Question asked by Mark, Academic
It’s argued that the 2020 valuation was undermined because it was carried out in the early days of the pandemic, when global markets were crashing. It’s also argued that since financial markets have now recovered, a new valuation would yield a much brighter conclusion, resulting in less need for reductions in benefits.
We would consider carrying out a fresh valuation if this were true. But this argument is based on a misinterpretation of our valuation process and approach. Under existing legislation, we’re required to calculate the scheme’s assets and compare them against its liabilities at a particular date in time. But the prudent conclusions and outcomes that have been reached in the valuation don’t hinge solely on the lottery of what happened in the markets on one day in March in 2020. The 18 months that followed the valuation date were spent making balanced decisions that were informed by subsequent developments.
As has been widely reported, since 31 March 2020 the value of the scheme’s assets has recovered to pre-pandemic levels and, as at February 2022, stood at £88.8bn. But this is just one part of the overall picture.
While our assets have increased in value, so has the cost of funding the pensions already promised to members (our liabilities) – and so has the cost of funding future pension promises (the ‘future service cost’).
That’s largely because:
- expectations for future investment returns are now lower, meaning that more contributions have to go in to get the same amount out at the end; you can read more about this in our article.
- inflation is now expected to be higher and the pensions promised to USS members are currently increased up to a cap, every year both before and after retirement broadly in line with inflation.
The deficit on a Technical Provisions basis is estimated to be lower today than it was at 31 March 2020. But the ‘future service cost’ – the contributions required for promising a set, inflation-protected income for life in retirement, paid no matter what happens to the economy or the HE sector in future – has continued to rise.
Active members are accruing benefits every day – adding to the value of the scheme’s liabilities. Any underfunding of these promises could lead to the value of the scheme’s liabilities growing at a faster pace than the value of its assets – creating, or adding to, a funding deficit. The amount of contributions required to adequately fund future benefits depends on amongst other factors, estimates of future investment returns. All things being equal, lower expectations for investment returns in the future means increases in the ‘future service cost’ to fund the same level of benefits.