The background

USS remains strong and secure, with funds growing year-on-year.

The 2017 valuation shows an actuarial funding deficit of £7.5bn, which means the scheme is 89% funded. It needs to target 100% to be confident of being able to fund all the pension benefits already built up by members.

That is not because we have “lost money” or because investments have been managed badly. The scheme’s Report and Accounts shows:

  • contributions and investment returns currently exceed the cost of pensions already in payment;
  • our funds have grown by £25bn in the past five years alone; and,
  • we have outperformed challenging investment benchmarks.

It is because the amount we reasonably expect to be able to generate in investment returns in future is now lower in the long-term than was assumed at prior valuations, due in large part to political and economic developments.

These investment returns part-fund pensions over many decades, and so lower returns also equate to a higher cost of building up defined benefits in future. The valuation estimates that the cost of building up the current package of benefits has increased by roughly a third.

How does that affect the price of things today?

In each valuation, we look at our liabilities – the cost of pensions already built up by members – and the cost of paying pensions that will be earned in the future.

Then we consider how much we can expect to get in returns on investments over time.

The level of investment risk we plan to take in the pursuit of investment returns determines our investment strategy – that is, the balance of ‘riskier’ return-seeking assets versus ‘safer’ fixed-income assets – and, in turn, our expectations.

In the same way low interest rates affect savers, if the investment outlook drops, the cost of providing the same level of pension benefits rises.

By law, this has to be a prudent expectation, rather than our “best estimate”.

Can’t USS just ride this out?

No. Current USS contributions of 26% of payroll amount to around £2.1bn a year, so an increase of 11.4% of payroll represents around £900m. The longer such a sizeable difference is left unaddressed, the greater the potential funding challenge could be for employers and members in the future.

We are also required by law to demonstrate every three years that the scheme is sustainable; that its contributions, investments and benefits are in balance with the financial support its sponsoring employers can provide. We are compelled by the same law to address a worsening funding position.

The statutory deadline for completing the 2017 valuation passed on 30 June 2018, and the Pensions Regulator has made its position clear: we are expected to present a credible plan for completing the process as soon as reasonably possible.

Therefore, in the absence of any changes from the JNC, we must increase contributions.

Published date: 25 July 2018