Thousands warn of ‘unjustified’ USS discount rate rises

The letter, which has 3,783 signatories and was copied to the Pensions Ombudsman, members of the Work and Pensions Committee, and Universities UK, which represents the scheme’s employers, attacks the proposed changes in the valuation methodology as having “little empirical or theoretical justification”.

Of particular concern to the signatories is the proposed increase in the “level of prudence” over the figure present in the 2018 valuation. 

The proposal would see prudence on a gilts-plus basis changed from the current pre- and post-retirement discount rates, both at 67 per cent, to 78 per cent for pre-retirement and 73 per cent for post-retirement where the covenant is rated as ‘strong’.

If we expect investments to generate less income over the long term than we assumed in the past, the pensions promised to our members by their employers are at risk of being underfunded

Bill Galvin, USS

Where the covenant is rated only as ‘tending to strong’, those figures rise to 85 per cent and 73 per cent respectively.

The signatories said this would see an increase of between £7.4bn and £9.5bn in the scheme’s deficit, and that the trustee has failed to justify this change in the methodology.

They further criticised a perceived “lack of transparency over quantitative methods used to estimate key parameters in the valuation”, as well as “a consistent failure to meaningfully address concerns raised by stakeholders”, and the fact that the valuation “does not implement many of the proposals made by the Joint Expert Panel jointly convened by [the Universities and College Union] and UUK”.

The signatories posed a number of questions to the USS trustee, demanding that it provides “evidence and justification” for the proposed changes to its valuation or else revert to the previous methodology.

They also questioned why the pre-retirement discount rate was set on a gilts-plus basis rather than the consumer price index-plus basis recommended by the Joint Expert Panel.

Trustees asked to justify changes

Additionally, the signatories seek “a robust account” justifying changes to the previously recommended recovery period of 15-20 years, information about how the mortality figures have been updated in light of Covid-19, and on how the post-valuation experience of asset values will be factored in. 

Finally, they asked “how the proposed changes for the 2020 valuation would affect USS members who are differentiated by age, disability, gender, race, migrant status, or permanent or casualised employment”.

Pensions Expert reported previously on concerns raised in December that the USS may miss its valuation deadline, with the scheme’s chief executive, Bill Galvin, warning that unfavourable contribution increases will not be avoided unless agreement on the 2020 valuation is reached.

The USS has until June this year to submit its new schedule of contributions to the Pensions Regulator.

Responding to these concerns, a USS spokesperson told Pensions Expert: “We understand members are concerned about the difficult choices facing the scheme. The continued fall in interest rates, exacerbated by Covid-19 and the worsening outlook for investment returns, has made the USS’s valuable pension benefits even more expensive to provide.

“We have engaged widely on the methodology for the 2020 valuation, including formally consulting with UUK, and will take advice from the scheme actuary before finalising our funding assumptions.

“We will thereafter publish a full update addressing current talking points and making clear the decisions facing UUK and UCU — including the cost of continuing to provide the scheme’s current benefits. We are committed to engaging with them as we work to achieve the best outcome possible in difficult circumstances.”

Poor returns put pensions at risk

In addition, Pensions Expert has seen a copy of an update issued to employers by Mr Galvin on Friday, to be published by the USS on Tuesday. 

In the update, he stated that the conclusion of discussions between the USS, its advisers and TPR is expected to be published in February as part of the scheme’s actuarial report and contribution determination, which will be issued to the joint negotiating committee.

“This will set out, among other issues, our position on the Joint Expert Panel’s recommendations, UUK’s response to the technical provisions consultation, the discount rates and prudence, the recovery plan, and the timeline and key milestones for progressing the valuation,” he said.

“Attention will then turn to the decisions UCU and UUK will need to make, through the JNC, as to how any overall increase to contributions will be met: through the design of the scheme’s benefits and/or its contribution structure.”

Mr Galvin added that the USS funding position has deteriorated since its March 2020 valuation, “and is now even more pressing”.

“Financial markets continue to signal that investment returns are likely to be lower in future than we expected in the past,” he said.

The 2018 valuation saw contributions set at 28.7 per cent to cover the future service cost of new USS pensions, and 2 per cent to recover its then £3.6bn deficit in respect of pensions already promised. At that time, the scheme’s assets stood at £63.7bn.

By the end of April 2020, the future service cost was tracking at 36.7 per cent and the deficit at £15.2bn, with assets recovering to £71.1bn. During March, that figure had fallen from £74bn to as low as £64.3bn.

By the end of November, the future service cost and deficit had increased still further, to 45.2 per cent and £23.9bn respectively, while assets had risen slightly to £78.8bn, Mr Galvin said.

“The net effect is that a recent recovery in asset values has been offset by a poorer outlook for expected future investment returns,” he continued.

“If we expect investments to generate less income over the long term than we assumed in the past, the pensions promised to our members by their employers are at risk of being underfunded. As trustee of the scheme, it’s our job to make sure that these promises are kept.

“We acknowledge and appreciate the challenges this presents to all parties. We are committed to finding a way forward in fulfilling our legal and regulatory responsibilities that allows us to work with higher education employers to build secure financial futures for our members and their families through a valuable and high-quality pension, and that puts the scheme on a sustainable footing,” he concluded.