Note from Sir David Eastwood, Chair of the USS Trustee Board, to heads of participating institutions (12 June 2019)


In light of recent developments, I want to address a number of important issues relating to the USS valuations: in particular how we have engaged with the Joint Expert Panel and the Pensions Regulator – and how their views have informed the Trustee’s decisions.

The Joint Expert Panel (JEP)

Firstly, I want to reiterate how far USS has gone to accommodate – as far as possible – our stakeholders’ responses to the JEP’s first report. This is important not just as far as it pertains to the 2018 valuation, but also in relation to how we have engaged, and will continue to engage, constructively with the JEP’s second phase of work (focusing on governance and methodology).

Firstly, a brief history:

  • In September 2017, we volunteered a contribution rate of 32.6%, to fund the increased cost of future accrual, and to close the funding deficit. (You will recall that the Pensions Regulator felt this would be at the limits of what it could consider acceptable for a scheme with strong covenant – and that it believed USS’s covenant was only ‘tending to strong’ [FT account required]).
  • Following feedback from employers that they, too, would not fully endorse the levels of risk proposed by the trustee, the trustee took steps to increase the resilience of the funding plan and this reduction in risk led to a revised contribution rate of 37.4%.
  • Following the failure of the Joint Negotiating Committee process, the JEP subsequently made seven proposals that, in effect, increased the discount rate and lengthened the recovery plan, in order to bring the required contribution rate down to a more manageable level – as a short-term solution to allow a fuller conversation to be held on the long-term sustainability of the scheme.
  • The JEP report also made clear that the impact of its proposals on the contribution rate was indicative, and that it was just one path to achieving a contribution rate “below 30%”.
  • The degree of additional risk involved in its proposals was not quantified (as this was something they proposed to address at a later stage).

Following the JEP report, and the subsequent re-statement of risk appetite by UUK on behalf of sponsoring employers, the trustee took the view that the most appropriate way for the trustee to engage with its stakeholders on these proposals was to complete the 2017 valuation, and to embark on a new valuation process, to explore these issues properly.

The Pensions Regulator

In December 2018, the Pensions Regulator wrote to USS and its stakeholders setting out its position:

“We are prepared to accept the 2017 Valuation proposal on technical provisions but it is at the limit of what we regard as being compliant with the requirement for prudence under the Pensions Act 2004.”

“Any further movement away from the 2017 valuation proposal which involves additional risk will need to be fully backed by additional, tangible and realisable contingent support from the employers.”

You can read the letter in full here.

In January 2019, the Trustee Board considered UUK’s feedback on the Schedule of Contributions (SoC) and Recovery Plan (RP) for the 2017 valuation - and reduced the rate to 35.6%. A stepped approach to the increased contribution requirements was agreed (and is currently under implementation). This outcome was subsequently communicated to the Pensions Regulator, and it has since closed its file on the 2017 valuation.

The 2018 valuation

As a result of the restatement of risk appetite from employers, and a review of the JEP proposals, five of seven JEP recommendations have subsequently been incorporated or partly incorporated in the 2018 valuation:

JEP proposals Featured in 2018 valuation
Incorporate realised investment returns Yes
Incorporate the latest mortality experience data Yes
Use updated future expected investment returns from the FBB approach Yes
Increase target reliance at 20 years from £10bn to £13bn in real terms Under consideration, acceptable with suitably robust contingency arrangements (or equivalent)
Allow for investment outperformance relative to technical provisions discount rate in the deficit recovery contributions Applied to 2017 valuation (following SoC/RP consultation) and under consideration for 2018 valuation
Smooth contribution rates over two valuation cycles Under consideration, but not preferable. Some smoothing introduced with early adoption of the retirement age changes (see below).
Defer de-risking for 10 years Under consideration, but not preferable (see below)
Non-JEP change proposed by USS: Early allowance for change in retirement age from 65 to 66 from October 2020 Yes
  • Smoothing contribution rates over several valuations would involve paying in less than is currently required to fund the benefits being accrued, in the expectation that these will cost significantly less in future years. This has the potential to leave future generations with a significant deficit to address if our funding assumptions around future investment returns and interest rates do not come to pass; if experience is poorer than expectation.
  • De-risking introduces less volatility in the funding plan and reduces the risk that – in significantly adverse outcomes - USS will make unsustainable calls on the sector in order to pay members’ benefits. It comes at the cost of foregoing the likely – but not certain – higher returns of investing in ‘riskier’ assets.

Introducing more of the JEP proposals (specifically increasing target reliance and allowing for outperformance in the RP) could achieve a contribution rate as low as 29.7%, which would be in line with the JEP’s aspirations for a rate “below 30%” – but this would introduce additional risk. In line with the Pensions Regulator’s stated position (see above) and the trustee’s risk appetite, this would require “additional, tangible and realisable contingent support from the employers”.

Contingent contribution arrangements (CCAs) have, accordingly, been discussed with stakeholders, and the trustee has outlined the level of contingent arrangements that would be required to make up for foregone contributions, in the future scenarios where the higher contributions were required by the scheme to fund current promises. These have proved difficult to agree.

In an attempt to find acceptable outcomes, the trustee has since tabled an option that would see a contribution rate of 30.7% apply until October 2021 (with a rate of 34.7% thereafter) instead of CCAs. This could:

  • avoid the increases scheduled for October 2019 and April 2020 (under the 2017 valuation);
  • give stakeholders time to reflect on the JEP’s second phase of work (expected in September this year), and;
  • allow further discussions on contingent contribution arrangements.

The trustee would also look to hold a valuation as at 31 March 2020, given the level of uncertainty currently faced by the scheme and the benefit afforded by more regular review in these conditions. This could result in the rate of 34.7% from October 2021 being revised.

So, in summary, we have worked very hard to accommodate our stakeholders’ views – in a way that is consistent with our legal, fiduciary and regulatory duties – and have moved significantly, to present the three options now on the table:

  • 33.7% – fixed rate, reviewed in 2021/22
  • 30.7% – fixed rate until October 2021, 34.7% thereafter but reviewed in 20/21
  • 29.7% – increases in certain conditions, reviewed in 21/22

We are facing up to these very difficult issues to ensure that the pensions promised to our members continue to be secure. We will engage with our stakeholders on the JEP’s next report in precisely the same spirit and with the continued aim of protecting all that is good about USS.

Professor Sir David Eastwood
Chair USS Trustee Board

Published date: 12 June 2019

Last updated: about 2 years ago