The UK’s Universities Superannuation Scheme (USS) has breached one of its funding measures as a result of the downturn in financial markets over the measures to halt the spread of coronavirus COVID-19.
The funding measure in question is the ratio of the deficit in the scheme on a self-sufficiency basis to the present value of 10% of employer payroll contributions annually over 30 years. A trigger event is constituted if the ratio exceeds 85% for five consecutive days, which happened on 12 March after a near miss earlier this month.
In accordance with a monitoring framework put in place following USS’s 2018 valuation, the scheme has to inform The Pensions Regulator (TPR) and consider what action, if any, would be appropriate. The trustee board is to consider the issues raised when it meets next week.
On a webpage aimed at USS members, USS said that it was “looking at a short-term response, which might include increasing employer contributions and/or supporting employers to reduce their liabilities”.
A spokesperson for USS said the funding measure in question was important because “uncertainty for the scheme’s future funding means an increased dependency on the potential support of the sector to underpin the assumptions made in funding the scheme”.
“Our pension promises are secure because they are supported by the strength and longevity of employers in the UK higher education sector,” the spokesperson added.
“It is important these sponsors are clear on the funding position and on their commitment to the scheme should our assumptions prove inadequate.”
2020 valuation ‘opportunity’
The triggering of the funding monitoring threshold comes as USS prepares for its 2020 valuation, which is due to be based on a snapshot of the scheme as at 31 March.
“Our current view is that COVID-19 will have a very significant near-term impact but is less likely to have a material impact as we look further out,” the USS spokesperson said. “However, market conditions mean that any forward look is challenging, and will take time to work through, which is the focus of the 2020 valuation.”
The 2020 valuation provided “an opportunity to take a calm and considered approach to assessing current conditions and any changes to the long-term outlook,” the spokesperson added.
In a letter to the head of sponsoring employers, USS group chief executive officer Bill Galvin said the scheme “will not rush to judgement on how to deal with the current circumstances”. He noted that the scheme had the ability to take account of “post-valuation experience” before it concluded the 2020 valuation.
According to Galvin, USS expected early guidance from the regulator on how to approach matters relating to current conditions in the month of April.
Aon today called on TPR to be pragmatic when reviewing 2020 valuations, noting that as much as 15% of UK schemes have a valuation date of 31 March 2020 or 6 April 2020. This meant their valuation would be driven by the prevailing market conditions, which given current volatility “could be an atypical day on the financial markets”.
As at 12 March valuation monitoring figures showed USS having assets of £68.2bn (€72.8bn), technical provision liabilities on a Gilts-plus basis of £80.3bn, and self-sufficiency liabilities at £105.6bn.