USS annual report shows significant improvement but angers unions

A memo sent by the USS to participating employers, published on July 25, said the scheme was in “a better position, in many different ways, at the end of the financial year 2021-22”.

The annual report published on July 25 showed that, as of March 31, the scheme’s defined benefit fund stood at £88.9bn, while its defined contribution assets amounted to £1.9bn.

The return on DB assets was 9.55 per cent, 2 per cent above the benchmark, and DB investment returns averaged 7.8 per cent a year (net of costs) over the past five years, leading to an overall increase in the value of the DB scheme by £25.3bn. 

A further £2.3bn was added to the value of the scheme’s DB assets by USS Investment Management, which outperformed its five-year “passive” benchmark by 0.6 per cent a year, making for a “substantial contribution to the scheme’s funding position”.

The scheme’s deficit on a technical provisions basis was just £1.5bn, down around £12bn from the figure revealed by the 2020 valuation, which kicked off a long and fractious period of negotiations between employers, unions and the scheme trustee over how best to minimise the resulting contribution rate hike.

Alongside the annual report and accounts, the scheme published a value for money assessment that, it said, proves that the USS manages its DB and DC assets at “a materially lower cost than our peers while delivering very good performance”.

Independent analysis by CEM Benchmarking showed that internal management had kept investment management costs roughly £101mn lower than the scheme’s “global peer median”.

“In fact, over the past five annual independent benchmarking reports, USS has been assessed as being 24 per cent less expensive — equivalent to £384m cheaper over that period,” it said.

However, the report also revealed the damage done by the fractious dispute over the 2020 valuation. Just 17 per cent of members rated their relationship with the scheme as “good”, while 30 per cent rated it as “average”, and 42 per cent reported a “negative relationship”, with the remaining 11 per cent being “passive”.

USS Group chief executive Bill Galvin hailed the results as evidence of the scheme’s resilience in times of exceptional economic volatility.

“While market conditions have been volatile, strong investment returns outpaced the growth in liabilities and the funding position has improved. Our operating model continues to ensure we manage our assets at a materially lower cost than our peers while delivering very good performance,” he said. 

“We have also made significant advances in our response to climate change, and to the service levels to our membership — improving our members’ digital offering, for example, and offering free guidance calls to members over 50. 

“We understand that, for members, all of this is set against a background of higher contributions and reductions to benefits. While their (and employers’) feedback on our service to them has consistently been very positive, the challenges and changes arising from the 2020 valuation have impacted their overall satisfaction.”

Galvin said that the USS “completely understands these sentiments” and is “committed to working together with our stakeholders to deliver the best possible outcomes, as we look forward to planning the scheme’s future against a less difficult backdrop than in the recent past”.

Benefit cuts were ‘totally unnecessary’

Although the USS was keen to portray the results as positive, the UCU was angered by the fact that benefit cuts had been forced through on the basis that the figures would be more dire than they transpired to be.

The union has been locked in a protracted battle with the USS trustee and employer group Universities UK over the outcome of the scheme’s 2020 valuation, which UCU argues was structurally flawed.

UUK and the USS trustee agreed a deal trading increased covenant support, a moratorium on scheme exits, and a variety of other measures for a lower contribution rate, with the rate initially proposed by the trustee — in response to an apparent deficit of more than £14bn — deemed “unaffordable”.

But the union argued that this deal amounted to significant cuts to member benefits, up to 35 per cent for “a typical lecturer” — though UUK disputes this figure — and criticised the decision to carry out a valuation at the high-point of Covid-induced market volatility.

The UCU and its members again criticised the decision following the publication of the USS annual report, with general secretary Jo Grady saying: “The latest USS accounts confirm we were right to oppose the brutal cuts that have slashed 35 per cent from members’ guaranteed income in retirement.

“The cuts were predicated on a flawed valuation conducted in 2020 at the height of Covid as global markets were crashing. Now that assets have increased by almost £25bn, it is clearer than ever that the 2020 valuation wildly underestimated the scheme’s strength.”

UCU members across the country have been involved in several rounds of strike action over pensions, pay and working conditions, and Grady said that the only way to avoid “continued industrial unrest” is for vice-chancellors “to work with UCU to use the health of the scheme to restore member benefits”.

Benefit changes were ‘difficult’ but necessary

Though acknowledging the significant improvement in the scheme’s funding position, an accelerated year-end review conducted by the scheme sought to dissuade those keen to make further benefit changes in advance of the 2023 valuation.

The briefing note accompanying the report said that, even with the significant improvement in the scheme’s funding position, the future service cost of the scheme would have risen to 36 per cent of pay without the benefit changes introduced in April, while the deficit would have been around £1bn higher (at £3bn), necessitating deficit repair contributions on top of the future service rate.

It also stressed that ongoing volatility meant the present healthy position could not be relied upon as a “solid basis for decision-making”, while interim benefit changes would interfere with planning for the 2023 valuation and potentially set a precedent requiring stricter oversight from the Pensions Regulator.

Rather than campaigning for interim changes on the back of the new results, the trustee board encouraged all participants to focus on “positive preparations” for the 2023 valuation, after which changes to benefits and contribution rates could be considered and implemented.

USS board chair Dame Kate Barker, commenting on the annual report and accounts, reiterated that the changesm — though unwelcome — were necessary to “put the scheme on an affordable and more stable footing”.

“For the first time in some years, recent data indicate we could be on track to achieving a more robust funding position, and our hope is that conditions improve over time, sufficient to allow more positive discussions in future,” she said. 

Barker added that, as it turns “the page on a difficult chapter” in its history, the scheme is “committed to working with UUK and UCU as they consider some important programmes of work: exploring lower-cost options, considering different benefit structures (such as conditional indexation), and reviewing the scheme’s governance arrangements.” 

“These are important initiatives to improve the resilience of the scheme and support a wider range of the academic community we serve,” she said.