Why USS employers should strongly support the rule change regarding withdrawal from the scheme

Here I briefly explain why I think it would make sense for at least the vast majority of USS employers to strongly support the rule change that would prevent a second employer, comparable to Trinity, from withdrawing from the scheme in the event that (as PwC claims it would) this would lead to a downgrading of the strength of the employer covenant.

Given its vast wealth combined with the modest benefit their members receive from USS, Trinity is in a highly unusual position, in comparison with the other 350 or so sponsoring employers in USS. Trinity makes this fact clear in the statement they released on Friday:

Trinity is a very small employer in USS, with fewer than 20 full-time permanent members of academic staff solely employed by the College in the scheme, out of around 200,000 members at more than 340 institutions. This represents around 0.01% of the active membership.

The majority of the College’s teaching staff (around 60) will remain members of USS by virtue of their primary employment by the University.

… USS is a Last Employer Standing Scheme, with sponsoring employers jointly liable. Trinity College is unusual among higher education institutions with as much as 75% of its income arising from endowment rather than fees and grants. Although the College is a tiny employer, in a worst-case scenario, all of its assets could be transferred to USS. [My bold emphasis added.]

There are perhaps two or three other Oxford or Cambridge Colleges that might be in a position similar to Trinity’s. But, even in terms of their narrow self-interest, it would not make sense for any university, including Oxford or Cambridge, to buy out their liabilities in order to exit the scheme. Various universities have explored this possibility and have come to the conclusion that the cost far outweighs the highly unlikely risk against which they would thereby protect themselves.

I think PwC lacks justification for their claim that, if one more employer comparable to Trinity leaves the scheme, the strength of the covenant should be downgraded. For all its wealth, Trinity’s overall share of the assets of all employers is very small. It’s hard to understand how withdrawal of such a small share of total assets of sponsors, which would be called upon in only the most improbable scenario, should make such a significant difference to covenant strength.

Nevertheless, PwC’s assessment makes it the case that, if one more wealthy Oxbridge College withdraws from the scheme, USS will downgrade the covenant from ‘strong’ to ‘tending to strong’, thereby making it much more expensive to continue to provide DB benefits.

It is therefore rational and reasonable for the vast majority of USS employers to protect themselves and scheme members against a second Trinity by strongly supporting the USS rule change regarding withdrawal from the scheme.

[This post is a sequel to “Oxbridge Fellows please support the USS rule change to prevent a second Trinity”.]