Six things you should know about the 2017 valuation

Assets of 60 billion

1. Our investment performance has been very strong

The value of our diverse assets rose by over 20% – more than £10 billion – to a new high of £60 billion in the 12 months to 31 March 2017

The growth of the scheme over the five years to 31 March 2017 was c.£10bn more than if we had been invested solely in bonds over that period.

Over the same five-year period, our assets achieved an average return of 12.1%, and our dedicated investment team’s active management added £1.1bn of value compared to a largely passive approach.

According to the very latest independent benchmarking, our investment-related costs in 2016 were £61m lower than our global peers.

Further reading: Performance of the USS Retirement Income Builder fund.

2. The investment outlook is the fundamental issue

While there has been a significant focus on the existence of a funding deficit, the estimated cost of funding future defined benefits is the most material issue arising from the valuation.

Real interest rates have fallen since 2014 (relative to inflation) and the price of assets have soared. These are linked: in a world of lower future returns, investors are prepared to pay significantly more for assets to secure future cashflows. These are the cashflows we need to secure your pensions.

Investing new contributions in future will therefore ‘buy’ fewer assets than they could previously, and the returns they can be expected to generate in future will be lower as a result of their higher purchase price.

Much lower prospective investment returns have created very challenging circumstances for defined benefit pension providers generally. For USS, the estimated cost of accruing future defined benefits – under the current benefit structure – has increased by a third since 2014.

With each three-yearly valuation, the trustee must be able to conclude (and demonstrate to the Pensions Regulator) that the scheme is sustainable. Lower future expected returns need to be offset by higher future contributions from members and employers, changes to future benefits – or a balance of the two.

We appreciate this presents difficult questions for our stakeholders but our conclusions have been reached objectively, following extensive engagement with the scheme’s sponsors and the Pensions Regulator, and with full disclosures to the Joint Negotiating Committee.

Further reading: 2017 valuation funding review: the challenges.

91% funnded

3. We do have a funding deficit

A deficit is the difference between the amount of assets held and the amount of money estimated to be needed to pay the ‘defined benefit’ pensions that active, deferred and pensioner members have already earned (which grow broadly in line with inflation over several decades).

Every three years the trustee must be able to conclude that it has sufficient funds to pay the pensions promised, or a credible plan to recover any shortfall (via a deficit recovery plan which must, by law, aim to eliminate any deficit).

The level of risk the scheme plans to take in the long term in pursuit of investment returns (which part-fund pensions) determines its investment strategy, its expected returns (see: Point 2), and so the contributions required to provide a given level of benefits.

Based on these factors, USS has a funding deficit of £7.5bn and is 89% funded.*

This is, as required by law, a prudent estimate but is informed by the collective financial strength of participating employers, independent professional advice and engagement with the scheme’s stakeholders and the Pensions Regulator.

The deficit must, by law, be addressed, and part of the employers’ overall contributions to the scheme will be dedicated (over a number of years) to closing the funding gap.

We are not alone in having a deficit. According to the Pension Protection Fund index, the majority – around 66% – of UK pension schemes with a defined benefit element were reporting deficits at the start of 2018.

Further reading: Discussing Deficits.

Backed by 350+ employers

4. Benefits you’ve earned are secure and protected by law

The defined benefits you’ve already earned with USS are backed by more than £60 billion in assets and the scheme’s 350-plus sponsoring employers.

In funding the scheme, we take the employers’ collective financial strength into account and actively rely on their continued existence and ability to underwrite investment risk over multiple decades.

In doing so, we must actively manage the long-term financial risks that they collectively bear.

The trustee requires confidence that it could ask for higher contributions from employers if the investment returns it expects to achieve – to fund pensions – do not materialise.

The risk that such contributions would divert resources away from sponsoring employers’ core missions or, in extremis, threaten their ability to invest and sustain themselves, is a key factor in setting the funding requirements.

We therefore never plan to take more investment risk than we consider employers are able – or willing – to support in funding pensions.

Further reading: Protecting pensions.

Prudent calculations

5. We don’t base our decisions on a ‘best estimate’

A ‘best estimate’ is only a 50/50 chance that our funding assumptions – about how future economic and social trends are likely to play out – will be right (or better than assumed).

In order to ensure your defined benefit pensions are properly secure, we have to apply a degree of prudence to our calculations.

Prudence is a requirement laid down in law so, legally, we cannot apply a ‘best estimate’ to funding – but we can – and do – adopt best estimates in every other assumption we make, apart from mortality.

We manage the prospect of experience being significantly worse than assumed by ensuring that the ability of employers to fund pensions already promised to members is, ultimately, within their collective means (see: Point 4).

Further reading: Protecting pensions.

Investment experts

6. You have a team of experts working just for you

The Universities Superannuation Scheme is a private occupational pension scheme established by, and run for the benefit of, the Higher Education sector.

The trustee’s primary responsibility is to act in the best interests of the scheme members.

We have to have a high degree of confidence that defined benefits earned at any point in time will be paid – and we take that duty very seriously.

We have endeavoured to conduct one of the most transparent valuations of any UK pension scheme to support a wider understanding of the challenges we, and all open defined benefit pension schemes, face.

Our objective, balanced and informed funding assumptions (based on detailed analysis and modelling) adhere to regulatory and statutory requirements, and have been overseen by UCU and UUK appointees who sit alongside independent experts on the Trustee Board.

Our conclusions have followed 24 months of engagement with sponsoring employers, member representatives, the Pensions Regulator and independent advisors.

Further reading: The 2017 Valuation

*This article was updated on 3 May 2018 following the JNC’s decision to revoke the benefit proposals it recommended in January 2018.

Published date: 16 March 2018