The £88.8bn Universities Superannuation Scheme has teased the possibility of increasing benefits and cutting contributions, after its latest review revealed a markedly improved funding position.
It is conducting an accelerated review of its 2022 funding position, due for release in the summer.
Interim monitoring of the scheme yielded a technical provisions deficit of £1.6bn as at March 31 2022, representing a significant shift from the deficit of £14.1bn two years prior.
Assets increased to £88.8bn — a surge of 22.3 per cent — while technical provisions liabilities rose by 9.8 per cent to £90.4bn. The future service cost of the scheme, meanwhile, fell to 24.7 per cent from 25.2 per cent.
It may be possible for the Joint Negotiation Committee to consider increasing benefits or decreasing contributions — or some combination of both
Bill Galvin, USS
In an update, the trustee suggested that “a significantly improved financial position” compared with the 2020 valuation could make it possible to alter benefits and contributions.
USS may face opposition over contribution cuts
The trustee largely attributed the recovery in the scheme’s funding position to high equity returns.
It said that the scheme liabilities, meanwhile, have risen due to increasing inflation expectations and lower future expected returns relative to gilts.
In an update to members, USS group chief executive Bill Galvin noted that “the scheme’s funding position is more resilient and moving in the right direction”.
He pointed to adjustments made to the scheme’s benefit structure, which introduced a 2.5 per cent cap on inflation-linked benefit increases from April 1 2022, as having prevented the technical provisions deficit from coming in at £3.1bn, with future service contributions needing to sit above 36 per cent.
“It must be the case that if the positive experience we’ve monitored over recent months becomes more established, there is potential for better news at the next valuation than at those of the recent past,” he wrote.
“Were such a scenario to play out, it may be possible for the [Joint Negotiation Committee] to consider increasing benefits or decreasing contributions — or some combination of both.”
Galvin announced that an “accelerated year-end review” would take place to help scrutinise further the scheme’s funding position, as at the end of March.
It will cover “a light-touch review” of the covenant, notable developments on mortality expectations, an assessment of the scheme’s investment assumptions and strategies, and an assessment of its funding assumptions. The review will be shared with the USS board by late June.
A spokesperson for USS Employers welcomed the scheme’s improved financial outlook.
They suggested that the accelerated review would be available in early July, adding that there is the possibility that work on the March 2023 valuation could commence earlier in order to carry out any necessary changes more quickly.
“We are seeking clarification from the USS trustee about the short and medium-term options that might be available should the positive financial position continue, but without having to undertake an earlier, full valuation,” the spokesperson said.
“We know a new valuation would take many months and divert focus away from fundamental reforms such as developing lower-cost options for members, considering alternative scheme designs, and conducting a thorough governance review of USS.”
‘A calamity’
The USS funding position, and the contributions imposed on its membership, have been the subject of ire among academics. In April, staff at 26 universities agreed to take part in industrial action and a marking boycott over pensions.
There is anger at the timing of the scheme valuation, which factored in the routing of equity markets by the outbreak of the coronavirus pandemic. Markets recovered their losses, while deficit recovery contributions were set at 6.2 per cent against the 2020 valuation.
The latest interim monitoring yielded a modelled range that limited contributions to 1.5 per cent and included the possibility of eliminating contributions altogether.
In a blog post, Michael Otsuka, who sits on the University and College Union negotiating team for USS pensions, highlighted that the 2020 valuation had been published in draft form in September 2021.
“At that time, it struck many as a calamity that employers and members were being called upon to bear the cost of deficit recovery contributions of at least 6.2 per cent per annum to recover a huge £14.1bn deficit that had been recorded way back on the last day of March 2020,” he wrote.
Lecturers’ USS lawsuit frustrated by centuries-old precedent
A lawsuit against Universities Superannuation Scheme directors alleging climate inaction and breaches of duty has failed on a technicality dating back to 1843, though the judge in the case did find that beneficiaries of a pension fund corporation do sometimes have the right to sue directors.
UCU general secretary Jo Grady called for “urgent steps taken to harness this much-improved position, preventing any more damage being done to our members’ hard-earned pensions”.
The USS may come up against attempts to reduce employer contributions following any continued improvement in the scheme’s funding position.
In May, the UCU and Loughborough University urged the USS not to reduce employer or employee contribution rates from current levels, saying that funding improvements should be used to increase member benefits instead.
