1. What is Conditional Indexation (CI)?
Indexation is the amount your pension is increased each year to take account of inflation. In conditional indexation this is not guaranteed, but depends on market forces and possibly other factors, such as governance structures and who makes the decisions.
2. How would this affect our current USS pension scheme?
Currently all elements of our pensions, including indexation (inflation protection), are guaranteed.
Conditional Indexation (CI) removes this guarantee.
3. How are pensions calculated now?
Currently there is an accrual rate of 1/75. This means that for every £1000 of pay you receive each year £1000/75 will be added to the pension you receive each year.
There is also a salary threshold above which members receive defined contribution (DC) pensions where the amount is not guaranteed. This is now over £70,000, so does not affect most members.
The value of accrued pensions are increased with inflation. This is called ‘indexation’. Indexation is guaranteed, but is based on a ‘soft cap’. It is currently equal to CPI (consumer price index, a measure of inflation) up to 5%. It then increases to 10% as CPI increases to 15% (at a rate of half a percentage increase for every inflation percentage increase) and is capped there.
Therefore pensions could be improved.
4. Why is Conditional Indexation being discussed?
The idea of Conditional Indexation was originally proposed when the valuation was showing a large deficit, largely due to the way it was being calculated.
The valuation is a calculation of the difference between the pension scheme’s assets and liabilities (payments that need to be made). Pension regulations require it to be calculated at least once every three years.
We had to take industrial action in 2018 to stop the loss of defined benefits (guaranteed pensions) but we were unable to prevent a massive cut in 2022. This was finally overturned in 2024, which required a lot of industrial action and work by negotiators.
5. Who will decide on the amount of indexation?
This is still being discussed, but it could just be USS with no or insufficient involvement of UCU.
6. Will Conditional Indexation prevent future deficits?
No, Conditional Indexation will not resolve problems associated with the valuation. This will require a different valuation approach and also a better investment strategy. UCU has been working on the valuation approach and also for a better investment strategy.
7. Will CI reduce the likelihood of industrial action?
Probably not, and it could increase it. It is likely that indexation will be calculated every year in addition to the valuation every three years. This gives more opportunities for disputes which could lead to industrial action.
8. What is UCU’s position on Conditional Indexation?
UCU is sceptical, but continuing to explore CI in the interests of members and to ensure no decisions are made that we are not involved in.
9. What do the employers and USS think of CI?
They support it. The employers would like to reduce their contributions and reduce the amount of USS liabilities that appear on their balance sheets to enable them to borrow more.
They are not using recent savings from reduced employer contributions to increase pay, or take measures to increase job security. Despite the recent significant reduction to employer (and member) contributions, employers are still threatening massive redundancies. The percentage of university income spent on staff (including pensions) has reduced to an all time low.
10. What are the benefits of Conditional Indexation to members?
USS has suggested that it could increase benefits paid to members. It has done some modelling which seems to shows this.
However, this modelling does not set these projected improvements against the risk to members from the loss of guaranteed indexation (see point 11 below). USS have not provided the details needed to check the model. It also does not consider the improvements in benefits that could be achieved in the current scheme.
11. What are the disadvantages of CI to members?
We will lose guaranteed indexation, which is of great value to members. Investment risk will be transferred from employers to members, and members will see a significant increase in risk. It is unclear what the benefits, if any, will be to set against this. No wonder UCU is sceptical!
12. Will Conditional Indexation provide a minimal level of indexation?
No. It could provide zero indexation, as USS thinks this will give greater flexibility. However, pensioners will receive the legally required minimum of 2.5%.
13. What would happen if there are several years with no or low indexation?
There is supposed to be some sort of ‘catch up’ mechanism to increase indexation subsequently when market conditions improve and allow this. However, the details have not yet been worked out.
14. Will this catch-up mechanism prevent problems due to years of low indexation?
No. Some pensioner members could die before indexation increases (if it does). Other members may put off retiring until indexation improves, or find it difficult to decide when to retire.
We are fighting casualisation and job losses, but have large numbers of casualised members who may leave the sector and could lose out on any catch-up.
It is difficult to provide more details of exactly what will happen as we do not know yet know what the governance mechanism will be.
15. If Conditional Indexation is introduced and it does not work out, can we go back to our existing pensions?
Unfortunately not, or at least not without extended industrial action. The employers are strongly pushing CI and would have liked to introduce it for the next valuation. USS also seems very strongly in favour.
So employers and USS are very very unlikely to agree to a return. If we move to CI we will lose guaranteed indexation and will not be able to get it back.