USS: Reports of a deficit of £17.5 billion are both premature and alarmist

The media have been reporting that USS has assets of £60 billion with liabilities of £77.5 billion, giving a deficit of £17.5 billion.

ICMA Extrerior thumbnail

The value of the liabilities depends on a crucial assumption - the discount rate. Using the same actuarial assumptions as the 2014 valuation, which gave a deficit of £5.3 billion in 2014; the 2017 USS Annual Report and Accounts estimates the value of the liabilities in 2017 to be £72.6 billion, giving a deficit of £12.6 billion. This deficit is almost a third smaller than the number quoted in the media.

The detailed 2017 actuarial valuation is currently in progress, and USS will consult with Universities UK on the assumptions to be used in September 2017. Therefore any deficit numbers are premature. The media deficit figure of £17.5 billion appears to be based on using the AA corporate bond yield as the discount rate, which is something USS does not use for its actuarial valuations (i.e. its technical provisions).

What has caused the USS deficit to increase from £5.3 billion in 2014 to an estimated £12.6 billion in 2017?

Increase in Liabilities
Interest on liabilities £7.2 bn.
Accrual of new benefits £5.9 bn.
Effect of market conditions on the liabilities £17.6 bn.
Total increase in liabilities £30.7bn
Increase in Assets
Contribitions £5.2 bn.
Investment returns £18.2 bn.
Total increase in assets £23.4 bn.
Increase in the deficit £7.3 bn.

Over this period the actual investment returns were £11 bn. higher than the £7.2 bn. expected in 2014. The principal cause of the increase in the deficit of £7.3 bn. is the fall in the yield on index linked gilts, which fell by 1.5%. This reduces the discount rate used to value the liabilities, which increases their magnitude.

Interest rates are now at their lowest level since the Bank of England was founded in 1694, so it is highly likely that over future decades they will increase. Such an increase will substantially decrease the USS liabilities. Time is a great healer, and this may be the case for the USS deficit.

Dr Ioannis Oikonomou

Associate Professor in Finance
Ioannis joined the academic faculty of the ICMA Centre in 2011. He is the Programme Area Director for all ICMA Centre Undergraduate Programmes as well as for the MSc in Behavioural Finance. He is also the module convenor of the undergraduate Portfolio Management course and postgraduate Behavioural Finance course. In...

Professor Charles Sutcliffe

Professor of Finance
Charles Sutcliffe is a professor of finance at the ICMA Centre. Previously he was a professor of finance and accounting at the University of Southampton, and the Northern Society Professor of Accounting and Finance at the University of Newcastle. In 1995-96 and 2003-4 he was a visiting professor at the...
Published 31st July 2017

Follow us