Under conditional indexation, some or all of the future increases to future benefits would be conditional upon the plan's funding position.
Under that design, future increases associated with inflation or cost of living, for example, or other adjustments to benefits are not guaranteed, and instead are applied each year depending on the funding position and USS' ability to make such increases.
If the plan does not have enough money to fulfill full annual inflationary increases due to a deficit, then smaller increases will be made to help to bring the plan back into balance.
Conditional indexation, which is common in Canada, also means better intergenerational fairness because any shortfall in funding is reflected in the level of increases granted to all plan participants as opposed to the current design where only the current active participants benefit from the change, USS said.
UUK proposed a theoretical scheme design based upon a model used by the C$242.5 billion ($181.3 billion) Ontario Teachers' Pension Plan.
The proposal follows a significant improvement in the funding position of USS expected under the 2023 valuation due to rapidly increasing interest rates.
USS' funding ratio as of March 31, 2020, was around 84%. A spokesman said that the fund's monitoring suggests the plan could potentially now be in surplus.
"The 2023 valuation of the USS scheme is underway. In preparation for this, we have been working with the UCU, representing scheme members, to agree a way forward which is designed to create long-term stability and increase confidence in the scheme as part of a package which could also include lower contribution levels and improved benefits," Vivienne Stern, CEO of Universities UK, said in the statement.
Conditional indexation could provide added stability, as far as is possible with defined benefits, along the lines of successfully implemented plan designs in Canada over the last decade, she added.
Aon is adviser to UUK.
At UUK's request, the USS trustee in March worked on a high-level policy and governance framework, as well as modeling of outcomes, of sustainable practical options that could be implemented by the plan.
UUK has now asked USS' sponsoring employers if they want to continue to explore and develop a new plan design, a USS spokesman said, adding that a potential alternative plan design is at "proof of concept" stage.