USS review sees ‘much improved’ deficit cut by £12bn

The March 2020 deficit of £14.1bn kicked off a long and fractious dispute between the USS trustee, the University and College Union, and employer group Universities UK, over the accuracy of the 2020 valuation and consequent hike in contribution rates proposed by the trustee.

In negotiation with UUK, the trustee agreed to a package of reforms that included a moratorium on scheme exits and greater covenant support in exchange for a lower contribution rate, but the UCU rejected the employers’ proposals arguing that they amounted to significant cuts to member benefits. 

The UCU has called several times for a new valuation to supersede what it said was a flawed 2020 exercise, carried out at the high-point of the Covid-inspired market shock, and leading to what it said was an unnecessary programme of benefits cuts.

The union repeatedly pointed to figures suggesting that the subsequent rebound in asset prices meant the scheme’s financial position was not as precarious as the 2020 valuation suggested, but calls for a new valuation were rebuffed by both employers and the USS trustee.

Earlier this year, the USS published a financial management plan monitoring report for the end of March 2022, which suggested a technical provisions deficit of £1.6bn and a future service cost requiring contribution rates of 24.7 per cent of pay.

However, the trustee board then commissioned an accelerated year-end review, allowing for the market volatility and uncertainty that were the backdrop of the monitoring report.

Deficit ‘much improved’ but volatility remains

The review incorporated a “light touch” appraisal of covenant, mortality expectations, investment assumptions, and strategies and funding assumptions. While less detailed than a full valuation, it was designed to provide “greater confidence” than the monitoring report could accomplish.

Considered by the trustee board at a meeting on July 23, the results showed a “much improved” deficit position compared with March 31 2020 — the figure dropping from £14.1bn to just £2.1bn.

It also revealed a modest decrease in contribution requirements under the new benefits structure, which came into force in April with the agreement of the trustee and UUK. The requirement dropped slightly from 25.2 per cent of pay to 24.8 per cent.

In a briefing note accompanying the report, the trustee said that, without the benefit changes introduced in April, the indicative position as at March 31 2022 would have seen a future service rate in excess of 36 per cent of pay, even allowing for the covenant support package pledged by employers.

The deficit, meanwhile, would have been £3bn and require deficit recovery contributions be paid in addition to the future service rate.

Though the accelerated year-end review showed that the value of the scheme’s assets had fallen from £93bn in November 2021 to around £78bn by the end of June, the trustee board said it expected a continuation of the broader positive trend for scheme funding “that has emerged since the calendar year”.

Falling asset prices could in fact be helpful to the trustee’s assessment of future service contributions, which account for the bulk of the overall contribution rate, as well as its assessment of the deficit — provided it was “accompanied by rising long-term expectations for investment returns and higher interest rates”.

The board allowed that it was “particularly challenging” to make judgments based on just a few months’ monitoring data and at a time of significant market volatility, but it said that a sustained improvement in the funding position would “potentially be good news for the 2023 valuation”, and may allow the Joint Negotiating Committee to consider lowering contribution requirements and enhancing benefits in future.

No changes before 2023 valuation

However, it was reserved on the suggestion of interim changes to benefits or contribution rates before the 2023 valuation, noting that this would be “extremely unusual” and require “a very solid basis for decision-making” that the current level of volatility “simply does not provide”.

Even if the trustee were to conclude that such a basis exists, the board noted that the scale of changes would be extremely limited, while the time taken to implement a proposal would overlap with the planning stages of the 2023 valuation, creating difficulties.

Furthermore, the persistent market volatility could mean that the improvement in the funding position is not sustainable, meaning that any changes would have to be reversed. The board also highlighted the “less-desirable consequences” that could arise from setting a precedent, such as increased scrutiny from the Pensions Regulator.

“While it is important to be cautious in setting expectations, the trustee thinks it is important that energies are instead focused on positive preparations for the 2023 valuation and working with stakeholders to consider how to approach any opportunities that could arise,” the briefing note said. 

“That would include the JNC prioritising the improvements it would want to make (perhaps under a pre-agreed framework) and engaging with the trustee on the approach to be taken for the valuation — and the trustee getting a head start on the associated data and analysis.

“If preparations begin early, and frameworks for any such decisions are agreed in advance of the valuation, it may be possible to conclude the valuation and implement changes more quickly than has been the case recently.”