB schemes like USS have faced over the course of the last decade.
It is relatively new territory for the UK but is more common internationally, particularly in Canada where schemes such as the Ontario Teachers Pensions Plan (OTPP) have implemented CI with very positive results.
A range of policy, legal and practical issues would need to be addressed before a CI arrangement could be introduced, and ultimately as a scheme design matter, will be for scheme’s stakeholders, UUK and UCU to support; but our initial work suggests this is a promising structure, capable of delivering greater stability and potentially better outcomes for everyone.
With Universities UK consulting its members on CI and DWP consulting on auto-enrolment regulations we are looking forward to seeing the appetite from employers, the University and College Union, and Government for taking this work forward.
Mel Duffield is chief scheme strategy and stakeholder officer at Universities Superannuation Scheme
