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31 July 2019

Protecting all that is good about USS

USS plays a key role in supporting the continued success of a sector that is of vital importance to the UK economy.

Valuable pension benefits are central to attracting and retaining the highest calibre of academics and support staff to our higher education sector, which enriches our society as a whole.

So we have a critically important role and, as the scheme’s latest Report and Accounts documents, we remain resolutely focused on achieving excellent outcomes for members and institutions in the face of very challenging conditions and competing pressures.

Members can be confident that the scheme’s dedicated professionals are working expertly and diligently on their behalf, in partnership with sponsoring employers, to this end.

They can have faith in the high standards demanded of, and demonstrated by, the scheme in gaining approval under the new Master Trust regime.

They can also take confidence from the performance of our in-house investment team, which has continued to add value in challenging market conditions at substantially lower investment costs than other funds of a similar size and complexity have achieved.

The Report and Accounts also covers the key business of the Board – and it has been an exceptionally busy year – as well as the governance structures in place to protect the integrity of its decision-making.

The division of duties that exists between the trustee and its stakeholders is a critical part of the checks and balances of running a mutual, multi-employer scheme like USS – but that is not to say we work in blissful isolation. Indeed, we are committed to working with our stakeholders.

This has been demonstrated in our constructive engagement with the Joint Expert Panel assembled by our stakeholders, and in our decision to launch a 2018 valuation to explore how the panel’s first set of recommendations might, where possible, be safely adopted.

It is also evident in the level of technical detail we have provided in what we believe has been the most transparent valuation process of any UK pension scheme.

The trustee is, however, in a unique position where it is required to make objective judgements. It must operate in a regulated environment, it must have regard to its fiduciary responsibilities, and it must be prudent.

The scheme’s latest and ongoing valuations have been of critical importance to the trustee, and the challenges here are real: as at 31 March 2019, all but one measure of USS’s funding position reported a deficit between the value of the scheme’s assets and the cost of funding the pensions promised to its members to date.

By any standard and objective measure, there is a deficit that needs to be addressed.

Under statute and regulation, a funding deficit must be addressed in a timely manner. In effect, this gives the past priority over the future as it involves using a portion of today’s contributions to pay for benefits already promised.

Of course, in performing our role we also consider the affordability of continued membership and protecting the enduring value of USS to the HE sector.

It is a very difficult balance to strike in the midst of continuing low interest rates and uncertainty surrounding Brexit, tuition fees and university funding, and the global economy.

These factors have contributed to uncertainty and volatility in financial markets, which has made both past benefits and the benefits being earned today more expensive to fund (the fundamental driver of the deficit figures reported in the Annual Report & Accounts).

While we might reasonably assume that conditions will be better in the future, we also need to weigh in the potential consequences of being overly optimistic in this regard, which could be severe – for the Scheme and for our members.

We acknowledge the challenges in levying higher contributions and have worked hard to find ways in which these can be escalated gradually, or made contingent on events.

The process has been painful and contested because, ultimately, there are no easy answers to these challenges.

We are, nevertheless, committed to working with our stakeholders to find a way forward that protects all that is good about USS; that ensures the promises being made to our members will continue to hold their real value.