UUK responds to USS’s consultation on funding proposals

We’ve recently consulted with Universities UK to understand the views of the employers on the assumptions and risk underlying our funding proposals.

USS, as trustee, outlined the maximum level of risk we could contemplate taking in funding the scheme on a prudent basis (a statutory requirement).

This was based on independent expert analysis of the levels of future contributions that could be afforded ‘in extremis’ by participating employers, should the funding assumptions ultimately prove inadequate.

We then sought employers’ views as to whether taking the maximum level of risk was appropriate – crucial to how we set the level of contributions to fund the pension.

Our prudent proposals – based on a fundamental building blocks analysis of future investment returns and the maximum available risk budget – forecast average annual returns of CPI + 0.9% and resulted in a funding deficit of £5.1bn (92% funded).

On this approach, the current combined contribution rate of 26% of payroll (8% employee; 18% employer) would have to increase by between 6% and 7% in order to maintain the current level of benefits.

UUK’s formal response to our proposals has been informed by feedback from 116 institutions, representing 92% of the total active USS membership. The quality of responses demonstrates a very clear understanding of the position.

A small majority of employers (53%) accepted the level of risk proposed, with many qualifying that the proposals were at the very edge of what would be acceptable, and a significant minority (42%) of survey respondents wanted less risk to be taken – including some of the very largest employers. Just 5% of employers indicated that the trustee should consider taking more risk.

While UUK confirmed the trustee’s judgement on their long-term capacity to support the scheme, it also indicated that employers wished to reduce the chances of being required to pay higher contributions in future.

In particular, UUK raised concerns about the challenges that would be faced if interest rates were not to revert at the pace and within the timeframe anticipated in the assumptions. It asked the trustee to consider whether the proposed investment strategy (including the degree of interest rate hedging) was optimal for the level for risk being run and the targeted level of returns.

We had originally proposed putting on hold the strategy agreed in 2014 to reduce the investment risk for a period of 10 years whilst long term interest rates revert to more “normal” levels.

UUK’s responses indicated to us that we should take a more moderate approach to risk. The trustee board accordingly agreed to retain the 2014 approach to de-risk the scheme’s investments over the next 20 years. In practice, over time, this means holding slightly fewer growth-seeking assets and more fixed income assets, which in turn results in a marginally lower income from investments to fund the current level of benefits and recover the funding deficit.

As a result, the board agreed a revised future average annual returns forecast of CPI + 0.71%, resulting in a funding deficit of £7.5bn (89% funded). Maintaining the current level of benefits would, in turn, require a combined contribution rate of 37.4% of pay, including increasing deficit recovery contributions from 2.1% of pay currently to 6%.

What happens next?

The trustee’s role is to set the required contribution rate – independently and objectively – for a given level of benefits. Employer (UUK) and union (UCU) representatives decide on future benefits and contribution sharing arrangements through our constitutional Joint Negotiating Committee (JNC), and they are actively considering how to respond to our findings.

We are currently supporting stakeholders in developing their thinking on various options for future benefit provision and the amount of deficit recovery contributions payable. Further information will be provided once a proposal for future benefits and cost sharing has been agreed by the JNC.

Any changes proposed as a result of these discussions in the JNC must be subject to employers consulting with all affected employees and would only impact the pensions earned in the future after changes come into force.

The date when any changes would be implemented depends on their precise nature and the time it would take to ensure we could support members and employers in running the scheme under revised terms.

Members should be clear that all benefits earned to date are secure and protected in law.

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