Deficit woes deepen as shortfall continues to plague USS

The shortfall, which stood at £15.2bn at the end of March 2021, has increased by £2.3bn since March 2020, further heightening concerns around the prospect of an upcoming hike to member contribution rates.

As revealed in the USS’s 2021 Report and Accounts, published on Thursday, the resulting deficit has risen by £11.6bn relative to £3.6bn registered at the 2018 valuation.

The scheme’s assets rose by £14.1bn, although liabilities increased by £16.4bn due to reduced future returns and increased inflation expectations. The scheme’s funding ratio — 86 per cent — has remained unchanged year on year.

The 2020 valuation — which USS group chief executive Bill Galvin said was impacting the scheme’s operating costs — is still underway, and so the reported funding position as has been calculated using the approach adopted for the 2018 valuation.

Dame Kate Barker, chair of the trustee board, said in the report: “It is clear that the present joint contribution rate is no longer adequate to fund the pensions our members now expect to earn on their future service and support the likely deficit recovery costs.”

She added that a change in investment methodology to better reflect the “open nature and maturity of the scheme” has resulted in trustees being able to “take more investment risk compared with the 2018 valuation, but lower gilt yields and the deterioration in the long-term outlook for investment returns have outweighed these positive factors”.

Performance drops below the benchmark

Galvin said a combination of factors, including the pandemic, an “adverse” asset allocation in the wake of Brexit, and the weaker performance of private market investments caused the year-end five-year relative performance to drop below its benchmark for the first time since the 2013 year end.

Yet the report noted that given the right economic conditions, “opportunities should be taken over the years ahead to reduce the amount of risk within the scheme, and specifically reduce the amount of investment risk”.

Following the 2020 valuation, the Pensions Regulator advised the scheme’s trustees to lay out three illustrative scenarios for rate hikes. In the most unfavourable scenario, the rate would be as high as 56.2 per cent.

“We know the increase in the overall contribution rate to 34.7 per cent, due to come into effect in October 2021, is a concern for employers and members. We will work as constructively as possible with our stakeholders as we grapple with these complex issues,” said Barker.

A rate hike would affect 200,000 members and 350 higher education employers.

Earlier this month, Universities UK, the group representing 340 USS employers, pledged additional covenant support to the pension scheme, in a move it said will spare its members the crippling contribution rate rises announced following the scheme’s 2020 valuation.

Figures show ‘flawed 2020 consultation’

Barker reiterated that the scheme was “working to maximise the strength of the employers’ covenant, their commitment to provide financial support to the scheme”, adding that a successful agreement in this area will have a “material benefit in terms of future contribution rates”.

However, there was a risk that this would come at the cost of other priorities within the higher-education sector, including student and staff services and improving the quality of courses.

In reaction to the figures released in the report, Paul Bridge, head of higher education at University and College Union, told Pensions Expert: “The latest accounts from USS show that assets have jumped by over £14bn in the past year and membership has also increased.

“This provides even more evidence that the scheme is healthy and the flawed 2020 valuation, conducted at the height of the Covid pandemic as markets were crashing, needs to be scrapped and replaced with a moderately prudent 2021 valuation.”

USS is one of only of few remaining private defined benefit pension schemes still open to both new members and future accrual.

In February 2018, the UCU ran the first of a major series of strikes over proposed changes to the USS, followed by further action taken in 2019 and 2020.