The 2017 valuation

2017 Valuation question and answers

What is a valuation?

A valuation is an assessment of the scheme’s assets (the investments we hold, and the returns we expect to make on those investments) and the liabilities (the amount we need to pay the pensions already earned).

Its purpose is to establish, at a particular point in time, whether the assets the trustee holds can reasonably be expected to pay the benefits that members have already built up in the scheme and what the predicted cost is of benefits yet to be earned.

By law, a valuation must be held at least every three years, and requires the trustee to take a detailed look at the all the factors that can influence the scheme’s funding position, and to consider whether any adjustments need to be made in order to bring its contributions, investments and benefits into balance.

In the USS structure, the Joint Negotiating Committee – made up of an equal split of member (UCU) and employer (UUK) representatives, with an independent, committee-appointed Chair (see: What is the Joint Negotiating Committee?) – has the task of deciding how future benefits and cost-sharing arrangements between members and employers need to respond to the funding position at each valuation.

What does a valuation involve?

The process begins with an assessment of the financial strength of our sponsoring employers.

Known as the covenant, this is the foundation of the valuation as it informs the trustee just how much financial support employers could provide to the scheme and how much investment risk could be taken. (The level of investment risk to be taken is set following detailed discussions with employers.)

For the 2017 valuation, for example, we undertook a very detailed study of the covenant informed by independent expert advice which concluded that, despite uncertainty about the short-term impact of Brexit, the employers’ ability to provide financial support for the scheme remains strong – and can be expected to continue to be so for at least 30 years.

This helps the trustee to establish the maximum level of investment risk it believes employers could support in funding the scheme – although, ultimately, the level of risk actually taken has to be acceptable to employers as they are, collectively, liable for any shortfall that could arise. In practice the trustee will agree the level of risk to be taken with the employers through UUK.

Another key part of the process is estimating how much money we think we will need in order to provide the current level of benefits.

There is no easy answer, so we look at a wide range of data and identify trends to predict what might happen in the future, with the main areas being:

  • The level of return we can expect from our investments;
  • Price inflation and, in turn, how much pensions might increase;
  • How much you might earn in the future and therefore pay into your pension over your working life;
  • How long you might live and be claiming your pension; and
  • Whether you have any beneficiaries who might also receive a pension after your death.

We apply insight, research and independent expert analysis in reaching these judgements, using as much relevant data as we can in order to decide upon informed, robust assumptions. These assumptions are crucial to working out how much money is needed to pay pensions and whether adjustments to the scheme need to be considered.

Establishing the amount of investment risk employers are able and willing to support in determining the expected cost of providing a given level of benefits is an important part of the process: all forecasts of future contribution requirements rely on funding assumptions which may or may not turn out to be a good predictor of actual contribution needs. Our aim is to ensure that the forecasts are not so far wrong that the sponsors cannot afford to make good any shortfall that could arise.

  • Read more about how our approach protects the pensions members have already earned: Protecting pensions

Once the trustee has reached its initial conclusions, it formally consults with UUK, on behalf of employers, to get their perspective on the assumptions being made and the level of risk involved.

We did this in September:

UUK and UCU representatives then, through the Joint Negotiating Committee (see: What is the Joint Negotiating Committee?), look to reach agreement on any changes required to contribution rates, future benefits, or both. If any changes are agreed by the committee, employers will then consult with affected employees.

The latest information about the valuation will be provided here.

How long will it take to complete?

The calculations for the 2017 valuation were done as at 31 March 2017 – and the law, in turn, sets 30 June 2018 as the deadline for finalising the valuation by submitting the required documents to the Pensions Regulator.

In order to meet that deadline, in February 2017 we started to discuss with stakeholders the range of assumptions under consideration.

In the summer, we presented our initial findings to the Joint Negotiating Committee (JNC – see: What is the Joint Negotiating Committee?), which requested a postponement to the trustee’s formal consultation with UUK until September 2017 to allow informal discussions to take place, to which the trustee agreed.

The consultation on the assumptions with UUK concluded in November 2017, the trustee reviewed its approach accordingly. The latest information about the valuation will be provided here .

What is UUK?

Universities UK (UUK) is the body which represents employers participating in USS on the Joint Negotiating Committee. For more information about UUK, visit www.universitiesuk.ac.uk.

What is UCU?

University and College Union (UCU) is the body that represents members on the Joint Negotiating Committee (see: What is the Joint Negotiating Committee?). For more information about UCU, visit www.ucu.org.uk.

What is the Joint Negotiating Committee?

The Joint Negotiating Committee (JNC) is a body established under the rules and has a vital role in the running of USS. The trustee establishes the contribution rate required for a particular level of benefits. The JNC is responsible for considering how any change in the rate is to be applied. If the contribution requirement is more than that currently being paid by members and employers, then it is for the JNC to decide how the cost of that increase shall be met – whether by changes to future benefits, future contributions, or a balance of the two.

The JNC is made up of equal numbers of UUK and UCU representatives, with an independent chair appointed by the committee itself.

What is a deficit?

A deficit is the difference between the amount of assets held (allowing for expected investment returns on assets held now and in the future) and the amount of money estimated to be needed to pay the pensions built up.

Pension deficits can occur at schemes which provide a promised level of income to members in retirement – defined benefit schemes.

For USS, this applies to benefits members earned before 1 April 2016 and those earned since in the USS Retirement Income Builder.

The costs of providing defined benefit pensions is influenced by investment returns, inflation, and how long people are living and drawing a pension for – which can change over time.

The biggest impact on costs tends to be the changing view on future investment returns.

While there has been significant focus on the existence of a deficit, it is actually the outlook for future returns that has had the most material influence on the outcome of the 2017 valuation.

Globally, we are expecting a prolonged period of low investment returns. This mirrors the historically low level of real yields offered by UK government bonds or ‘gilts’

You can read more about this here:

What this means for USS is that the amount of investment return we expect to achieve on the scheme’s assets is lower than it has been historically – this creates a funding gap (the deficit) and increases the contribution requirement for future service benefits.

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.

Does USS have a deficit?

Yes, and the trustee responded to it through the 2014 valuation by establishing a 17-year plan to manage it.

We reported in the 2017 Annual Report and Accounts that, purely on a monitoring basis, the deficit had risen from £5.3bn in 2014 to £12.6bn. This was driven by the significant decline in yields on low-risk UK government bonds – gilts – over that period.

Since then, however, the funding assumptions have been updated for the latest valuation and it is estimated to be £7.5bn – which, with assets of £60bn, gives the scheme a funding ratio of 89%. More information on this assessment is available here and here.

The deficit remains within the affordable means of the scheme’s 350-plus sponsoring employers – including the oldest and most prestigious universities in the country – to recover, over time. The plan to recover the gap will be reviewed in finalising the valuation during 2018.

The most significant issue arising from the 2017 valuation was, in fact, the substantial increase in the contribution requirements for offering the current level of benefits in future: the trustee’s analysis concluded that contributions would need to rise by at least 11% of pay from the current 26%.

You can read more about this here: 2017 valuation funding review the challenges

What has changed since the last valuation in 2014?

Two things have changed significantly: the returns we can expect on our investments in future have fallen and the risk surrounding our forecasts of these returns has increased.

In 2014, we forecast the scheme’s investments (c.60% equity-like; 40% bond-like) would return c.5% per annum.

Since then, investment values have soared, largely driven by the decline in real interest rates and investors seeking alternative investments. Higher purchase prices result in lower future returns.

Secure investments like UK government bonds (gilts) are offering much lower future returns (gilt yields have fallen by 1.6% per year from already below-inflation levels in 2014) so investors have looked elsewhere for secure returns. That has increased competition across all asset classes and driven up prices.

Lower future expected returns have to be offset by higher future contributions, reduced future benefit promises - or a balance of the two.

Risk levels have also risen since 2014. At March 2017, our assets of £60bn were £22bn less than we would need to invest in a low risk portfolio (that gives a high level of confidence of being sufficient to pay all pensions earned to date with no further contributions). This is an indication of how much we rely on our sponsoring employers to support expected returns from riskier investments. The same gap was £14bn in 2014.

The trustee expects this gap to close over the next 20 years – in part due to markets re-aligning towards historical norms – but there are credible scenarios where making good on past promises could require substantially higher contributions for long periods.

How do you estimate how much you’ll need in order to pay pensions?

The costs of providing defined benefit pensions change over time, so we maintain a watchful eye on the things that influence those costs, such as:

  • The level of return we can expect from our investments;
  • Price inflation and, in turn, how much pensions might increase;
  • How much you might earn in the future and therefore pay into your pension over your working life;
  • How long you might live and be claiming your pension; and
  • Whether you have any beneficiaries who might also receive a pension after your death.

Every three years we look at these features for all of the scheme’s members, across their whole lifetime, and make reasonable predictions of how a wide range of financial and demographic trends will play out over several decades.

We apply insight, research and independent expert analysis in reaching these judgements, using as much relevant data as we can in order to decide upon informed, robust assumptions that are then used to calculate how much money will be needed to pay pensions. This is presented as the scheme’s liabilities.

Read more about how our approach protects the pensions members have already earned: Protecting pensions

Why do you have to invest contributions?

Employer and member contributions are invested to fund future pensions. The level of investment return we can reasonably expect from them in future has a strong influence on the ability to fund pension promises already made and whether a given level of pension can continue to be offered without jeopardising the sustainability of the scheme.

USS Retirement Income Builder contributions are invested on the trustee’s behalf by USS Investment Management Ltd – a wholly-owned investment management subsidiary company – to increase their overall collective value. This ensures that the cost of providing pensions – the required contribution rate – is minimised. Read more about how our approach protects the pensions members have already earned: Protecting pensions

Why are you expecting lower investment returns in future?

In 2014, we forecast the scheme’s investments (c.60% equity-like; 40% bond-like) would return c.5% per annum.

Since then, investment values have soared, largely driven by the decline in real interest rates and investors seeking alternative investments. Higher purchase prices result in lower future returns. Secure investments like UK government bonds (gilts) are offering much less future income (gilt yields have fallen by 1.6% per year from already below-inflation levels in 2014) so investors have looked elsewhere for secure returns. That has increased competition across all asset classes and driven up prices.

So while the investment team has continued to be successful against the benchmarks set – you can read more about this here: Investment challenges: thefacts – its expectations of how successful it can be in future reflect the reduced returns available in the markets.

Risk levels have also risen since 2014. At March 2017, our assets of £60bn were £22bn less than we would need to invest in a low risk portfolio that gives a high level of confidence of being sufficient to pay all pensions earned to date with no further contributions. This is an indication of how much we rely on the sector to support expected returns from riskier investments. The same gap was £14bn in 2014.

The trustee expects this gap to close over the next 20 years – in part due to markets re-aligning towards historical norms but there are credible scenarios where making good on past promises could require substantially higher contributions for long periods.

Expected future investment return form an important part of the valuation of the scheme’s liabilities, as we subtract the amount we can prudently expect to make in future – relative to the level of investment risk that the trustee believes can be taken – from the total cost of providing pensions to give us a present day view of the scheme’s funding level.

What feedback has USS considered?

Our conclusions are made objectively after taking independent advice, with full disclosures to the Joint Negotiating Committee (see: What is the Joint Negotiating Committee?) and following a formal consultation UUK on behalf of employers.

The trustee’s independent actuary confirms our assumptions are towards the optimistic end of the range he considers suitable. Other advisers have separately reached the same conclusion.

The Pensions Regulator has questioned whether the scheme’s sponsors’ could afford to provide the extra financing should there be another market shock. Through our consultation with them in September, the scheme’s sponsoring employers clearly told us that they wish to minimise the chances of this happening: Further reading: UUK responds to USS’s consultation on funding proposals

The trustee has taken all these inputs on board, and balanced them, in reaching its conclusions.

Does the deficit mean I won’t get my pension?

A deficit does not mean that benefits won’t be paid: defined benefits already built up in the old final salary and career revalued benefits sections of the scheme and, since 1 April 2016, in the USS Retirement Income Builder, are protected by law and in the scheme rules.

A deficit does, however, flag up a concern that some action needs to be considered. We have reviewed the funding position in carrying out the 2017 valuation and have worked closely with employer (UUK) and UCU representatives through the formal decision-making body, the Joint Negotiating Committee (JNC – see: What is the Joint Negotiating Committee?), to identify the most appropriate way to respond to our findings.

The latest information about the valuation will be provided here .

The deficit remains within the affordable means of the scheme’s 350-plus sponsoring employers – including the oldest and most prestigious universities in the country – to recover, over time. The plan to recover the gap will be reviewed in finalising the valuation later in 2018.

The most significant issue arising from the 2017 valuation was, in fact, the substantial increase in the cost of offering the current level of benefits in future: the trustee’s analysis concluded that contributions would need to rise by at least 11% of pay from the current 26%.

How will the deficit affect my pension?

Benefits already earned by both active and deferred members are protected by law and in the scheme rules. Benefits already being paid to retired members are not affected by the proposed changes arising out of the valuation.

The funding deficit remains within the affordable means of the scheme’s 350-plus sponsoring employers – including the oldest and most prestigious universities in the country – to recover, over time. The plan to recover the gap will be reviewed in finalising the valuation.

The most significant issue arising from the 2017 valuation was, in fact, the substantial increase in the contribution required for offering the current level of benefits in future: the trustee’s analysis concluded that contributions would need to rise by at least 11% of pay from the current 26%.

We have worked closely with employer (UUK) and UCU representatives through the formal decision-making body, the Joint Negotiating Committee (JNC – see: What is the Joint Negotiating Committee?), as it has considered how to respond to our findings, and you can read the latest information on the valuation here .

What do I do if I have any questions that aren’t answered here?

If, after you’ve taken the chance to explore our dedicated 2017 valuation pages, you have any questions on the process that we’ve not been able to answer here, you can submit them to a specialist team by using the Contact Us form.

Last updated: about 6 months ago