You may have seen recent coverage of USS in the media, in particular on scheme funding and the current deficit. We want to ensure that you understand the trustee company’s assessment of the current situation, and the ongoing work we are involved in with member and employer representatives to enable the scheme to deliver good quality pensions for the long-term.
As you know USS is one of the largest pension schemes in the UK; it has assets of approximately £40 billion and is supported by nearly 400 UK universities and related employers. Given its size and scale it is inevitable that there will be media interest and speculation about its funding position. The scheme currently has a deficit, which, as we have previously reported, was £11.5bn at the end of March 2013 and £7.9bn at the end of June 2013 on a scheme-specific funding basis. The value of the deficit changes because there remains a great deal of volatility in financial markets, this continues to make managing scheme deficits challenging for most defined benefit pension schemes. Much of the media coverage in recent days has focussed on scheme funding, how it is measured, and what the trustee is doing about the deficit.
The trustee board measures scheme funding in a number of ways in order to give the fullest picture to scheme members. There is no single definitive way to measure the cost of providing a pension. Trustees must use their judgment and expertise to value these liabilities, taking the best advice available, to do this.
The trustee board devotes considerable time to overseeing the scheme's funding plan, and assessing its ongoing suitability in the context of current market conditions, the financial health of the sector and scheme demographics.
In USS we explain scheme funding to members on two main bases, one which is specific to the scheme and includes a prudent assumption of return on investments and one which is based on the current rate of UK government bonds, the value of which changes frequently, which in turn affects the value of the deficit. We have continued to use this latter basis as a more demanding measure and reference point, although it’s not required by legislation. We use other bases in specific circumstances. One of these is the FRS17 accounting basis, and we report each year to institution finance directors the funding ratio on this basis, because that is used by some institutions in their financial accounts. Some have suggested it should be used as a basis for deciding the correct level of contributions.
We feel that this approach is too simple and the right way to make these decisions is to look at scheme funding holistically. Our scheme-specific assessment considers the financial strength of the employers, the membership of the scheme, and the investment strategy. This measure includes a level of expected investment return above UK government bonds, and if the trustees have a reasonable expectation of these investment returns then not taking them into account when calculating the funding position of the scheme would mean higher contributions for current members and employers than is necessary.
The role of the trustee company, as we prepare for the 2014 valuation, is to assess the ongoing suitability of these assumptions in the funding strategy for the scheme within the context of the holistic funding plan. The trustee board has signalled that all of the factors affecting scheme funding will be reviewed, once again, as the holistic funding plan for the scheme is updated. This ongoing update of the funding plan involves substantial engagement with the scheme’s employer and member representatives. These exchanges will continue over the coming months, and we believe that all parties are very much aware of the responsibility to find sensible long-term, sustainable, responses.
For schemes like USS, these processes of regular review are extremely important. Of course, for both sponsors and members, they raise uncertainty, and this can be difficult. These are challenging times but, as we said in the Members’ Annual Report, members can be reassured that the benefits they have built up are secured by the long-term funding plans which the trustee board reviews regularly, and ultimately the substantial and enduring nature of the employers that back the scheme.
We expect that coverage of USS’s funding position and speculation regarding outcomes will continue over the coming months, given the size and standing of the HE sector and its principal pension scheme. As we look ahead to the March 2014 valuation we plan to continue our communication with members so that you have the clearest picture of any developments. In the meantime, if you have questions please contact the USS communications team by email to email@example.com, by telephone to the USS Liverpool office on 0151 227 4711, or by contacting your employer’s pensions contact.