The Universities Superannuation Scheme (USS) is to carry out a more detailed assessment as to whether the pension fund’s indicative funding position at the end of March could point to the prospect of higher benefits or lower contributions, or a combination.

According to an update from chief executive officer Bill Galvin last week, the suggested deficit at the end of March was £1.6bn (€1.9bn) and the future service cost of benefits 24.7% of payroll.

“While these figures are not a predictor of what might emerge from any formal valuation [..] they do indicate that the scheme’s funding position is more resilient and moving in the right direction,” he told employers.

On the basis of the valuation of the scheme at the end of March 2020, the deficit was £14.1bn and the future service cost 25.2%. That valuation has been intensely contested and the benefit changes that followed have led to industrial action at universities.

From April USS members are accruing defined pension benefits at a lower rate than before, and the threshold up to which they are accrued is £40,000 rather than £60,000. The changes were approved by the trustee board following recommendations from the JNC (via the independent chair’s casting vote).

According to USS, without the benefit changes, but allowing for the associated additional covenant support, the suggested deficit at the end of March this year would be £3.1bn and the cost of servicing future benefits would be more than 36% of payroll.

However, Galvin said that there was “potential for better news at the next valuation” if the positive experience over recent months became more established and that in such a situation, the JNC could consider increasing benefits or decreasing contributions, or some combination of both.

“The note of caution reflects the paradigm shift that appears to be underway in financial markets as they react to the prospect of higher inflation,” he added. “Asset values and rates of return are quite volatile. It is extremely difficult to make long term judgements.”

“Asset values and rates of return are quite volatile. It is extremely difficult to make long term judgements”

Bill Galvin, CEO of USS

Because of this uncertainty, USS would be holding an “Accelerated Year-End Review” to get more considered insight into the scheme’s funding position as at 31 March 2022.

“The AYR will incorporate a light-touch review of the covenant, any notable developments in published mortality expectations, a review of the investment assumptions and strategies, and a review of the funding assumptions (allowing for the risk management framework metrics),” Galvin said.

UUK, representing USS sponsoring employers, said there was the possibility of starting work earlier on the scheduled March 2023 valuation so that any improvements in terms of contributions and/or benefits might be implemented more quickly.

“We are seeking clarification from the USS trustee about the short and medium-term options that might be available should the positive financial position continue, but without having to undertake an earlier full valuation,” said UUK.

“We know a new valuation would take many months and divert focus away from fundamental reforms such as developing lower-cost options for members, considering alternative scheme designs, and conducting a thorough governance review of USS.”

Jo Grady, general secretary of the university staff trade union UCU, said: “Ahead of a new valuation which can increase staff benefits in the longer term, there must now also be urgent steps taken to harness this much improved position, preventing any more damage being done to our members’ hard earned pensions.”

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