The Trustee of USS, the UK’s largest private pension fund, has today published an update report that explains the funding challenges facing the scheme.
The Trustee update confirms that a separate actuarial report (“the section 76.1 report”) and contribution determination have now been shared with USS’s Joint Negotiating Committee (JNC) which represents employers and scheme members. It sets out the increases in pension contributions that would be necessary to maintain the scheme’s existing benefits, in light of persistent low interest rates and reduced expectations of future investment returns.
Even in the most favourable scenario considered, which would require further financial commitments from employers to strengthen the scheme’s covenant, the overall contribution rate would need to rise to 42.1% of payroll. It currently stands at 30.7% and is already due to rise to 34.7% under the 2018 valuation.
The section 76.1 report also prices the contribution cost of an illustrative package of commitments suggested by Universities UK (UUK), which represents employers. Under this scenario, contributions from employers and members would need to rise to 49.6% of payroll. Of the three scenarios included in the section 76.1 report this is the scenario on which the Trustee based its contribution determination that has been shared with the JNC. Without any such commitments from employers, the overall contribution cost would rise to 56.2%.
The illustrated increases reflect the need to make a substantial amount of deficit recovery contributions in every scenario, with the fund’s deficit at 31 March 2020 ranging from £14.9bn to £17.9bn (on a Technical Provisions basis), and to address the rising cost of members building up new defined benefits within the scheme. This reflects that expectations of future investment returns are now lower than assumed in the past.
The report notes that, while employers have indicated that current contribution rates are at the limit of being sustainable, UUK plans to consult employers on covenant support measures, contributions and benefit options. The Trustee will review the funding assumptions if different covenant support measures and/or benefit structures are proposed by the stakeholders as a result of this consultation.
Dame Kate Barker, Chair of the USSL Trustee Board, also details in her introduction recent discussions with The Pensions Regulator (TPR) in which the regulator made clear the proposals in the report were at the limits of compliance. Dame Kate explains USS also discussed other proposals “that TPR felt would not be prudent enough to comply with Part 3 of the Pensions Act 2004.”
Dame Kate said: “We fully recognise the scale of the challenge facing the scheme and sympathise with our employers and members in light of the difficult decisions that lie ahead. Trends in financial markets have made the valuable pension promise offered by USS – a set inflation-linked income for life in retirement, regardless of what happens to the economy in future – much more expensive today than in the past.
“I believe everyone involved with USS wants to find a way forward, consistent with our legal and regulatory duties, that provides valuable and secure pensions, and that puts the scheme on a sustainable footing. We are committed to being as collaborative and constructive as we can in supporting UUK and UCU’s discussions to this end.”
The sharing of the section 76.1 report and contribution determination with the Joint Negotiating Committee is a key milestone in USS’s 2020 valuation. Under the scheme’s constitution, it is now the role of the Joint Negotiating Committee, which has equal numbers of representatives from UUK and the University and College Union, to decide on any changes to contribution rates or benefits that may be necessary. UUK plans to begin its consultation with employers later this month.
Under the terms of the 2018 valuation, the total contribution from employers and active members of the scheme is set to rise to 34.7% from this October – split 23.7% and 11% respectively.
Because of the need to consult with employers and employees about the likely changes, USS has informed TPR that it will not be possible to complete the valuation by the statutory deadline of 30 June 2021. The current expectation is that the valuation process will not conclude until late 2021 or early 2022.
The Trustee update is available on our valuation page or can be downloaded below.