A panel of industry experts appointed to help resolve a dispute about the UK’s largest pension fund has urged changes to the Universities Superannuation Scheme’s (USS) valuation governance to help combat low levels of trust between the parties involved in the £70.1bn (€78.2bn) scheme.
In its second report on USS, the joint expert panel (JEP) also made recommendations for changes to the valuation methodology, such as the adoption of dual discount rates.
However, it suggested the governance changes were more pressing, saying agreeing these alongside a set of shared valuation principles – another of its recommendations – should be a priority and should happen before work on the 2020 valuation had progressed too far.
It suggested the creation of a series of joint bodies within USS, including a valuation forum and a high-level joint union/employer steering committee to agree issues relating to the future direction of the scheme.
It also called for a review of the role and remit of the joint negotiating committee (JNC), including whether the chair should continue to have a casting vote.
Earlier this month staff at more than 50 universities finished a multi-day strike that was partly in response to an August JNC decision to raise contributions for employers and members. Committee chairman Sir Andrew Cubie reportedly had to use his casting vote because union and employer representatives on the JNC could not agree.
Pensions regulator backs dual discount rates
On the valuation methodology, the JEP suggested a dual discount rate approach to the valuation of USS that would be able to distinguish between past and future service, better reflect the demographics of the scheme, and automatically evolve as the scheme matured.
The JEP said it understood that up to 50% of defined benefit schemes currently use a dual discount rate approach, which could offer “a middle ground between the starting point of self-sufficiency and a less cautious approach of employing a higher discount rate with an implied higher growth investment strategy”.
The panel also recommended that different approaches to contributions be investigated to address a high level of scheme opt-outs among younger and lower paid staff, and backed the mutuality of USS as a “great strength” of the scheme.
It said a failure to address the issues raised in its report would be “a disaster” for members, employers and the higher education sector, which was why it proposed that the pension fund and its stakeholders – trade union Universities and College Union (UCU) and employer body Universities UK – come together in a facilitated process.
Joanne Segars, chair of the JEP, said: “Our recommendations, which should be considered as a package, are rooted in the belief that the USS is of crucial importance to members, employers and to the health of the higher education sector.
“We propose significant changes to governance and valuation methodology, each of which may be difficult for individual parties to accept. However, as work on the 2020 valuation commences, employers, unions and the trustee must urgently come together through a facilitated process to make them work.”
The Pensions Regulator (TPR) said the JEP’s high-level recommendations aligned with its views.
“In particular, we agree with the need to ensure the scheme’s long-term sustainability,” said a spokesperson, adding that the adoption of a dual discount rate broadly aligned with its proposed approach for the new defined benefit funding code.
The JEP was set up last year after a proposal to close USS’ DB section led to nationwide strikes led by UCU. In its first report, which was specific to the 2017 valuation, it said USS could reduce its deficit by implementing several measures, including taking more investment risk and re-evaluating the sponsor covenant.
In its new report the expert panel said there had been a “failure to collectively go forward” with its recommendations.