April 2022 USS Concession

Before imposing their April 2022 changes, the employers made one concession. The 2.5% cap on indexation would be deferred by a few years. How significant is this concession?

To answer this, one needs to understand two points. Firstly, that benefits earned before April 2022 must, by law, be treated according to the rules current when they were earned.

Secondly, one must understand how indexation works in the USS.

Each April, benefits earned more than 12 months ago, i.e. before the previous April, are indexed based on the CPI figure for the previous August, perhaps reduced by some form of cap.

So, before the concession was announced, the expected indexation caps for different years of benefits were as follows.

Apr 22 Apr 23 Apr 24 Apr 25 Apr 26
Pre Oct 11uncappeduncappeduncappeduncappeduncapped
Pre Apr 215% soft 5% soft 5% soft 5% soft 5% soft
2021--22 0% 5% soft 5% soft 5% soft 5% soft
2022--23 -- 0% 2.5% hard 2.5% hard 2.5% hard
2023--24 -- -- 0% 2.5% hard 2.5% hard
2024--25 -- -- -- 0% 2.5% hard
2025--26 -- -- -- -- 0%

So the first time the new 2.5% cap would apply would be the first time that post April 2022 benefits are indexed, which is April 2024.

The concession is that the 2.5% cap will not apply until after the April 2025 increase, but thereafter it will apply to all post April 2022 entitlements. (The employers say that they hope this will not be necessary, and that the 2.5% cap will never be needed, but all that is committed to in a binding fashion is to defer applying until after April 2025.) To fund this concession, the employers have raised their contribution rate from 21.4% to 21.6%. So the new table reads as follows:

Apr 22 Apr 23 Apr 24 Apr 25 Apr 26
Pre Oct 11uncappeduncappeduncappeduncappeduncapped
Pre Apr 215% soft 5% soft 5% soft 5% soft 5% soft
2021--22 0% 5% soft 5% soft 5% soft 5% soft
2022--23 -- 0% 5% soft 5% soft 2.5% hard
2023--24 -- -- 0% 5% soft 2.5% hard
2024--25 -- -- -- 0% 2.5% hard
2025--26 -- -- -- -- 0%

How much this is worth will depend on the CPI figures in August 2023 and August 2024. If one assumes that the current inflation blip has disappeared and CPI is below 2.5% by then, it is worth nothing. If one assumes that inflation is 15% or higher, it is worth 7.5% each time the cap is applied.

If one assume that inflation stays around 5%, then a 2.5% cap causes a real-terms loss of around 2.5%, and the old cap no loss at all. If one assumes that one earns the maximum £470 annual defined benefit pension (i.e one's salary is above £s;40k), then the new rules would index the contributions from 2022-23 and 2023-24 as generously as before, until April 2026, whereas the proposed rules would have effectively left those two years of contributions being worth £905 after April 2025, rather than £940.

Today's high, and rising, inflation highlights two problems with the pre (and post) 2022 indexation rules. The use of the CPI figure for the previous August is common to almost all UK pension schemes, but causes a lag when CPI is rising, which is mostly offset by gains when it is falling. The CPI figure for August 2021 was 3.2%, so this is the gain USS pensioners will receive in April 2022. At the time of writing it is not known what the CPI figure for April will be, but that for January 2022 was 4.9%, and it seems reasonable to assume that the invasion of Ukraine will push it well above 5%.

More importantly, no indexation applies to benefits earned less than a year ago. So, on average, benefits wait 18 months to receive their first annual indexation, and thus lose, on average, six months of indexation. It has always been thus, but now, with a stricter indexation cap, during periods of high inflation those paying into the USS lose out twice.