2017 valuation

The final contribution rates required of members and employers under the 2017 valuation have now been confirmed.

The confirmation comes after the Trustee Board considered Universities UK's (UUK) response to its consultation on the Schedule of Contributions and Recovery Plan - the final formal steps of the valuation process.

UUK's feedback made clear that the key concern was the rate of deficit recovery contributions (DRCs) - set at 6% by the Trustee Board for the purposes of consultation.

In considering UUK's response, the Trustee Board acknowledged the tentative willingness of employers to take on more risk (as identified in UUK's autumn consultation on the Joint Expert Panel's report).

On balance, and within the limited scope of meaningful changes that could be considered at this late stage of the valuation process, the Trustee Board agreed to make a change to the level of investment returns allowed for in the Recovery Plan.

Allowing 10% of the difference between the "best estimate" investment return and the prudent technical provisions discount rate corresponds, in turn, to DRCs of 5%, payable over slightly more than 17 years from the valuation date (31 March 2017).

Under the Trustee's application of the cost-sharing rules, these specific contributions will come into effect from 1 April 2020 when members will contribute 11.4% of salary and employers will contribute 24.2%. (This revises down the original schedule, of 11.7% and 24.9% respectively).

The change to the rate of DRCs does not result in any changes to the cost-sharing increases scheduled for April 2019 (8.8% & 19.5%) or October 2019 (10.4% & 22.5%), as these increases relate solely to the cost of benefits currently accruing (as opposed to benefits already earned).

Final contribution rates - 2017 valuation

*Revised down from 11.7% and 24.9%

A new valuation, as at 31 March 2018, is now underway which could result in a different outcome to the 2017 valuation and, in turn, the cost-sharing increases planned for October 2019 and/or April 2020 being mitigated or avoided.

• For a copy of the final 2017 actuarial valuation report, click here.

• For a copy of the final Schedule of Contributions under the 2017 valuation, click here.

• For a copy of the final Statement of Funding Principles under the 2017 valuation, click here.

Why can't USS apply the Joint Expert Panel's (JEP) recommendations to the 2017 valuation, and avoid the cost-sharing increases?

The 2017 valuation is more than six months overdue (the statutory deadline for completion was 30 June 2018), and the Trustee has a legal obligation to complete it and implement cost sharing.

The Trustee could only revisit some of the fundamental issues raised in the JEP's report - such as market risks, investment strategies and contribution levels - by holding a new valuation, as at 31 March 2018, with an accompanying full consultation on the assumptions underpinning the scheme's Technical Provisions. In line with the guidance from the Pensions Regulator, these should be set according to the sponsoring employers' risk tolerance.

Only a new valuation would allow a sufficiently robust, coherent, informed and internally consistent position to be developed, and the latest data and market experience to be properly incorporated.

Published date: 31 January 2019

The recent cost-sharing consultation

Members currently paying in to USS were recently consulted on the proposed outcome of the scheme’s latest valuation, which was influenced in part by the amount of financial risk our sponsoring employers told us they were willing to underwrite.

Members currently paying in to USS were recently consulted on the proposed outcome of the scheme’s latest valuation, which was influenced in part by the amount of financial risk our sponsoring employers told us they were willing to underwrite.

We do not propose to make any changes to the cost-sharing arrangements and will now consult with UUK (on behalf of the employers) before they are finalised. We will also be sharing a summary of the consultation responses with the scheme’s formal stakeholders through the Joint Negotiating Committee.

Alternative proposals

You may have read about alternative funding proposals that have been put forward by a panel assembled by UCU and UUK which could result in lower contributions than you were consulted upon.

The panel’s proposals would require employers to take on greater risk, and both members and employers paying higher contributions, than we were advised they were originally willing to support.

UUK consulted employers on the stakeholder panel’s proposals and subsequently announced that employers are willing to support them, subject to us providing more information on the additional financial risks involved – and if and how they could be managed, and mitigated.

A 2018 valuation

To make sure we consider the implications of this development in line with the laws governing pension schemes, we’ll carry out an new valuation of the scheme’s funding position – as at 31 March 2018.

As the last valuation was a thorough and robust review, much of the information we need is already available but we will update things like market data, forecasted investment returns and life expectancy, and we will also be able to incorporate actual investment experience since the date of the last valuation (which was as at 31 March 2017).

We’ll work through this in the next few weeks and will formally consult UUK (on behalf of employers) on our updated funding assumptions over December and January.

This is when we will assess the proposals put forward by the stakeholders’ panel and consider the scale of the additional financial risks involved, and the ways and means by which employers are willing and able to fund the risks that the Trustee could contemplate taking.

When will contribution rates be confirmed?

We plan to finalise the updated contribution rates based on this new valuation in early February and the Joint Negotiating Committee will then consider how to address the outcome.

Given the timescales of the processes involved, we can’t now avoid the proposed April 2019 contribution increase – but we hope an alternative way forward will be agreed before the significantly higher cost-sharing increases are planned to come into effect from 1 October 2019 onwards.

Our objective throughout this process will remain the same: to ensure that the defined pension benefits members earn are secure and can be paid as they fall due.

*As member and employer representatives on the Joint Negotiating Committee could not agree on an alternative outcome to the 2017 valuation, the default cost-sharing rules (76.4-8), were triggered and member and employer contributions into the scheme will be increasing from 1 April 2019 as a result (and further increases are planned in October 2019 and April 2020). It also proposed that your employer’s portion of ‘the match’ will also be discontinued from 1 April 2019.

Published date: 22 November 2018

Members may have been alerted to a blog published over the weekend claiming that analysis we provided to Dr Sam Marsh (a UCU elected JNC representative) last week has uncovered a large and demonstrable error in the most recent valuation.

There is no such error in USS’s valuation. Dr Marsh’s analysis is not wrong in isolation – but it is simply not an adequate premise on which to set the funding arrangements for the scheme.

The commentary that this analysis has generated is based on an incomplete understanding of the scheme’s current funding proposals and of regulatory requirements. The fundamental issues at stake have been addressed at various stages over the course of the valuation. We have engaged extensively with both employer representatives and member representatives (via the JNC) appointed to consider these issues in depth and in context.

Firstly, it has always been clear from USS valuation discussion papers (and latterly from the Joint Expert Panel’s analysis) that it is expected that the cost of pension provision in future will fall, as interest rates rise. We have been clear on that since the earliest discussions on the valuation.

In effect, Dr Marsh’s approach takes the JEP’s proposals to ‘smooth’ contributions over two valuation cycles, and extends that to 20 years. It is not surprising that when this is done, current contribution levels are (in aggregate) ultimately adequate.

However, it is important to understand what lies beneath the projections: most notably, an assumption – formed by USS and fundamental to the valuation - that interest rates will rise in the future and sooner than if the current forward interest rates available in the market were taken as our base case.

If that does not happen, then the scheme is less resilient to funding shocks that might emerge in the near term. Our Chief Risk Officer goes into this in a more detail in a technical note accompanying this briefing.

We only need to look at what happened in the three years between the 2014 and 2017 valuations to see how quickly underlying funding assumptions can prove to be wrong: in this short period, severe declines in gilt yields increased the potential cost of moving to a low risk portfolio (to protect the scheme from downside risk) by £13bn (from £14bn to £27bn, updated to £22bn using our 2017 assumptions).

The trustee must ensure the scheme is robust under its core assumptions, and it must also be manageable even if interest rates do not rise.

There are many conditions that must be met in order to present a coherent funding plan for a scheme as large and complex as USS. One is that the scheme can be in balance, and within the risk budget set by scheme sponsors, at our ‘funding horizon’ of 20 years. This is the focus of Dr Marsh’s analysis. However the trustee must also ensure it has a credible path to this position. This path must ensure the scheme’s funding position is not unduly subject to the risks of short term shocks raising the hurdle rate beyond what is credible or sustainable.

As noted above, we have provided a more technical note on these points.

There must also be a path that manages the scheme’s position in the event that interest rates do not rise as anticipated – for managing ‘downside’ risk.

Independent expert advice on covenant confirmed that while the sector is expected to be strong in the long term, the scheme is towards the upper end of the range of the amount of risk that can be supported in the short term.

This view is shared by the scheme actuary, the schemes sponsors, and very importantly by the Pensions Regulator. Continuing to pay the same contribution rate and not moving to moderate the investment strategy would exacerbate the risk in the scheme in a manner that would not be compatible with the advice received by the trustee and could well be challenged by the regulator.

As a result, contributions must rise in the short term to manage these risks, acknowledging that the most likely – but by no means certain – path for contributions is that they fall in the future. Should this happen, there will be more options available to adjust contributions, benefits or investment strategy.

The trustee’s fundamental belief is that risk is multifaceted, and requires a wide perspective, and broad tools to manage it appropriately. This approach to the valuation has been carefully constructed, and robustly built based on independent advice from our scheme actuary and covenant adviser. It has been subject to independent review by a third party actuarial firm, and by TPR. None of these reviews has suggested there is scope to take the level of risk in the funding arrangements that is proposed by recent commentary.

Subsequent claims that nothing has to change in the scheme because asset projections in isolation suggest current contributions are adequate understates the risk of underpaying the economic cost of pensions today: as we set out above, the recovery from any downside event could be very difficult.

As USS does not have government backing, it must be funded within the risk appetite and collective capacity of our sponsoring employers. An approach based solely on asset projections ignores the need for the scheme to attain a position within the risk appetite of sponsoring employers, and the time required – as a result of our size and scale and market constraints – to make adjustments to the types of assets we would need to hold to achieve this.

Legislation requires the trustee to choose prudently economic and actuarial assumptions taking account of an appropriate margin for adverse deviation, with the objective of ensuring that benefits can be paid as they fall due. It is not possible or sensible to smooth these assumptions over a twenty year period.

Finally, we can confirm that we provided all of the information and analysis that was requested by the Joint Expert Panel. Given that it ignores downside risk, the approach Dr Marsh looks to support by using asset projections alone is not an adequate approach to risk management in the context of USS. As such, it was not requested by – or provided to – the JEP or employers.

In providing the analysis requested at the JNC by Dr Marsh, which subsequently informed Professor Otsuka’s blog, we clearly stated in our document the limitations of the analysis. It is not a sufficient approach to setting funding assumptions, and would not meet the requirements of the USS valuation.In providing the analysis requested at the JNC by Dr Marsh, which subsequently informed Professor Otsuka’s blog, we clearly stated in our document the limitations of the analysis. It is not a sufficient approach to setting funding assumptions, and would not meet the requirements of the USS valuation.

Published date: 16 October 2018

The employer consultation on the cost sharing provisions is now half way through - you have until Friday 2 November 2018 to leave your response.

The cost sharing provisions would see both member and employer contributions rise and the employer’s 1% matched contribution end from 1 April 2019.

Along with your employer, we will review all feedback to the consultation, so it is important for you to respond before the deadline of 5pm on 2 November 2018.

As our timeline shows, the cost sharing process runs parallel to – but entirely separate from – the JEP process, meaning it was vital for employers to consult with you from 3 September, before the Joint Expert Panel (JEP) published its report.

In our statement on the JEP report, we have reaffirmed that, in the absence of a Joint Negotiating Committee (JNC) decision, cost sharing remains the only default process that the trustee is legally able to operate for addressing the regulatory and legal obligations of the latest valuation.

It is important, therefore, that members take the opportunity to engage with the cost sharing consultation before the window for comments closes.

The proposals put forward by the JEP’s report would require employers to be willing to take on higher levels of risk – and to pay higher contributions – than has been formally expressed to us to date. They would also require increases in member and employer contributions that are higher than the initial 28.3% proposed from April 2019 under the cost sharing provisions.

UUK and UCU are now considering the JEP report, and we will continue to engage with them as they consider their respective positions. This is expected to inform subsequent JNC discussions later this year. We have repeatedly expressed the view that the JEP report could provide the basis for UCU and UUK to agree a way forward that could be introduced before the significantly higher phases of cost sharing increases come into effect, and we sincerely hope that comes to pass.

Published date: 2 October 2018

Our most recent update on the 2017 valuation looks at the establishment of the Joint Expert Panel (JEP) by our stakeholders, and the separate ‘cost sharing’ process that is being followed at the same time.

The Joint Expert Panel

Members may be aware that University and College Union (UCU) and Universities UK (UUK) have established a Joint Expert Panel (JEP) to assess the scheme’s latest valuation.

Joanne Segars OBE has been appointed as Chair, and UCU and UUK have both appointed three members each.

We are engaging constructively with the panel, which is expected to report back to UCU and UUK in September 2018. UUK and UCU will then consider the panel’s recommendations in the scheme’s formal negotiating forum, the Joint Negotiating Committee (JNC), before deciding on any changes to benefits and/or contributions.

The cost sharing process

As we explained to members last month, the trustee must complete the current valuation process as set out under the scheme rules, which provide for the ‘cost sharing’ process (Rule 76.4-8) to take effect.

Under cost sharing, any increase to the contribution rate required by the trustee (that cannot otherwise be addressed by a JNC decision on benefit and/or contributions changes*) is split 35:65 between members and employers respectively.

Why cost sharing?

The cost sharing process will run in parallel with the work of the JEP and the implementation of any subsequent JNC decision. There are several reasons why this is being done at the same time, rather than after the JEP has reported back to UCU and UUK, as follows:

1. The law

Universities Superannuation Scheme Limited, as the trustee, has a statutory obligation to complete the 2017 valuation and the deadline for doing so will pass on 30th June 2018. We will not meet this deadline and the Pensions Regulator has made clear to USS and its stakeholders that the trustee is expected to present a credible plan for completing the process as soon as reasonably possible.

2. The scheme rules

The cost sharing process is set out under the scheme rules as a pre-determined process for dealing with the JNC not reaching a decision on benefit and/or contribution changes. The concept was first introduced into the rules following the 2011 valuation and the current wording was introduced after the 2014 valuation – both at the request of stakeholders (via the JNC).

3. The timescales

Depending on the complexity, implementing scheme changes typically takes up to 12 months to complete from the point of a JNC decision (due to the consultative procedures and technical processes involved). The JEP is expected to produce a report to UCU and UUK in September 2018, which is expected to inform subsequent JNC discussions in autumn/winter. Any changes to benefits and/or contributions arising from a JNC decision would be implemented by USS as soon as practically possible, but would most likely take up to 12 months to introduce. This would be well beyond 1 April 2019, which is the timescale required to complete the current valuation (see point 1) under the cost sharing process (see point 2).

4. The cost

Based on an extensive assessment, and the feedback it received from stakeholders, the trustee has concluded that the combined contribution rate (required to repair deficits in funding for pensions already earned and offer the current level of benefits in future) has increased from 26% of payroll today to 37.4%. The longer this is left unaddressed, the greater the potential funding challenge could be for employers and members in the future.

What happens next?

As we explained to members last month, the rules dictate that the offer of the match will automatically end from 1 April 2019. This would reduce the combined contribution rate required from 37.4% to 36.6%**. However, the trustee and its stakeholders are actively considering the actual changes that will be applied from 1 April 2019, and there will be a consultation with affected employees and their representatives on these matters in late summer this year.

A further update to members on the expected impact on contributions from 1 April 2019 is expected in late July.

What has happened?

The pension landscape has shifted dramatically in recent years: in 2006, there were almost 3,500 defined benefit (DB) pension schemes in the private sector still open to new members.

Fast forward 10 years, and USS is one of fewer than 700 private, funded schemes that remain open.

In its recent White Paper, Protecting defined benefit pension schemes, the Government acknowledged that ‘increasing longevity, a prolonged period of low interest rates, and expected low future investment returns’ means that defined benefit schemes are currently ‘more expensive to maintain than was anticipated when they were set up’.

We’ve seen the cost – that is, the level of contributions which, along with expected investment returns, is needed to fund a set level of benefits – change significantly.

For any open defined benefit pension scheme to be demonstrably sustainable (as is required, by law, with a valuation), its contributions, investments and benefits need to be in balance with the financial support the sponsoring employers can provide.

More information on the 2017 valuation – including updates, blogs, Q&As, video guides, and official documents – is available on our website.

For a glossary of our terms please see more information on our important terms page.

* To the extent that this is not addressed by a decision of the JNC to reduce employer contributions into the USS Investment Builder above the salary threshold, among other potential changes.

** Subject to any decision of the JNC on the rate of employer contributions above the threshold, among other potential changes.

Published date: 22 June 2018

On Friday 27 April, representatives of UUK and UCU sitting on USS’s Joint Negotiating Committee (JNC) agreed to revoke benefit proposals it recommended to the trustee in January.

No alternative benefit proposals were tabled by either party due to their commitment to the establishment of a separate Joint Expert Panel (JEP) to review the 2017 valuation.

The JNC and trustee intend to engage constructively with the JEP. However, the law still requires the trustee to complete the 2017 valuation – which has found that the cost of continuing to accrue the level of defined benefits currently offered by USS has increased significantly.

The trustee must therefore be able to demonstrate to the Pensions Regulator that, against this analysis, the scheme is sustainable: that it has sufficient funds to pay the pensions promised, or a credible plan to recover any shortfall. It must also conclude on the funding requirements for future pension promises.

The trustee has concluded, taking account of the position of the regulator as it was expressed to USS and its stakeholders, that completion of the valuation should run in parallel to the JEP, to provide assurances that the trustee is, ultimately, in a position to address its statutory obligations.

Any new benefit agreement which might subsequently be recommended by the JNC arising from the parallel work of the JEP could lead to the revision of contribution requirements in line with the costs of those benefits, which would be implemented by the trustee as soon as practically possible.

However, under the scheme rules, the absence of any benefit proposals being recommended by the JNC (as is now the case) results in the ‘cost-sharing’ rule (76.4-8) taking effect.

• The concept of cost sharing was first introduced into the scheme rules following the 2011 valuation and the current wording was introduced after the 2014 valuation – both at the request of the stakeholders (via the JNC) as a pre-determined process for dealing with a failure of the JNC to reach agreement on benefit design.

This ultimately involves the increase to contributions required to be paid to the scheme (as determined by the trustee’s valuation) being split 35:65 between members and employers respectively.

In the absence of an alternative way forward being agreed by the JNC in line with scheme rules, the trustee is of the view that contributions need to move, progressively, to align with the cost of accruing the current level of benefits.

The automatic removal of ‘the match’ under the scheme rules will reduce the maximum combined contribution required from 37.4% to 36.6%. However, the trustee will not be able to confirm the contribution requirements that will be applied from 1 April 2019 until later this year, as this will be subject to the agreed process within the scheme rules and stakeholder decisions through the JNC on the rate of contributions to the USS Investment Builder above the salary threshold (and any other changes the stakeholders wish to apply in accordance with the rule).

A statutory consultation by participating employers with affected employees and their representatives would follow thereafter.

No benefit or contribution changes – of any kind – will be introduced before 1 April 2019.

In taking this step, USS is not seeking to impose any benefit solution on the JNC but is acting in line with the scheme rules and with regard to its statutory obligations. The trustee will continue to do all it can to support the JNC in its discussions, which it recognises are challenging.

Further updates will be provided in due course. In the meantime, members can explore all of the updates, blogs and Q&As the trustee has provided over the past year in carrying out the valuation, the key valuation documents that have informed the trustee’s conclusions, and a range of supporting films. These materials serve to demonstrate the robustness of the analysis, engagement and decision-making the trustee has applied over the past two years in carrying out the 2017 valuation.

Published date: 3 May 2018

1. Our investment performance has been very strong

The value of our diverse assets rose by over 20% – more than £10 billion – to a new high of £60 billion in the 12 months to 31 March 2017

The growth of the scheme over the five years to 31 March 2017 was c.£10bn more than if we had been invested solely in bonds over that period.

Over the same five-year period, our assets achieved an average return of 12.1%, and our dedicated investment team’s active management added £1.1bn of value compared to a largely passive approach.

According to the very latest independent benchmarking, our investment-related costs in 2016 were £61m lower than our global peers.

2. The investment outlook is the fundamental issue

While there has been a significant focus on the existence of a funding deficit, the estimated cost of funding future defined benefits is the most material issue arising from the valuation.

Real interest rates have fallen since 2014 (relative to inflation) and the price of assets have soared. These are linked: in a world of lower future returns, investors are prepared to pay significantly more for assets to secure future cashflows. These are the cashflows we need to secure your pensions.

Investing new contributions in future will therefore ‘buy’ fewer assets than they could previously, and the returns they can be expected to generate in future will be lower as a result of their higher purchase price.

Much lower prospective investment returns have created very challenging circumstances for defined benefit pension providers generally. For USS, the estimated cost of accruing future defined benefits – under the current benefit structure – has increased by a third since 2014.

With each three-yearly valuation, the trustee must be able to conclude (and demonstrate to the Pensions Regulator) that the scheme is sustainable. Lower future expected returns need to be offset by higher future contributions from members and employers, changes to future benefits – or a balance of the two.

We appreciate this presents difficult questions for our stakeholders but our conclusions have been reached objectively, following extensive engagement with the scheme’s sponsors and the Pensions Regulator, and with full disclosures to the Joint Negotiating Committee.

3. We do have a funding deficit

A deficit is the difference between the amount of assets held and the amount of money estimated to be needed to pay the ‘defined benefit’ pensions that active, deferred and pensioner members have already earned (which grow broadly in line with inflation over several decades).

Every three years the trustee must be able to conclude that it has sufficient funds to pay the pensions promised, or a credible plan to recover any shortfall (via a deficit recovery plan which must, by law, aim to eliminate any deficit).

The level of risk the scheme plans to take in the long term in pursuit of investment returns (which part-fund pensions) determines its investment strategy, its expected returns (see: Point 2), and so the contributions required to provide a given level of benefits.

Based on these factors, USS has a funding deficit of £7.5bn and is 89% funded.*

This is, as required by law, a prudent estimate but is informed by the collective financial strength of participating employers, independent professional advice and engagement with the scheme’s stakeholders and the Pensions Regulator.

The deficit must, by law, be addressed, and part of the employers’ overall contributions to the scheme will be dedicated (over a number of years) to closing the funding gap.

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.

4. Benefits you’ve earned are secure and protected by law

The defined benefits you’ve already earned with USS are backed by more than £60 billion in assets and the scheme’s 350-plus sponsoring employers.

In funding the scheme, we take the employers’ collective financial strength into account and actively rely on their continued existence and ability to underwrite investment risk over multiple decades.

In doing so, we must actively manage the long-term financial risks that they collectively bear.

The trustee requires confidence that it could ask for higher contributions from employers if the investment returns it expects to achieve – to fund pensions – do not materialise.

The risk that such contributions would divert resources away from sponsoring employers’ core missions or, in extremis, threaten their ability to invest and sustain themselves, is a key factor in setting the funding requirements.

We therefore never plan to take more investment risk than we consider employers are able – or willing – to support in funding pensions.

5. We don’t base our decisions on a ‘best estimate’

A ‘best estimate’ is only a 50/50 chance that our funding assumptions – about how future economic and social trends are likely to play out – will be right (or better than assumed).

In order to ensure your defined benefit pensions are properly secure, we have to apply a degree of prudence to our calculations.

Prudence is a requirement laid down in law so, legally, we cannot apply a ‘best estimate’ to funding – but we can – and do – adopt best estimates in every other assumption we make, apart from mortality.

We manage the prospect of experience being significantly worse than assumed by ensuring that the ability of employers to fund pensions already promised to members is, ultimately, within their collective means (see: Point 4).

6. You have a team of experts working just for you

The Universities Superannuation Scheme is a private occupational pension scheme established by, and run for the benefit of, the Higher Education sector.

The trustee’s primary responsibility is to act in the best interests of the scheme members.

We have to have a high degree of confidence that defined benefits earned at any point in time will be paid – and we take that duty very seriously.

We have endeavoured to conduct one of the most transparent valuations of any UK pension scheme to support a wider understanding of the challenges we, and all open defined benefit pension schemes, face.

Our objective, balanced and informed funding assumptions (based on detailed analysis and modelling) adhere to regulatory and statutory requirements, and have been overseen by UCU and UUK appointees who sit alongside independent experts on the Trustee Board.

Our conclusions have followed 24 months of engagement with sponsoring employers, member representatives, the Pensions Regulator and independent advisors.

*This article was updated on 3 May 2018 following the JNC’s decision to revoke the benefit proposals it recommended in January 2018.

Published date: 16 March 2018

Employer (Universities UK) and member (University and College Union) representatives on our Joint Negotiating Committee (JNC) have, for several months, been discussing potential changes to the scheme’s future benefit structure in response to the latest triennial valuation.

The valuation reviews USS’s funding position and it has been a challenging process: very low prospective investment returns across all asset classes have increased the costs and associated risks of defined benefit plans.

In response to this, the Joint Negotiating Committee considered distinct benefit reform proposals tabled by both UCU and UUK. No joint proposal was tabled. Both were put to a vote and UUK’s proposals were carried by the JNC.

The proposed changes, detailed below, are subject to a statutory consultation by employers with all affected employees (active members and employees eligible to join). This is due to begin in March. They would come into effect no sooner than 1 April 2019 and would only apply to benefits built up from that point onwards by active members (people currently paying into the scheme).

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 this decision.

From 1 April 2019 (at the earliest):

• The salary threshold (the salary up to which defined benefits currently build up) would reduce to zero;

• All future benefits, until further review, would be built up in the USS Investment Builder (the defined contribution part of the scheme), except death in service and ill health retirement benefits – see below;

• There would be no changes to the provision of death in service or ill health retirement benefits. These would remain based on full salary regardless of the salary threshold;

• The employer contribution is proposed to remain at 18% of salary; as is the case now, this would cover deficit recovery contributions, the subsidy of investment management charges and scheme running costs, and their part of death and incapacity benefit contributions; 13.25% of their overall contribution would go into members’ USS Investment Builder funds;

• Members would continue to contribute 8% of pay, but would have access to a lower cost option of contributing 4% while still receiving the full employer contribution into the USS Investment Builder of 13.25%;

• Members’ 8% (or 4%) would include a contribution to partly finance their death in service and ill health retirement benefits.

• The ‘match’ – the additional 1% employer contribution currently available when members contribute an additional 1% to the USS Investment Builder – would be discontinued.

Background

Based on the prudent funding assumptions set by the USS trustee board in November, which were informed by a formal consultation with UUK, maintaining the current level of benefits would require a combined (employer and member) contribution rate of 37.4% of pay – an increase of more than 11% on the current rate (26%: 18% employer; 8% member). This included deficit recovery contributions of 6% (up from 2.1% of pay currently) to address a funding deficit estimated to be £7.5bn (89% funded).

The JNC’s decision results in an estimated funding deficit of £6.1 billion, which means the scheme is 91% funded.

Published date: 23 January 2018

We’ve recently consulted with Universities UK to understand the views of the employers on the assumptions and risk underlying our funding proposals.

USS, as trustee, outlined the maximum level of risk we could contemplate taking in funding the scheme on a prudent basis (a statutory requirement).

This was based on independent expert analysis of the levels of future contributions that could be afforded ‘in extremis’ by participating employers, should the funding assumptions ultimately prove inadequate.

We then sought employers’ views as to whether taking the maximum level of risk was appropriate – crucial to how we set the level of contributions to fund the pension.

Our prudent proposals – based on a fundamental building blocks analysis of future investment returns and the maximum available risk budget – forecast average annual returns of CPI + 0.9% and resulted in a funding deficit of £5.1bn (92% funded).

On this approach, the current combined contribution rate of 26% of payroll (8% employee; 18% employer) would have to increase by between 6% and 7% in order to maintain the current level of benefits.

UUK’s formal response to our proposals has been informed by feedback from 116 institutions, representing 92% of the total active USS membership. The quality of responses demonstrates a very clear understanding of the position.

A small majority of employers (53%) accepted the level of risk proposed, with many qualifying that the proposals were at the very edge of what would be acceptable, and a significant minority (42%) of survey respondents wanted less risk to be taken – including some of the very largest employers. Just 5% of employers indicated that the trustee should consider taking more risk.

While UUK confirmed the trustee’s judgement on their long-term capacity to support the scheme, it also indicated that employers wished to reduce the chances of being required to pay higher contributions in future.

In particular, UUK raised concerns about the challenges that would be faced if interest rates were not to revert at the pace and within the timeframe anticipated in the assumptions. It asked the trustee to consider whether the proposed investment strategy (including the degree of interest rate hedging) was optimal for the level for risk being run and the targeted level of returns.

We had originally proposed putting on hold the strategy agreed in 2014 to reduce the investment risk for a period of 10 years whilst long term interest rates revert to more “normal” levels.

UUK’s responses indicated to us that we should take a more moderate approach to risk. The trustee board accordingly agreed to retain the 2014 approach to de-risk the scheme’s investments over the next 20 years. In practice, over time, this means holding slightly fewer growth-seeking assets and more fixed income assets, which in turn results in a marginally lower income from investments to fund the current level of benefits and recover the funding deficit.

As a result, the board agreed a revised future average annual returns forecast of CPI + 0.71%, resulting in a funding deficit of £7.5bn (89% funded). Maintaining the current level of benefits would, in turn, require a combined contribution rate of 37.4% of pay, including increasing deficit recovery contributions from 2.1% of pay currently to 6%.

What happens next?

The trustee’s role is to set the required contribution rate – independently and objectively – for a given level of benefits. Employer (UUK) and union (UCU) representatives decide on future benefits and contribution sharing arrangements through our constitutional Joint Negotiating Committee (JNC), and they are actively considering how to respond to our findings.

We are currently supporting stakeholders in developing their thinking on various options for future benefit provision and the amount of deficit recovery contributions payable. Further information will be provided once a proposal for future benefits and cost sharing has been agreed by the JNC.

Any changes proposed as a result of these discussions in the JNC must be subject to employers consulting with all affected employees and would only impact the pensions earned in the future after changes come into force.

The date when any changes would be implemented depends on their precise nature and the time it would take to ensure we could support members and employers in running the scheme under revised terms.

Members should be clear that all benefits earned to date are secure and protected in law.

Published date: 14 November 2017

The USS trustee started its consultation on 1 September on its proposed assumptions for the 2017 valuation with Universities UK (UUK). 

It is important to note that the consultation USS is holding on the proposed technical provisions for the 2017 valuation is with Universities UK, which represents the scheme’s sponsoring employers. More than 350 employers have been sent the consultation document by UUK so they can consider it and inform the final response to USS. In order to manage the consultation process effectively, any members wishing to secure a copy of the full consultation document, having read the key summary we have provided below, are advised to contact their employer.

USS is committed to supporting members through the valuation process and will provide more detail on the technical provisions once the consultation with UUK has been completed.

The trustee reviews all assumptions every three years to place a value on the pensions promised to date and to assess what payroll contributions are required in future to fund the pensions currently offered.

Based on the proposed assumptions, the trustee believes there is a deficit of just over £5bn – similar to the figure assessed in March 2014. However, the cost of funding future pensions promises has increased by 35%. The proposed assumptions result in an increase of 6%-7% of pay, from the 26% of pay paid by employers and members now, for the current package of benefits offered.

The increase proposed is a significant challenge for our stakeholders, UUK and University and College Union (UCU) to address.

The trustee is responsible for setting the required contribution rate after consulting UUK, as the formal representative of all USS employers, on its proposed approach. Decisions on future benefit levels and how the total required contributions are shared between employers and members are made by the Joint Negotiating Committee – made up of an equal number of UUK and UCU representatives, with an independent chair.

The consultation runs until 29 September with a conclusion on the assumptions to be used expected in late October.

Decisions on any changes to future benefits or contributions levels will follow later in the valuation process and no changes can be made without a full consultation with all affected employees by their employers.

How the assumptions impact the results

The most significant assumption is the expected rate of return on the scheme’s assets. The trustee is required by law to form a prudent view, taking into account the specific factors of the scheme, such as where the money is invested, and how much risk the employers supporting the scheme are able to bear.

Since the last valuation, expectations for future returns have fallen significantly. This affects everyone saving for retirement whether in USS or another form of private pensions. If contributions made to the scheme are likely to grow at a slower rate than previously thought, then more money is required to fund a given pension promise. That is the main reason why the required contribution rate has increased.

The simplest indicator that future returns are likely to be lower is the drop in the expected return on index linked gilts of around 1.5% per annum since March 2014.

The proposed approach is explained in more detail below and is equivalent to an average annual rate of return to value future benefit payments of CPI plus 0.9%. The assumptions contain a margin for prudence that the trustee believes will be sufficient to cover more than two thirds of all future scenarios.

The valuation results are very sensitive to this assumption. A variation of 0.1% per annum on the assumed return impacts the deficit by £1.2bn: a higher assumed return lowers the resulting deficit.

Trustee assessment of planned investments

USS has progressively diversified its portfolio over many years to ensure that the level of investment risk inherent in the scheme remains within affordable levels for the employers and members. The current investments are broadly half in equities, one third in bonds and the balance in infrastructure, property and other assets.

The strategy has returned substantially more than a portfolio of bonds or gilts over the last five years, generating £10bn more for the scheme than if invested purely in gilts for the last five years, for example.

Over the next 20 years, as USS grows in size by an expected £30 billion in assets, the trustee will continue its strategy to reduce the equity allocation proportionate to the growth in the scheme to ensure that the risks inherent in funding the scheme remain within affordable limits of all the employers.

The trustee’s views on a reasonably prudent level of expected return from the assets it plans to hold over the next 20 years and beyond are noted below.

Years 1-10: Assumed annual return of CPI less 0.53%: reflecting very high current asset values and expectations for a prolonged period of low long term interest rates.

Years 11-20: Assumed annual return of CPI plus 2.8% falling linearly to CPI + 1.7% by year 21 as the scheme’s asset allocation changes; reflecting a period of expected higher interest rates and the proposed gradual reduction in allocation to equity-like investments.

Years 21+: Assumed annual returns of CPI plus 1.7%: a prudent view of long term investment returns on the revised portfolio.

Overall, this is equivalent to an average annual rate of return to value future benefit payments of CPI plus 0.9%.

Deficit recovery plan

In the consultation, the trustee proposes to keep employer contributions towards the deficit at the current 2.1% of pay. The length of the recovery period will be consulted upon later in the valuation process once decisions on future benefits have been made by the stakeholders.

Published date: 1 September 2017