Understanding conditional indexation: what it could mean for USS members

The first report, published in June 2025, was an interim update on the working group’s progress. It provided an overview of how CI might work in practice and examined examples from other jurisdictions. The aim was to identify whether CI could improve member outcomes or make contributions and benefits more stable with an affordable cost for both members and employers.

The report highlighted the ongoing “volatility” within the scheme, particularly in relation to contribution rates and member benefits, and noted that greater overall stability could help address these issues. Whilst it recognised that adopting CI would introduce additional uncertainty for members (as pension increases would depend on the scheme’s financial performance), the working group expressed a clear interest in exploring whether the potential benefits of CI, most notably improved member outcomes and enhanced stability in benefits and contributions, could outweigh the associated risks for members.

Having acknowledged the funding pressures associated with a CI model, the report outlined an illustrative framework designed to ensure that increases could be granted while maintaining an appropriate level of funding within the scheme. This framework proposed regular assessments of affordable increases using two key tests: a sustainability test, which would determine the level of increases that could be supported both now and in the future, and an affordability test, which would assess whether members’ benefits would remain well‑funded following any increase. Only where both tests were satisfied could the full anticipated increase be awarded. Based on that model, the report anticipated 10-20% higher benefits than the current index-linked approach, though specific members may experience differing benefits depending on the example design used.

The second report built upon the findings from the interim report in a more detailed manner which could inform discussions with stakeholders on the potential implications of adopting a CI model. The report focused more closely on how a CI model would be practically implemented within the scheme, exploring questions of governance, decision-making and member outcomes.

The report found that CI may offer additional flexibility in funding management and could allow the scheme to better respond to stress. For example, if target increases are unaffordable, CI could scale back benefit improvements to meet those targets, rather than requiring urgent action to meet guaranteed index-linked increases. Conversely, CI was found to have a higher likelihood of keeping member benefits stable and could allow higher increases which would be capable of boosting members’ pensions.

The report also emphasised the uncertainties of adopting the model. Notably, outcomes would be “particularly sensitive in the early years” after introducing CI. This is because initially most of the scheme’s liabilities would still be traditional (non-CI) benefits, so any funding shortfall might necessitate very low indexation on the relatively small portion of CI-linked benefits to have an effect. In other words, the first generation of members under CI could face a high risk of below-inflation increases until the new benefit structure matures. The report highlighted the need for effective modelling to manage these risks.

Unlike the first report, the second report did not propose extensive example designs for CI but instead laid out the trade-offs and choices that stakeholders would have to weigh up when providing commentary on the proposed implementation of CI within the USS.