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The USS Valuation: Carry on with the Status Quo, or Remove Almost All Risk for the Employers and Make Pensions a Worse Deal for Members?

Pounds and pence 1566451

USS is now consulting employers on the assumptions to be used to value the scheme (its technical provisions). The resulting valuation is reported to the Pensions Regulator, and is also used by USS. In its annual accounts published in July 2017 USS reported an initial estimate of a deficit of £12.6 billion, but this has been revised down to an estimated deficit of £5.1 billion using the prudent valuation assumptions currently favoured by USS. Instead of using the pessimistic forecasts of USS, a different approach, which is supported by the UCU actuaries, is to value the scheme on the basis of ‘best estimates’ of future outcomes. If best estimates are used USS currently has a surplus of £8 billion.

In planning for the future, USS has put forward a self-imposed requirement which they call ‘Test 1’. This is a radical change to the policy pursued by USS since its formation over forty years ago. It involves making USS self-sufficient under almost all circumstances, which requires moving a substantial proportion of the assets from equities to bonds, thereby lowering the expected return on the scheme’s investments. To prevent these lower returns leading to a large deficit, either the total contribution rate must increase from 26% to 32% or 33%; or the same level of contributions to the defined benefit section must accrue lower benefits.

The options offered by USS to the employers in the consultation document all assume this shift of assets from equities to fixed income to de-risk the investments in compliance with Test 1. The three broad options offered are:

  1. Drop the employers’ 1% match for additional member contributions to the defined benefit section, and increase employer contributions from 18% to 22%, and member contributions from 8% to 10%.
  2. The employers pledge additional security to USS, such as a charge on university assets.
  3. Reduce the benefits accrued in future in the defined benefit section of USS.

USS is being very risk averse by adopting Test 1 and aiming to make the scheme self-sufficient with almost no chance it will ever have to call on the employers (and members) to make additional contributions.

We must wait to see what comes from of the USS consultation with the employers. Will they seek to radically change USS in order to make it self-sufficient under almost all circumstances and inevitably make members worse off, or will they accept the status quo and leave contribution rates and benefits unchanged, as recommended by the UCU actuaries?

The University of Southampton have publicly announced that they support the closure of the defined benefit section, with all future benefits accrued in the defined contribution section (the investment builder). This would place all the risk on the members, with the employers bearing zero risk. It will also very probably lead to substantially lower pensions for the same level of contributions, and make USS markedly inferior to the Teachers Pension Scheme which applies to the post-1992 universities. Other ideas being considered by the employers include lowering the salary cap from £55,500 to £20,000, and reducing the lump sum payment on retirement (currently three times the annual pension).

Professor Charles Sutcliffe

Professor of Finance
Published 9 October 2017

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