Aon warns USS consultation could confuse employers

Aon’s paper, published on September 24 by Universities UK as part of a package of materials for employers, highlighted the wide range of possible consultation results as a cause for concern.

The consultancy concluded that the range is so broad that “employers will not know how their answers to this first consultation will impact on the next stage of the valuation discussion when the recovery plan is consulted on”.

The paper continued: “They do not know the consequences of particular choices on the overall outcome. This makes the whole consultation process difficult from an employer perspective.

“Overall, it seems inevitable that the valuation will be drawn out and somewhat iterative.”

UUK thinks the USS may reach ‘negative and unwarranted conclusions’ without employer intervention

Sam Marsh, Universities and College Union

All of the possible outcomes presented by the trustee are bad, Aon’s paper stated. 

The consultancy also alerted to an additional point of concern around covenant support requests. If employers do not or are not able to agree a covenant support request, the USS trustee suggested that total contributions for the current level of benefits will rise from 30.7 per cent to 60.3 per cent of pay, and perhaps higher still. 

It would result in just eight per cent of pay to spend on member benefits, a scenario Aon said is “not credible”.

Indeed, as reported in Pensions Expert’s coverage on the launch of the consultation, USS chief executive Bill Galvin said that the “contribution rates we’ve illustrated are unlikely to be considered affordable or sustainable by either employers or our members”. 

However, Aon’s paper suggested that the range of outcomes presented “is too wide to allow employers to judge the merits of agreeing to the covenant support requests — even if they are viable”.

It continued: “The top end of the range is similar to the bottom end of the range of contributions for a [tending to strong] covenant, meaning the employer covenant support may have almost no impact — or it may have a large impact, it is simply not clear.”

USS: Too many factors beyond our control

Asked to respond to these concerns, a USS spokesperson directed Pensions Expert back to the foreword of its consultation document, in which it is argued that “the range of potential contributions we show is very wide — from 40.8 per cent to 67.9 per cent of employers’ USS payroll”.

“This includes illustrative contributions towards the deficit, as well as to support the current benefit structure,” the document stated.

“This range is necessary as there are a number of covenant-related factors outside of our control that could change and which will be critical to the overall valuation outcome.

“These include the commitments that employers are willing to make, and the underlying financial resilience of the higher education sector to Covid-19. We are seeking [UUK’s] feedback on these issues.”

As reported previously, the USS has argued that its covenant position is critical, not least as it determines how much risk can be taken. 

While measures were undertaken at the time of its 2018 valuation to increase the covenant strength to ‘strong but on negative watch’, those measures had not come into effect at the time of the most recent valuation, leaving the scheme in the comparatively weaker position of ‘tending to strong’.

In an information document for employers on the technical provisions for the USS 2020 valuation, the scheme cited this fact, as well as the particularly difficult timing of the valuation, as causes of concern. 

Much of the uncertainty hinges on the fact that the trustee has yet to complete its covenant work, the document stated.

“We need better clarity on the likely recovery plan contributions — even if the details need to be confirmed later — and in particular a sensible discussion on the likely duration of any recovery plan and the use of investment outperformance, which reflect properly the value of the employer covenant.”

USS accused of ‘moving the goalposts’

The University and College Union commissioned a report to First Actuarial that has been sent to various branches to assist them in dealing with employers as they prepare their responses to the USS consultation.

The First Actuarial paper suggested that the “USS has proposed to ‘move the goalposts’ substantially to a more expensive funding target”.

It further argued that the range of options presented by the consultation all rest on an unnecessarily low discount rate of the consumer price index plus zero per cent, which means a no return on assets in real terms.

“This is extremely low and results in a very high demand for contributions. Realistically, a positive real return can be expected from suitable assets,” the paper stated.

First Actuarial disputed the suggestion that the consultation reflects the recommendations of the Joint Expert Panel, set up to examine the USS valuation. Excepting the adoption of a dual discount rate, “the USS has not adequately responded to the JEP’s recommendations,” the paper continued. 

It added that “the consultation is rendered meaningless by its narrow scope”, and that the USS “should be consulting on total contributions” as that is what employers and active members are interested in. 

The USS approach “hurts active members” as they “are put at risk of low or no pay rises, reduced job security and increased risk of redundancy if the employers’ pension contributions are too high,” the report stated.

Dr Sam Marsh, a University of Sheffield teaching fellow and one of the UCU’s elected negotiators on pensions, who analysed the several documents published by UUK, said in a twitter post: “UUK thinks the USS may reach ‘negative and unwarranted conclusions’ without employer intervention, are in danger of not making ‘sensible judgment’, and have failed to build credibility in their funding and investment approach.”