The Universities Superannuation Scheme has launched a consultation with employers over its 2020 valuation, which at worst could present a £17.9bn deficit. But it faces a fight with the Universities and College Union, which said it had no confidence in the “needlessly cautious” approach taken by the USS.
The consultation covers the proposed methodology and assumptions used in setting the scheme’s technical provisions, and is intended to determine the level of contributions required to fund member benefits.
In their foreword to the consultation, Professor David Eastwood, chair of the USS trustee board, and chair-elect Kate Barker acknowledge the many challenges facing the UK’s higher education sector, and point to the impact of coronavirus as contributing to the “difficult messages” contained in the document.
It’s not a world any of us would wish to be in, but it is the world we are in and we have to consult on that basis
Dame Kate Barker, USS
The pair wrote that the pandemic has had a dual impact on the scheme, impacting both sponsor covenant and asset returns.
“These factors have combined to increase the objective price of protecting and maintaining the valuable benefits offered by the USS. The uncertainty surrounding these factors is reflected in the wide range of potential outcomes we have illustrated for this consultation,” they continued.
They warned that economic experience had been substantially worse than the assumptions and expectations that drove the last valuation in 2018, and that this was the case even before the pandemic struck.
The pair argue that the fact several of the covenant-strengthening measures decided upon in 2018 had yet to be put in place meant that the covenant position in 2020 had to be assumed to be weaker than that in 2018.
The consultation sets out a range of potential outcomes of the 2020 valuation. The USS deficit, depending on covenant position and discount rates, could range from a low of £9.1bn to a high of £17.9bn, and future service costs could rise to a best-case 29.4 per cent and a worst case of 37.6 per cent of salary.
While in each case “the single equivalent discount rate is higher relative to gilts than the 2018 valuation”, it remains the case that “the deficits and future service costs in all cases are higher than the values at the last valuation on March 31 2018”.
The document also shows that, when taking into account the cost of repairing the deficit, total contributions required could range from 40.8 per cent to 67.9 per cent, though it is made clear that these are illustrative figures, with USS chief executive Bill Galvin acknowledging that “the contribution rates we’ve illustrated are unlikely to be considered affordable or sustainable by either employers or our members”.
The contribution figures will be the subject of their own consultations later in the valuation process.
Tough demands made of universities
In a press briefing, Mr Galvin identified employer commitment to the scheme as being the “one single big dependency” that will determine the future health of the scheme.
Asked what universities could do to avoid significant rises in contributions, he warned that it is “almost inevitable” that contributions will have to rise.
Strict measures will be required to limit the extent of those increases, Mr Galvin said.
“If employers provide the trustee with a commitment to sticking with the scheme for at least the next 30 years, and if employers agree that they won’t mortgage their assets away in a way that is superior to the pension scheme’s claim on them, they give us equal claim to any other lender that provides capital to the sector. If we get those two things in place, then we’re a long way towards getting into a position when we can talk about moving towards the lower end of the contributions requirements,” he explained.
“We do need confirmation that as we go through the autumn the sector has been reasonably resilient to Covid-19 and the prospects for the sector haven’t been fundamentally damaged, but those are the two big asks that will have by far the biggest impact on the outcome in this valuation.”
Dame Kate agreed, pointing out that these two measures “have been on the table since the 2018 valuation”.
Asked whether the 40 per cent contribution rates were the best that is achievable and whether that was affordable, she said “it’s our judgment that it’s unlikely to be affordable”, but added that it is up to employers to decide based on these illustrations.
“It’s not a world any of us would wish to be in, but it is the world we are in and we have to consult on that basis,” Dame Kate said.
Union warns against ‘punitive changes’
Reacting to the consultation, the UCU criticised the approach taken by the USS, accusing it of cherry-picking recommendations by the Joint Expert Panel — a body established in response to the strike action undertaken — the UCU and others over a similar disagreement in 2018.
UCU head of higher education Paul Bridge said: “We have no confidence in the needlessly cautious methodology applied by the USS. We are also disappointed the USS has cherry-picked from the recommendations made by the JEP. UCU members are well informed and expect to see better evidence behind the judgments the USS has made.
“We want the USS to take account of the strong, long-term outlook for the scheme. Members are leaving the scheme because of its high cost — calling for unnecessarily large reductions in benefits and increased member contributions is not the way forward,” he continued.
“Universities need to start demanding more from the USS and push back against this approach.”
USS delays scheme valuation
On the go: The Universities Superannuation Scheme has been forced to delay its valuation by two weeks, due to the “urgent and difficult matters relating to A-level results and admissions”.
Asked to respond to this criticism, Mr Galvin said: “We’ve laid out a way in which we believe the scheme could take more risk than was anticipated in the 2017 valuation. In order to take that risk, we need the support of employers, on whose balance sheet we rely.
“We’ve been very clear what pensions would cost if we didn’t have an employer on whose balance sheet we could depend in taking some risk. That’s significantly more expensive than the proposition we’re putting here.
“If we can get the support from employers that’s required, then we can take more risk in funding these benefits and that can bring the cost of contributions down to a more reasonable level,” he continued.
“We are looking to find ways, with the employers if they wish to do so, to support risk taking in the scheme that would make the cost as manageable as possible with respect to our members, while making sure those pensions are secure, and members can rest easy about the prospects for their retirement.”
