You asked, we answered

Question asked by Mark, Academic

It’s argued that the 2020 valuation was undermined because it was carried out in the early days of the pandemic, when global markets were crashing. It’s also argued that since financial markets have now recovered, a new valuation would yield a much brighter conclusion, resulting in less need for reductions in benefits.

We would consider carrying out a fresh valuation if this were true. But this argument is based on a misinterpretation of our valuation process and approach. Under existing legislation, we’re required to calculate the scheme’s assets and compare them against its liabilities at a particular date in time. But the prudent conclusions and outcomes that have been reached in the valuation don’t hinge solely on the lottery of what happened in the markets on one day in March in 2020. The 18 months that followed the valuation date were spent making balanced decisions that were informed by subsequent developments.

As has been widely reported, since 31 March 2020 the value of the scheme’s assets has recovered to pre-pandemic levels and, as at February 2022, stood at £88.8bn. But this is just one part of the overall picture.

While our assets have increased in value, so has the cost of funding the pensions already promised to members (our liabilities) – and so has the cost of funding future pension promises (the ‘future service cost’).

That’s largely because:

• expectations for future investment returns are now lower, meaning that more contributions have to go in to get the same amount out at the end; you can read more about this in our article.
• inflation is now expected to be higher and the pensions promised to USS members are currently increased up to a cap, every year both before and after retirement broadly in line with inflation.

The deficit on a Technical Provisions basis is estimated to be lower today than it was at 31 March 2020. But the ‘future service cost’ – the contributions required for promising a set, inflation-protected income for life in retirement, paid no matter what happens to the economy or the HE sector in future – has continued to rise.

Active members are accruing benefits every day – adding to the value of the scheme’s liabilities. Any underfunding of these promises could lead to the value of the scheme’s liabilities growing at a faster pace than the value of its assets – creating, or adding to, a funding deficit. The amount of contributions required to adequately fund future benefits depends on amongst other factors, estimates of future investment returns. All things being equal, lower expectations for investment returns in the future means increases in the ‘future service cost’ to fund the same level of benefits.

Question asked by Justin, Computing Officer

Prudence is a way of managing the scheme’s risk. We haven’t taken an aggressive approach to this prudence but one that’s consistent with our legal obligations.

We’ve had to take into account factors such as the deteriorating and increasingly uncertain outlook for future investment returns, and employers’ attitude to risk. This isn’t to ‘overfund’ the scheme, but to ensure we can be confident, in line with our primary legal obligation that the scheme is adequately funded so you have a pension that is secure and which you can rely upon when you retire.

We haven’t aimed for ‘self-sufficiency’ in the valuation – but the approach that has been adopted is a measure of how much we’re relying on employers to fund the benefits promised to members.

A ‘self-sufficiency’ approach is, at face value, riskier than insurance companies and banks would consider to be ‘low risk’, but it would give us sufficient confidence that the pensions already promised to our members could be paid. But we also care about the sustainability of the scheme – the affordability of the regular contributions required of members and employers. So, we don’t target self-sufficiency – it’s estimated that that would cost around £30bn more than the value of our assets (at 31 March 2020). It would mean raising contributions to a much higher rate and would make the estimated cost of funding future pensions much less sustainable.

This shows the extent to which we’ve tried to balance our primary legal duty with the sustainability of the scheme: by relying on riskier, uncertain future investment returns to mitigate the rising future service cost – but only to the extent that employers could underwrite the risks of those returns not materialising.

Question asked by Saul, Lecturer

Firstly, it’s important to note that prudent expectations for investment returns (upon which we base the discount rate) are, by definition, not a ‘best estimate’. They reflect a wide range of factors – not just one potential version of the future in isolation.

By law, the actuarial and economic assumptions used to calculate the amount needed to pay members’ benefits in future must be chosen prudently, taking into account an appropriate margin for possible adverse experience. The discount rate, yield on assets, anticipated future investment returns and mortality and other demographic assumptions must also be based on prudent principles.

So, discount rates set for a valuation do differ from our central forecasts.

Secondly, we rely on economic growth and future investment returns to pay members’ benefits. Members’ benefits increase in value every year both before and after retirement broadly in line with inflation, up to a cap. So, we need to have confidence in the returns we can achieve relative to inflation.

One way of looking at the economic cost of pension promises is to compare them to index-linked government bonds or ‘gilts’ (note that we do not invest solely or even primarily in gilts).

Index-linked government bonds are one of the only investments which provide returns that are low risk and contractually linked to inflation. Most other types of investment come with the risk of doing materially worse than inflation over time and hence worsening the scheme’s funding position.

Index-linked government bonds used to offer attractive yields relative to inflation (for example, in the 1990s the 20-year real yield in the UK was around +4%). However, since then real yields have fallen dramatically, and similar bonds today offer a negative ‘real’ yield (as low as -2.5% at the date of 2020 valuation). That means, all else being equal, every year these bonds will actually lose value after inflation.

Say you want to ‘guarantee’ you will have £100,000 in real terms in 20 years’ time (the ‘guarantee’ being equivalent to a promise to pay from the UK government). If index-linked bond yields were like they were in the 1990s, you would only need to invest about £50,000 today. However, with real yields at -2.5%, you would need to invest about £170,000 today.

This is why delivering a strategy which beats inflation over time is harder and much more expensive than in the past. And bond yields touched their lowest levels in history over the course of 2020.

Finally, when the only ‘guarantee’ offered by the market is a real-terms loss (relative to inflation), it’s not surprising to see that investors are prepared to take more risk in search of reward. The economics of supply and demand sees ‘riskier’ growth assets go up in price as investors search for higher returns. That increases the value of all our existing assets – but it also means the price of the assets we can buy today has gone up and the return (or yield) we can expect to make on them in the future will be proportionately lower.

Question asked by Fiona, Professor

If conditions improve, the Joint Negotiating Committee (JNC) which is responsible for the scheme’s benefit design, may be in a position to consider improving benefits and/or lowering contributions. But, while everyone involved with USS wants to provide the best possible outcome, we must deal and react to the current situation.

Also, while things could improve, we have had to address a hard truth: the economic cost of funding ‘guaranteed’ pensions has increased over the past decade, due to high asset prices and lower expectations for future returns.

That is as true for USS as it is for other DB schemes. SAUL (The Superannuation Arrangements of the University of London) is a multi-employer DB scheme serving colleges and institutions that have links with Higher Education. It has reported its future service cost now stands at 35% of payroll (some 63% higher than in 2014). The ‘unfunded’ Teachers’ Pension Scheme has increased employer contributions to 23.68% – a 43% rise on the previous rate (16.5%).

According to the Pension Protection Fund*, 89% of private DB schemes in the UK have closed to new members since 2006, while 50% have stopped offering DB pensions altogether. USS active members account for more than a fifth of the fewer than one million people in the UK who are still actively paying into private DB schemes. So, while things can get better, the outlook is that providing a guaranteed pension to members when they retire will cost more than in the past.

*Stats from Purple Book 2021

Question asked by Andrea, Senior Lecturer

Market conditions at 31 March 2020 were extraordinary, fuelled by the initial impact of the Covid-19 pandemic on the global economy.

But they were not universally negative for the valuation: asset prices crashed, increasing the deficit in respect of pensions already promised – but lower market prices meant the outlook for future investment returns was unusually high – lowering the ‘future service cost’.

We compensated for these extraordinary conditions in the 2020 valuation principally through the:

• discount rate – higher than normal (compared with low-risk returns) but moderated prudently; and
• deficit Recovery Plan – significant, enduring investment outperformance over 18 years.

A year later, at 31 March 2021, conditions had broadly normalised in a manner that supports the decisions made in relation to the 2020 valuation:

• asset prices had recovered (allowed for in the deficit Recovery Plan) but, partly as a consequence; and
• the outlook for future investment returns had reduced (allowed for in the discount rates).

To put this into context, the scheme’s deficit had quadrupled from £3.6bn on 31 March 2018 to more than £14bn on 31 March 2020. Despite this, the contributions required from employers to recover the deficit as set out in the Schedule of Contributions for the 2020 valuation have been set at 6.3% of payroll – just 0.3% higher than under the Schedule of Contributions for the 2018 valuation.

In contrast, for the reasons set out in the Q&As above, the future service cost has continued to rise.

You can read more about what our interim monitoring the scheme’s funding position has been showing in our blog.

Question asked by Pina, Professional services

High inflation is unlikely to have a positive effect on the scheme’s funding position. The pensions promised to USS members are currently increased every year both before and after retirement broadly in line with inflation. Higher inflation effectively makes the cost of fulfilling those pension promises to members more expensive. As set out in the Q&As above, it also presents challenges from an investment perspective.

The Joint Negotiating Committee (JNC) did recommend capping this inflation protection at 2.5% per year for benefits built up from the 1 April 2022. However, following the statutory employer consultation, the JNC recommended the 2.5% cap should not come into effect for most members until 1 April 2026* on benefits built up from 1 April 2022.

*This is subject to the trustee’s current consultation with UUK on the statutory funding documents. More information on the cap can be found in our article.

Question asked by Simon, Finance

Yes, employers will contribute to your Investment Builder pot if you earn over the salary threshold which will be set at £40,000 from 1 April 2022.

To give you an idea of how the contributions work. You have a total contribution of 31.4% of salary going into the scheme, 21.6%* from your employer and 9.8% from you.

So, how much do you build in the Investment Builder? Well you’ll have a joint contribution of 20% of your salary above the salary threshold going into your Investment Builder savings pot. This is made up of an 8% contribution from you and a 12% contribution from your employer. The remaining balance of your contribution on salary above the salary threshold goes towards the Retirement Income Builder.

*Contribution rate for the next two years, until April 2024 when it will fall to 21.4%. This is subject to a short consultation with UUK.

Question asked by Robert, Academic

We understand the value that a defined benefit scheme has for many members. The vast majority of staff working at USS are also members of the scheme. Our role is to ensure the benefits you’ve been promised by your employer can be paid. It’s not up to us to decide what type of benefits are provided by the scheme - that’s a decision for the Joint Negotiating Committee (JNC).

As set out in the Q&As above, we care about the sustainability of the scheme and look to strike the right balance between the security of the benefits being promised and the affordability and sustainability of the contributions required to fund them.

Question asked by Nigel, Academic

The collective financial strength of all 340 participating employers (‘the covenant’) effectively underwrites the security of the pensions being promised to our members. But, as an open, relatively immature scheme, the strength of the covenant is supported by the ability of employers to fund the scheme on an ongoing basis through regular payroll contributions. That is, the contributions required are affordable, sustainable, and do not have a significant impact on employers’ core functions.

Running the scheme on this basis requires us to take account of the ability of all participating employers to fund the scheme on an ongoing basis – not just the ability of the wealthiest.

It’s with this collective in mind that we need to be careful how much investment risk we expose the scheme to, which could weaken this financial support. For example, if investments didn’t materialise, that might mean higher contributions from employers are required, which could be beyond the means of some the institutions in the collective.

Ultimately, it is for employers (as a collective, represented in the scheme by Universities UK) to decide what they consider to be affordable and sustainable in this context.

In terms of the underlying economics behind the changes, we’ve covered some of this in the other Q&As but here’s some further reading:

• Valuation FAQs
• Scheme funding - what's the latest picture?
• There is no silver bullet in the UK’s pension dispute
• Explaining our central projections for future investment returns

Question asked by Bill, Professor

USS already offers support to members on how they can voluntary contribute to the Investment Builder, the defined contribution part of USS to boost their retirement income.

We have a lot of handy videos and information on the website on retirement planning. We also have information on the Investment Builder, how it works and how you can save into it on our Investment Builder page. It’s also worth reading about the options you have when it comes to taking your Investment Builder pot.

For members wanting more support they can log in to My USS and sign up to receive more information from us. For members wanting to speak to someone about the decisions they need to make they can also visit our guidance and advice page.

Over the next few months we’ll also be offering more support to members through webinars, emails, and information on the website to support members on using the Investment Builder to achieve their retirement goals.

Question asked by Charles, Professor

This would be a matter for the Joint Negotiating Committee (JNC) to consider. The trustee’s role is to protect benefits which have already been built up and to ensure that they can be paid when they fall due. The JNC is responsible for matters of benefit design and the trustee is always ready to support the stakeholders in their discussions and consideration of benefit design.

Question asked by Pina, Professional services

Workplace pensions are one of the best places to save for retirement because you not only get tax relief on your contributions, you also benefit from an employer contribution. In USS your employer will pay a contribution to the scheme which is equivalent to 21.6%* of your salary.

The defined benefit pension that USS offers is also relatively rare nowadays. The vast majority (89%) of private DB schemes in the UK are now closed to new members; 50% have stopped offering future benefits full stop to existing members. There are virtually no other savings vehicles available to you that will offer that same kind of guarantee for when you retire, bar your State Pension.

Added to all of the above you also get life cover and financial protection for your loved ones.

There are other savings vehicles you could consider – for example, you could invest in a personal pension instead – but you wouldn’t benefit from the employer contribution. You’d probably also need to significantly increase what you personally save in your pension to get a moderate income when you retire. For example, the general rule on how much you need to save in your pension is by looking at the age you start saving and halve it, that is how much of a percentage of your salary you should be saving each year. So, if you start saving into your pension at 30, you need to be saving at least 15% of your salary in your pension each year for your retirement.

You can read more on different savings vehicles, but as Head of Retirement Income Options at WEALTH at work, Mark Hewitson said: “The question is not do you need a workplace pension but why would you not have a workplace pension?”

*Contribution rate for the next two years, until April 2024 when it will fall to 21.4%. This is subject to a short consultation with UUK.

Question asked by Pina, Professional services

The negotiations are carried out by the Joint Negotiating Committee (JNC), which is made up of representatives of Universities UK (UUK) on behalf of employers and Universities College Union (UCU) which represents members. Along with an independent chair, they discuss and set the level of future pension benefits - if we find that USS needs to change contributions, the JNC decides how these should be shared between employers and members, or whether there should be a change to future benefits. If the UCU and UUK representatives cannot come to an agreement the chair can exercise their casting vote.

Our role is to make sure the benefits you’ve been promised can be paid. To do this we carry out valuations which are required by law at least every three years. These valuations calculate our funding position – they act like a financial health check for the scheme. We share this information with the JNC, which decides what should happen next. Find out more about the part we play in your pension.

Question asked by Richard, Research Fellow

At the moment, this is in the early stages. The JNC has set up a working group, which is looking at what changes could be made to reduce the cost of the scheme to members so that less members leave because of affordability. This group is developing a report which will be discussed by the JNC in April after which a consultation with stakeholders is expected to follow. You can find out more about this in a recent update from UUK.

Question asked by Rebecca, Professor

We don't have a view on the affordability of the contributions involved, that is a matter for the JNC to decide. Our primary legal duty as trustee of USS is to protect the benefits promised to USS members. The JNC – made up of UCU and UUK representatives, and an independent chair – decides what benefits are provided and how the contributions required to fund those benefits are shared between members and employers. You can read more on this and the UCU proposal here.

Question asked by Siobhan, Lecturer

As of 1 April this year, the salary threshold will reduce from £59,883.65 to £40,000. A joint contribution from you and your employer of 20% of your salary above £40,000 goes into the Investment Builder. Your employer covers the cost of the administration and managing your investments, so you don’t need to worry about the cost of that.

In terms of how you pick where you invest, you have two options. The first option, Do It For Me, is where our team of investment experts manage your funds for you. This is the default option, and we’ll automatically assign you this option, unless you tell us otherwise.

The other option, if you want to manage your own investments, is to choose Let Me Do It. To do this you need to log in to My USS. In the Investment Builder section of My USS you’ll get a choice of 10 funds to choose from, and you can invest in one or more of them. They range from lower risk funds with possible lower returns, to higher risk funds, with potential higher returns. You can find out more about this on our Investment Builder page.

In terms of how this works when you retire, the Retirement Income Builder will give you a guaranteed income for life and one-off cash lump sum. You can dial up your monthly pension and reduce the lump sum or vice versa – that’s up to you. Your Investment Builder, on the other hand, will give you a savings pot. The value of this savings pot will depend how much you’ve paid in and how well your investments have performed. However, you don’t need to take your Investment Builder savings at the same time as your Retirement Income Builder, you can leave it invested or you can take it earlier.

And you can take your Investment Builder pot in a variety of ways, including cash payments, drawdown, and using it to buy a guaranteed income for life by purchasing an annuity. It’s worth reading more about this on our using your Investment Builder pot page.

Question asked by David, Professor

Employment in the Higher Education sector has evolved, with more mobility amongst academics, but also increases in the number of professional services staff enrolled into the USS pension. This has meant more members leaving with less than two years’ service who until 1 April 2022 had different options available to them compared to those members with more than two years’ service. The JNC considered these issues and decided it was appropriate that these members build a full pension on the same basis as everyone else. This means that members who aren’t sure about their long-term future in the sector can join USS with confidence that whatever happens, they are building a valuable pension with a significant employer contribution.

Question asked by Paul, Professor (retired)

No. The JNC’s changes will only impact benefits built up after 1 April this year, so if you’re already retired, it won’t impact your pension.

The benefits you’ve already built up are safe and secure and are protected by law, and that goes for the benefits already built up by non-retired members too.