Representation of the Pensions Regulator’s views on risk

USS is required by law (and the scheme rules) to consult with Universities UK (UUK) on the proposed technical provisions assumptions underpinning scheme valuations. UUK, in formulating its response, consults with the scheme’s participating employers.

The technical provision assumptions determine the amount of risk in the scheme. The discount rate is the most significant of these assumptions. This is even more the case for USS than for other schemes because, in response to feedback from stakeholders, the requisite margin for prudence – the allowance for adverse outcomes – is contained almost entirely in this assumption (with only a small amount of prudence contained in the mortality assumptions).

As a result, ‘Best estimate’ assumptions are applied for other factors such as scheme demographics and inflation (with mortality, there is a specific legislative requirement for prudence).

In advance of this important consultation on the technical provisions, methods and assumptions, the regulator wrote to USS in December 2018 and copied in the scheme’s stakeholders (UUK and UCU) to reiterate its views that the level of risk in the 2017 valuation was at the limit of what it considered to be compliant with the requirement of prudence under the Pensions Act 2004, and to explain that any additional risk taken on by the scheme would require additional, tangible and realisable contingency support from employers.

UUK provided employers with a copy of this letter; it was also published on the UCU and USS websites.

Rather than repeat its contents in the formal consultation with UUK, USS summarised its interpretation of the regulator’s perspective across two sentences.

USS simplified the regulator’s position by referring to the discount rate, in the belief that it would serve as a useful and simple point of reference, given its importance to the USS valuation.

However, the regulator was not content with being characterised as a “gilts–plus” regulator and pointed this out in a private & confidential letter sent to USS and UUK (as the formal consultee) in January.

The regulator asked USS to consider changing the document - but as it was already in the public domain, did not insist upon it.

In response to the regulator's comments, UUK provided further clarity on the regulator’s position -and on the relationship between risk and the discount rate - in the supplementary advice provided to employers in their subsequent consultation.

USS took the view that this additional clarification, and the wide circulation and ready availability of the regulator’s letter, meant that it was not necessary to provide further clarification in the document it had issued to UUK, as the summary statement was not unreasonable and any change might add confusion given the existence of the other material.

As these steps ensured a full and clear position from the regulator had been provided to employers, the matter was deemed closed and so was not put on the Trustee Board’s agenda.


Why have these events been highlighted now?

It has been suggested that USS’s approach to presenting the regulator’s views was misleading.

This suggestion is at odds with the publication and circulation of the regulator’s full and comprehensive views, both before and at the start of the consultation, and UUK’s subsequent advisory notes.

USS accepts that the Pensions Regulator does not take a “gilts-plus” approach – and neither does USS. However, it is clear that the regulator has significant concerns about the level of risk in the 2017 valuation.

In hindsight, USS could have discussed the two sentences it included in the consultation document with the regulator in advance – and it will certainly do so in future.

But, fundamentally, the views of the regulator are crystal clear to both USS and to the scheme’s employers.

In particular, every employer asked to make a decision on these issues through our consultation with UUK has had full, clear and comprehensive information on which to base their considerations.

It is of vital importance to members and employers that energies are focused on the substantive issue of finding an agreed solution to the funding challenges of the scheme.

USS is – exceptionally – making this statement to this end.


Published date: 18 June 2019

Last updated: about 4 months ago