Carlo Morelli, member of the UCU Superannuation Working Group
USS has produced its second report into changing our pension scheme into a Conditional Indexation (CI) scheme, Conditional Indexation: second report (December 2025). They and our employers claim they are just exploring the feasibility of CI, and have yet to make any decision.
While the final decision may not have been made, their enthusiasm for it is increasingly evident in the positive spin it is given in the first UCU – USS conditional indexation interim report, June 2025 and now second report.[i]
Before making the case against CI, it is worthwhile clarifying what a pension such as USS is, and is not. Unlike the state pension, USS is not redistributive. In short, the more of your salary you and your employer pay in, the more you get out, whereas the state pension pays out entirely based on how long you paid, and you receive the same irrespective of your earnings. This is important when it comes to considering questions of equality between existing types of scheme members under CI.
There are essentially four main types of current USS scheme members:
- retired members (meaning those whose pensions are in payment),
- deferred members (those not in work in the sector but with pensions built up and not yet in payment),
- active members (currently making payments into USS), and finally
- dependents (partners and children of deceased members in receipt of pensions).[ii]
Changes to a CI-based pension has significant implications on how different groups of members will be treated.
Unlike employer pensions in the public sector, such as in the NHS or the Teachers’ Pension Schemes, USS is a funded scheme. It is not a ‘pay-as-you-go’ scheme in which current employees are paying the pensions of previous employees. Instead, USS has its own assets built up over decades of member contributions, currently valued at over £74bn. This fact is important when it comes to discussing issues of intergenerational fairness between current members of the scheme and the next generation of staff not yet in employment.
These distinct constituencies of current or potential scheme members are important to consider when it comes to any pension scheme. But in the case of USS, they have been central to its success to date.
The forthcoming triannual March 2026 valuation of the scheme is estimated to show a ‘notional’ surplus of as much as £15bn.
USS is considered to be an ‘immature’ scheme, because contributions in and returns on assets continue to exceed payments out, and thus the asset-base continues to grow.[iii] This is also why we have retained guaranteed benefits for our pensions – a defined benefit (DB) pension scheme.
Now, if you disadvantage one group of current members you risk current members removing “their” pension pot from the scheme, to the detriment of its asset base. On the other hand, if you ignore the interests of future members you risk making the scheme unattractive to potential new members, resulting in the scheme becoming ‘mature’, with income no longer covering expenditure and the assets depleting.
As I will now explain, unfortunately, Conditional Indexation introduces these risks.
But there is no need for CI. The scheme is in a very healthy surplus. Instead of discussing increasing the risk of a worse outcome to members under CI, this huge surplus should be used to both protect and extend the current DB scheme, providing better benefits for all.
What is CI anyway?
The very first point to make is that ‘CI’ is not one thing. It is really a spectrum of potential scheme designs, all of which have one thing in common: they seek to pass on inflation risk to members in different ways, affecting different types differently.
Essentially, the greater the inflation protection (and hence the more like a fully DB scheme it is) the higher the projected cost.[iv]
The more ‘flexible’ the scheme is permitted to be, the weaker the inflation guarantee becomes, and hence the more the scheme becomes like a fully Defined Contribution scheme – and the lower the cost to the employers.
As explained on p.8 of the Second Report:
“Importantly, to have maximum flexibility from a funding perspective (and therefore help ensure stable contributions, benefits and indexation), the indexation to be awarded cannot be prescribed in a legally binding formula. In practice this would mean that decisions on indexation would ultimately be a matter of judgement for the relevant decision makers rather than governed in an entirely mechanical fashion – this would enable the scheme to be funded on the basis that CI increases are not guaranteed – thereby delivering increased flexibility compared with the existing approach.” – USS, CI Second Report, 2026, p.8
Thus, Conditional Indexation claims to be a means of protecting members from inflation reducing the real value of their pension, but it makes this inflation protection conditional rather than guaranteed.
‘Flexibility’ in these documents is in relation to control over funding, particularly employers’ funding, rather than the benefits promised to members.
Members would bear the inflation risk, and the guaranteed benefits of our DB scheme are sacrificed in the interests of managers running the scheme and employers whose make the largest contributions (on our behalf, as deferred wages) to the scheme.
Under a CI scheme, each year a decision will be made by scheme managers on whether it is ‘appropriate’ to pay an expected target level of inflation increase to members’ contributions. During the first 10 years following the introduction of CI, and extending to 30 and 60 years when reaching a steady state, the risk of not reaching the target level of increase is expected to be at its greatest (Second Report, p.14 and p.20). The biggest risk will be borne by current pensioners and the current generation of active members.
The process by which this takes place is required to be:
“Fair and transparent: Members, employers and the Trustee should be able to trust that the decision-making framework will lead to fair and reasonable outcomes based on transparent information and in accordance with fiduciary duties.” (original emphasis) – USS, CI Second Report, 2026, p.6
This ‘fairness and transparency’ condition would be achieved through… ‘A well-written policy document’ (p.7)!
Members may recall extensive, well-written critiques of the gilts-based valuation method as the basis of the scheme valuation produced by members, which were ignored and trumped by the ‘fiduciary duty’ reportedly insisted upon by the Pensions Regulator.
However, CI has another problem. It is not only inflation risk that transfers to members under CI. A still stronger guarantee to members’ benefits exists in the Defined Benefit scheme’s collective Employer Covenant.
USS is termed a ‘last man standing’ scheme. This means that if individual universities were to fail, their liabilities (known as Section 75 debt) would be paid by the remaining employer member organisations in USS.
CI would remove employers from this collective covenant by allowing scheme managers to refuse to provide the target level of indexation until the Section 75 debt had been recovered. So pensions can be devalued in real terms if employers leave the scheme. It is no wonder that employers are being encouraged to support CI, given the reported levels of liability in their annual balance sheets under the FRS17 regulations.
Ultimately, CI is not a solution to an inadequate valuation methodology, it passes the buck onto members, and should be rejected!
Intergenerational Inequality: setting member against member
It is not only inflation guarantees that CI seeks to undermine. It also risks pitting member against member in its decision-making over these target inflation increases. Inflation protection in USS is uniformly applied to all types of members, but under CI this would not necessarily be the case.
While active members are modelled in the Second Report within target inflation at CPI+1%, retired members are modelled with a target inflation of CPI. However, this advantage given to active members is only if the target is achieved. On the other hand, under current UK legislation, retired members are protected from poor outcomes with a requirement of inflation protection of 2.5% or CPI whichever is the lower.
It is obvious that a significant level of intergenerational inequality is built into CI proposals. Retired members will have greater protection from poor returns compared to active members. This problem could in theory be mitigated by the use of the current surplus creating a buffer against missing target indexation in the establishment of CI. However, the surplus is generated from past accrual. In this scenario, retired members would see their built-up pension surplus being transferred to today’s active members, instead of increasing retired members’ benefits. And once any surplus is spent, the potential for protection for the next generation is lost.
CI is not a solution to providing decent pensions for past, current or future staff in higher education. Instead, it is a gamble with our pensions that need not be taken. There is a large surplus in the current scheme that could be used to increase benefits to all types of members rather than pitting one section of members against another.
In UCU we need to discuss how to use the reported surplus to the benefit of all members, past and present. For one thing, the current system of inflation protection could be improved with no additional cost.
Our pensions are currently protected as long as inflation is below 5%, but above this and up to 15% there are lower levels of protection. This limitation on inflation protection could be lifted. This has no real cost if inflation remains low, but protects all members equally if it were to rise, for instance under a Farage government or a Trump-induced military conflict or a stock-market crunch.
Conclusion
CI is being promoted as a ‘solution’ to the failings of the long-standing valuation methodology. Yet it is nothing of the sort.
It simply passes all the inflation risks of funding a pension onto members and away from employers and USS.
While members may be bamboozled by supposedly sophisticated modelling in the coming months the key task is simple. We must continue to demand a guaranteed pension.
We struck in 2018 to retain a guaranteed pension for all, and we won. We struck again to reverse pension cuts. The scheme is in surplus.
Don’t let it be stolen now.
Notes
[i] The Second Report includes 60 references to the word ‘could’, 24 to ‘would’ and 46 to ‘will’, compared to 32 to ‘not’, 3 to ‘cannot’, 1 to ‘unable’ and 1 to ‘will not’.
[ii] Members can be in more than one category, such as taking flexible retirement, and there are also some other membership types, such as those who receive full commutation of benefits due to terminal illness.
[iii] The 2025 Financial Report & Accounts show exceptionally this is not the case, due largely to the writing off of USS’ £1bn investment in Thames Water. See Financial Report & Accounts 2025, p.59, available at Report and Accounts.
[iv] The current scheme has inflation protection up to 5%, which is fully 100% matched. If inflation were to rise above 5% up to 5-15% this additional level is matched by 50%. Inflation over 15% is not protected at all. USS is said to have a ‘soft-cap’ for indexation. In a world of CI, any inflation protection would be conditional upon the rules of the CI scheme, with no inflation protection in any year where it was determined unaffordable.
