The funding shortfall for the UK’s largest pension scheme has increased to £6.6bn (€7.3bn), according to its chief executive.

Bill Galvin, CEO of the Universities Superannuation Scheme (USS), detailed the effects on the scheme of negative real yields on government bonds in a 23 August email to Alistair Jarvis, chief executive of employer organisation Universities UK (UUK).

The news comes as UUK and the University and College Union (UCU) are attempting to negotiate a new schedule of contributions. Employers have backed a combined contribution of 30.7% of salary, with members paying 9.6%. However, the UCU has demanded that member contributions remain at 8%, and has threatened strike action.

Galvin said USS’ trustee board would have to make a judgement on how to interpret recent market movements and factor them in to the 2018 valuation decision. UK regulations require all schemes to carry out a formal valuation at least every three years, including assessing contribution rates.

Galvin said: “Given recent volatility in financial markets and the regulatory requirement that the trustee conclude [that] the long-term assumptions underpinning the funding proposals remain safe, there is a real risk that the trustee will, at the end of the consultation and before concluding the valuation, need to reconsider the contribution rates and/or evaluate other mitigating actions that may be required.”


Summer market volatility has pushed up USS’ deficit and could affect negotiations over contribution rates

The CEO said there had been a “downwards drift” in real yields for much of the past year, which had “become pronounced in recent weeks”.

“At the end of July the real yield on 20-year UK index-linked Gilts was -2.20%, and in August they have fallen even lower,” Galvin said. “At the time of the last trustee meeting [on] 21 August they stood at -2.44%.”

Using the technical provisions basis of valuing scheme assets and liabilities, this meant USS’ funding deficit was £6.6bn as of the end of July, he said. This compared to the £3.6bn shortfall reported on 31 March 2018.

USS reported a £5.7bn shortfall in its annual accounts as of the end of March 2019, although this used data from the March 2017 valuation, which has since been replaced by the 2018 valuation. 

In addition, actuaries have warned that the scheme’s next valuation, due to use data as of 31 March 2020, might not produce contributions rates lower than currently scheduled.

If UUK and UCU agree to the 30.7% contribution rate, it will be in place until October 2021, after which the combined rate will increase to 34.7% of salary, with members paying 11%.

However, in an analysis of the contribution schedule – which will be out for consultation in September – Aon actuaries John Coulthard, Andrew Claringbold and Joanna Davies said the deterioration of market conditions was “concerning”.

“There is no guarantee that the 2020 actuarial valuation will result in contributions that are lower than 34.7% from 1 October 2021,” they wrote.

Regulator voices concerns

Earlier this month the Pensions Regulator (TPR) wrote to USS trustee board chairman Sir David Eastwood to outline concerns over the route being taken by the scheme.

The planned contribution schedule – referred to as ‘option 3’ based on choices presented to stakeholders in May – “misses the opportunity to secure a material amount of cash funding for the scheme in the short term”, wrote TPR director of supervision Mike Birch.

Birch also highlighted scenario analysis work conducted by the USS trustee board, which showed that there was a 5% chance of the scheme requiring total contributions of as much as 55% of salary. There was a 22% chance of an increase to “above 40%”, he said.

“Of course, many assumptions underlie such projections but the overall message is clear – the risk of some very serious downside scenarios arising over relatively short periods of time is not insignificant,” he said.

The trustees and other stakeholders “must actively monitor and manage this risk”, Birch said, and decide what actions should be taken in such circumstances, including asset sales, delays to capital expenditure, and changes to benefits.