The Universities Superannuation Scheme (USS), the UK’s largest private pension fund by way of assets, has laid out how pension contributions would need to rise sharply if existing benefits are to be maintained, with employers critical of how it is valuing their support.
As at 31 March 2020, the fund’s deficit ranges from £14.9bn (€16.7bn) to £17.9bn on a technical provisions basis, although USS notes that future service costs have also risen given that expectations of future investment returns are now lower than assumed in the past.
The overall contribution rate currently stands at 30.7% of payroll and is already due to rise to 34.7% under the 2018 valuation.
According to an update on the scheme’s 2020 valuation, the trustee has told the Joint Negotiating Committee (JNC), which represents employers and scheme members, that the total contribution rate would need to rise to 49.6% on the condition that an illustrative package of commitments made by employers late last year is implemented.
Bill Galvin, CEO of USS, told journalists this morning that the scheme considered these proposals to be “relatively weak”, particularly compared with what USS had in the way of commitments when it signed the 2018 valuation.
Without any commitments from employers, a scenario that is not seen as likely, the overall contribution rate would rise to 56.2%.
In the most favourable scenario considered by USS, which would require further financial commitments from employers to strengthen the scheme’s covenant, the overall contribution rate would need to rise to 42.1%.
“We would really like to do some of the things the Joint Expert Panel (JEP) recommended, like a 15-year recovery plan,” said Galvin, adding that this would require employers sticking with the scheme for at least the duration of that plan, in turn implying a 12-year moratorium on employer exits at the end of this three-year valuation. Universities UK (UUK) has proposed a six-year rolling moratorium.
The JEP was set up by University College Union (UCU) and UUK to assess the 2017 valuation of USS, which resulted in proposals to close the defined benefit section, in turn triggering nationwide industrial action. In 2018 the panel said USS could do take more risk to reduce the deficit.
It is now up to the JNC to decide on any changes to contribution rates or benefits that may be necessary. UUK, which represents employers, plans to begin a consultation with employers later this month. USS said it will review its funding assumptions if different covenant support measures and/or benefit structures are proposed as a result of this consultation.
Employers were disappointed by what USS outlined today.
“The very high prices for current benefits put forward by the USS trustee are unaffordable for employers, risk pricing even more staff out of the scheme, and undervalue the collective and enduring financial strength of the participating employers,” said a UUK spokesperson.
“Employers and their staff need significant reassurance that the USS trustee is not being overly prudent on matters like projected investment returns or undervaluing possible covenant support measures, both of which remain under discussion.”
At the UCU, which represents staff and hence scheme members, general secretary Jo Grady said USS and employers “must do better”.
“For their part employers need to show higher education staff that their commitment to USS is serious by working with UCU and USS on covenant support measures and to get key aspects of the Joint Expert Panel implemented,” she said. “UCU will be holding a special sector conference for higher education branches to decide our next steps and cannot rule anything out.”
USS is keen to point out The Pensions Regulator’s (TPR’s) stance on the proposals in the scheme’s 2020 valuation update report, saying TPR had made clear they were at the limits of compliance. It also drew attention to Dame Kate Barker, chair of the USS trustee board, explaining that USS had explored other proposals that the regulator felt “would not be prudent enough” to comply with scheme funding legislation.
Dame Kate said: “We fully recognise the scale of the challenge facing the scheme and sympathise with our employers and members in light of the difficult decisions that lie ahead.
“Trends in financial markets have made the valuable pension promise offered by USS – a set inflation-linked income for life in retirement, regardless of what happens to the economy in future – much more expensive today than in the past.”
She continued: “I believe everyone involved with USS wants to find a way forward, consistent with our legal and regulatory duties, that provides valuable and secure pensions, and that puts the scheme on a sustainable footing. We are committed to being as collaborative and constructive as we can in supporting UUK and UCU’s discussions to this end.”