University pension schemes have seen their equity holdings increase as a proportion of their portfolio, a survey of self-administered trusts in the sector has revealed, sparking debate among experts about their exposure to market volatility.
The survey by consultancy Barnett Waddingham, analysed public disclosures from 36 university SATs with financial years ending on July 31 2013. The survey found the average funding level of the schemes had risen to 82 per cent in 2013 from 77 per cent in 2012.
This was boosted by the schemes’ generally high equity allocations, with an average weighting of 62 per cent among the 33 schemes that disclosed their allocation figures. Of these, 12 showed a 70-80 per cent weighting towards the asset class.
“Local government has potentially the ability to take more risk because they’re backed by the taxpayers, but these schemes are only backed by the universities,” said Alan Collins, actuary at consultancy Spence & Partners. “There’s less justification for them taking the risk they are taking.”
Nick Griggs, partner at Barnett Waddingham, said schemes were at risk from market volatility, but argued that the nature of their sponsors meant they were better able to take on risk over the long term.
“[Universities] can accept the ups and downs because [they] are safer than average private sector companies… We expect them to be there for longer,” said Griggs.
The survey found almost 90 per cent of the schemes were open to future accrual. Griggs said the schemes would need to take action to mitigate against the increase in cost resulting from the abolition of contracting-out in 2016.
Options could include raising contribution rates or lowering the accrual rate. However, in light of recent changes to defined contribution pensions in the Budget, some employers may also choose to scrap DB altogether.
“About 50 per cent of DB schemes are still open to future accrual and most of those are contracted out,” said Lynda Whitney, partner at consultancy Aon Hewitt, adding most employers will take a 2 per cent hit on salary.
“It’s either an opportunity to have an overall benefit review – in light of what just happened with the Budget – or they’ll be able to use the statutory override,” she said. “The expectation is that there’ll be a contribution or accrual rate adjustment.”
Changing life expectancy
The life expectancy assumptions in the schemes ranged from 20 to 24 years for a 65-year-old male. However, all schemes surveyed were those for non-academic staff.
“There’s quite a wide range [in life expectancy]; that can have a significant impact on the liability value,” said Griggs. “We had expected more consistency.”
Collins added that 20-year assumptions were at the low end of the spectrum for life expectancy at that point. “These days 24 is more in line with expectations,” he said. “The ones with 20 are facing higher costs in the future.”
The range in assumptions may have been down to regional variations and other demographic factors, which were not covered in the survey.
