University self-administered trusts could face a sharp rise in the value of liabilities, industry experts have warned, sparking calls for a review of the sector’s risk exposure and possible consolidation.
University SATS are defined benefit schemes for non-academic staff administered by pre-1992 universities. Similar schemes for non-academic staff at post-1992 institutions are typically run by local authorities.
The average funding level for this group of university schemes was approximately 81 per cent as at July 31 2014, falling from 83 per cent in 2013, according to a recent survey by consultancy Barnett Waddingham.
However, while the data does not account for the decline in bond yields since July last year when the survey was carried out, such schemes are still demonstrating a higher-than-average allocation to risk assets such as equities.
Making use of flexibility
Mark Packham, director of pensions at PwC, urged schemes to take advantage of their autonomy and implement changes to contribution and benefit structures ahead of the cessation of contracting-out in April 2016
“If you’ve got the flexibility on making changes to benefit structure you should use it after appropriate consultation with the members who are going to be affected,” he said.
Yields on AA-rated corporate bonds, used to set discount rates for schemes under IAS 19 and FRS 17 accounting standards have fallen to the lowest levels since UK entities have been required to account under these rules.
I’d still like to really see justification for why this sector is so heavily weighted in equities
Alan Collins, Spence
Nick Griggs, partner at Barnett Waddingham and author of the research, said universities can expect to see increases in their accounting liabilities of between 20 and 25 per cent as a result of the fall in bond yields alone if they remain at current levels.
“Whilst yields have fallen, I’m sure many will be relying on the fact yields will rise in the future and therefore schemes aren’t derisking. That is seen by the asset allocation most universities are taking,” he added.
The data showed a 4 percentage point drop in the average equity across the sector last year, falling to 58 per cent from 62 per cent in 2013 – but still far exceeding the average 30-40 per cent allocation of private sector schemes.
The strong covenant of universities underwriting SATS, often based on historic property assets, allows schemes to ride out equity market volatility in pursuit of returns over extended time horizons.
Alan Collins, head of trustee advisory services at Spence & Partners, said the fall in equity allocations could be indicative of schemes taking profits amid historic highs in equity markets, though he thought it unlikely it signalled a move out of risk assets more broadly.
“Maybe they’ve just moved out of equity towards income-based or alternative growth assets, maybe multi-asset, diversified growth or property,” he said.
However Collins added schemes need to carefully consider whether the rewards of running such an investment strategy outweigh the risks.
“I’d still like to really see justification for why this sector is so heavily weighted in equities,” he said.
Strength in scale
Universities have not pursued DB scheme closures as actively as the private sector. Survey data indicated that almost 90 per cent of SATS were still open to future accrual in July 2014.
Sophie Ash, pensions director at consultancy KPMG, said changes to benefits in the Universities Superannuation Scheme, the DB scheme for UK university academic staff, is raising the profile for universities to review what they are offering non-academic staff.
“The time is ripe for universities to be looking at changes,” said Ash.
The time is ripe for universities to be looking at changes
Sophie Ash, KPMG
Mark Packham, director of pensions at PwC, said there were opportunities for SATS in grouping together to economise through scale.
“Over the last few years [Superannuation Arrangements of the University of London] Trustee Company have taken on SATS from London universities and from Essex. It’s an alternative way of dealing with these schemes,” he said.
In 2014 the University of Essex trust merged with the 38,000-member Saul scheme, comprised of approximately 50 underlying institutions.
Dennis Buckley, chairman of Saul, said SATS planning to go it alone will be faced with increasing costs.
“Schemes would be better getting together, not necessarily with Saul, but regionally as Saul has done, or in a mastertrust,” said Buckley. “They’re better off being part of a bigger organisation which is more secure.”
