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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, plus the money we receive in contributions from employers and members), 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 trustee can reasonably expect to have enough money to pay the benefits built up prior to 1 April 2016, and since then those built up in the USS Retirement Income Builder.

A valuation is held every three years, and is an opportunity for the trustee to take a detailed look at the myriad factors that influence the scheme’s funding position, and to consider whether any adjustments need to be made.

As well as being a specific legal requirement, the valuation also gives everyone involved – that’s the trustee, the employer representatives (UUK) and University and College Union representatives – an opportunity to come together and formally take stock.

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What does a valuation involve?

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

This is the foundation of the valuation as it shows the trustee just how much financial support employers can 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 this year’s valuation, for example, we undertook a very detailed study 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.

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 logic, research and insight 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.

Judging the right amount of investment risk to take so that we balance the level of benefits provided and the expected cost of providing those benefits isn’t easy – but that’s what the valuation process does.

Employer (UUK) and UCU representatives will, 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.

At the end of the process we will have agreed a strategy for contributions, benefits and investments as well as a realistic plan to recover the existing deficit.

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How long will it take to complete?

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

Preparations actually began in early 2016 with the most important element of the process: an assessment of the financial strength of USS’s sponsoring employers.

Since then, we’ve been in detailed discussions with employer (UUK) and UCU representatives over the method of the valuation itself and the range of assumptions that we will apply.

In September, USS will hold a formal four-week consultation with UUK, which represents the scheme’s 360-plus sponsoring employers, to establish their official position on the valuation’s findings.

UUK and UCU representatives will then, through the Joint Negotiating Committee (JNC – see: What is the Joint Negotiating Committee?), look to reach agreement on any changes required to contribution rates, future benefits, or both.

While there will be time to consider these decisions, the JNC discussions need to be largely settled before the New Year to ensure the statutory deadline is met because if any changes are agreed, employers will then have to consult with affected employees.

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Who are UUK?

For more information about Universities UK (UUK), visit www.universitiesuk.ac.uk. They are the body who represent all employers participating in USS when making decisions about the scheme’s future.

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Who are UCU?

For more information about the University and College Union, visit www.ucu.org.uk. UCU is the body that employers negotiate any scheme changes with through the Joint Negotiating Committee (see: What is the Joint Negotiating Committee?).

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What is the Joint Negotiating Committee?

The Joint Negotiating Committee (JNC) has a vital role in the running of USS. The trustee establishes how much money needs to be paid for a particular level of benefits. If that contribution requirement is more or less than that currently being paid by members and employers, then it is the JNC who must decide how the cost of that increase shall be met – whether by changes to future benefits, future contributions, or both.

The JNC is made up of equal numbers of representatives from UUK and UCU together with an independent chair.

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What is a deficit?

A deficit is the difference between the amount of assets held along with the money gathered in contributions and anticipated future investment returns, and the amount of money estimated to be needed to pay the pensions.

Pension deficits can occur at schemes which provide a guaranteed 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 are influenced by things like investment returns, inflation, and how long people are living and drawing a pension for – so they change over time.

But one of the biggest impact on costs is future investment returns.

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

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.

We are not alone in having a deficit. According to the Pension Protection Fund index, the vast majority – around 75% – of UK pension schemes with a defined benefit element were reporting deficits in the first quarter of 2017.

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Does USS have a deficit?

Yes, and the trustee has responded to it by establishing a long-term plan to manage it. The recovery plan put in place in 2014 runs for 17 years – and it will require careful management during the valuation process to steer the most appropriate course.

Our monitoring suggests that the next full valuation – as at 31 March 2017 – will report that the existing benefits are likely to cost more to provide in future than at the last valuation in 2014.

We won’t know the exact scale until we’ve completed our thorough analysis, but we are already working closely with employer (UUK) and UCU representatives through the formal decision-making body, the Joint Negotiating Committee (see: What is the Joint Negotiating Committee?), to consider the most appropriate way of responding.

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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 the scheme’s funding position, 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, which means we have to make reasonably prudent predictions of how a wide range of financial and demographic trends will play out over several decades.

We apply logic, research and insight 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.

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Why do you have to invest contributions?

USS Retirement Income Builder contributions are invested on the trustee’s behalf by USS Investment Management (USSIM) Ltd – a wholly-owned investment management subsidiary company – to increase their overall collective value. This ensures that the cost of providing pensions is minimised, within an acceptable level of risk so that we have a high level of confidence that benefits promised to date are secure

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Why are you expecting such poor investment returns in future?

Since 2014, the investment environment has been much more challenging than anticipated: yields on government bonds (gilts) have fallen further than ever before as governments around the world have bought them in order to inject money into struggling economies.

The reduced availability of government bonds has caused investors, particularly those linked to pension funds like USS, to seek other forms of steady, inflation-linked returns.

USS was already operating successfully in these alternative markets – but the continued pressure in the gilts market has prompted other investors to follow suit, with the effect of driving prices up and, in turn, potential future returns down.

So while the investment team has continued to be successful against the benchmarks set, its expectations of how successful it can be in future reflect the reduced returns available in the markets.

This expected future investment return forms an important part of the valuation of the scheme’s liabilities, as we subtract the amount we can reasonably expect USS to make in future from the total cost of providing pensions to give us a present day view of the scheme funding level.

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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 USS Retirement Income Builder, or through the old final salary and career revalued benefits sections of the scheme prior to April 1 2016, are protected by law, and in the scheme rules.

However, a deficit does flag up a concern that some action needs to be considered, and we are already working 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.

That could involve changes to future benefits, future contribution rates, or both. If these changes are required they will only apply to future benefits, yet to be earned. Your rights to benefits already earned in the scheme remain the same.

If any changes are agreed by the JNC, employers will then consult with affected employees.

Throughout this whole process, the trustee’s sole motivation is to act in the best financial interests of members and sponsoring employers to make sure that benefits already earned are financially secure.

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How will the deficit affect my pension?

We are working closely with employer (UUK) and UCU representatives through the formal decision-making body, the Joint Negotiating Committee (see: What is the Joint Negotiating Committee?), to identify the most appropriate way to respond to this year’s valuation.

That could involve changes to future benefits, future contribution rates, or both – but if any changes are agreed by the JNC, employers will consult with affected employees.

Defined benefits already built up in the USS Retirement Income Builder, or through the old final salary and career revalued benefits sections of the scheme prior to April 1 2016, are protected by law, and in the scheme rules.

Throughout this whole process, our sole motivation is to act in the best financial interests of members and sponsoring employers to make sure that benefits already earned are financially secure.

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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 (selecting the '2017 valuation' option).

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Last updated: 01/09/2017

Last updated: about 23 days ago