USS Contribution Rates

The following table was taken from a document on the USS website.

Apr 1975 - Mar 19806.25%12.00%18.25%
Apr 1980 - Mar 19826.25%14.00%20.25%
Apr 1982 - Mar 19836.35%14.00%20.35%
Apr 1983 - Dec 19966.35%18.55%24.90%
Jan 1997 - Sept 20096.35%14.00%20.35%
Oct 2009 - Sept 20116.35%16.00%22.35%
Oct 2011 - Mar 20167.50%16.00%23.50%
Apr 2016 - Mar 20198.00%18.00%26.00%
Apr 2019 - Sept 20198.80%19.50%28.30%
Oct 2019 - Sept 20219.60%21.10%30.70%
Oct 2021 - Mar 20229.80%21.40%31.20%
Apr 2022 - Dec 20239.80%21.60%31.40%
Jan 2024 -6.10%14.50%20.60%

Or, as a graph, (click to enlarge)

contribution rates

The graph makes it clearer that employees enjoyed almost 30 years of stability in their contribution rate, and then five increases in the next ten years. In those first 30 years, the employers seemed to think themselves responsible for paying extra if the scheme was declared to be underfunded. Now they like sharing the burden.

The drop in January 2024 is remarkably dramatic. Although justified by the formulae that the Trustee and Regulator use, those formulae were pretty discredited even before this point. My personal view is that the cut looks too steep, and that a total contribution rate a couple of percentage points higher would have given more future stability, whilst still offering employers and employees lower rates than they have suffered for over a decade.

From October 2011 to March 2016 employees in the new career averaged earnings section of the scheme paid 6.5%, not 7.5%. From April 2016 the final salary section was closed to all members, and all were in the career averaged scheme.

At various times (1983 to 1996, and 2016 to 2023) the employers' contribution rate has included an element for paying for an alleged deficit in the pension fund, as well as funding future benefits.

It is noticeable that from 1983 to 1996 the employers were happy to pay 18.55%. When the crisis of 2011 struck, it took a very long time for the employers to get their contribution rates back to this level, whereas employees quickly ended up paying an unprecidentedly high rates.

Before 1997 pension funds could claim a tax credit on UK dividends. If a fund received a dividend of 80p, it would be topped up to £1, which was a refund of the advance corporation tax (ACT) that the company would have paid on the dividend. (The company could then reduce its corporation tax bill by the amount of ACT paid.) Gordon Brown scrapped this system in 1997, meaning that UK dividend income in pension funds was significantly reduced. Despite this loss of income, the USS did not increase its contribution rates until over a decade later. At this point the Trustee looks rather complacent in not insisting on more money sooner, something which would have reduced the size of the current problem.

The USS claims that if benefits are not cut in April 2022, the total contribution rate needs to rise ultimately to 57%, something that most employees and employers would find unaffordable. The break-down of this amount was 37% to fund future benefits, and 20% to repair the deficit. The table provided in the statutory consultation is:

- Mar 20229.8%21.4%31.2%
Apr 2022 - Sept 202211.0%23.7%34.7%
Oct 2022 - Mar 202312.9%27.1%40.0%
Apr 2023 - Sept 202313.9%29.1%43.0%
Oct 2023 - Mar 202415.0%31.0%46.0%
Apr 2024 - Sept 202416.0%33.0%49.0%
Oct 2024 - Mar 202517.1%34.9%52.0%
Apr 2025 - Sept 202518.1%36.9%55.0%
Oct 2025 - 18.8%38.2%57.0%

This multi-stage increase does lead to all sorts of interesting questions. At which point would you prefer to have your contributions return to the top line of the table, in exchange for the proposed cuts to benefits? Those with disposable income might be happy to remain on the above escalator for a couple of years if the only alternative is the proposed cuts. They might also hope that some form of post-Covid and post-Brexit recovery might improve the scheme's finances so that the final increases are deemed unnecessary.

But there are plenty of employees, and employers, who would start to feel very squeezed before the end of 2022. Squeezed employers are likely to respond with below-inflation wage increases, making the financial situation of employees even worse, and job cuts, leading to extra work for those who remain, and stress and uncertainty for those who are forced out. (The 11%/23.7% rate was expected to be introduced in October 2021, so this step ought to be within the employers' budgets.)

But if enough people point out that for the first thirty years of the scheme the total contribution rate never rose above 25%, and the benefits were more generous than the current ones, it might cause a realisation that a long-term contribution rate of over 55% for current benefits lacks economic justification. It is credible that pensions today cost more than they did in the 1980s due to longer life expectancies and lower economic growth. It is not credible that they cost well over twice as much.

Or, put another way, the main benefit of the current scheme is a pension of 1/75th of salary for each year worked, plus a 3x lump sum, both payable from the age of 67. If one assumes that investments merely match capped CPI, and that people will, on average, live to 94 (i.e. 27 years of pension, plus a 3x lump sum, making a 30x payout overall), then the total contribution ought to be around 30/75th of salary, i.e. 40%. In the real world, life expectancy is not close to 94, and the long-term return from an investment fund should beat CPI easily, especially with the current cap.