Comment on interim monitoring of the 2020 valuation (as at 28 February 2022)

The latest interim monitoring report provides some positive indicators of the current funding status and contribution requirements of the scheme, as a result of the changes to benefit structure agreed by the Joint Negotiating Committee (JNC), and recent market developments.

The value of the scheme’s assets as at 28 February 2022 stood at £88.8bn, with an implied Technical Provisions deficit of around £2bn. The indicative required contribution rate has fallen – due primarily to the lower future service cost arising from the 2.5% cap on annual inflation protection from 1 April 2026 onwards under the JNC’s changes.

This is to be welcomed.

Markets, of course, are volatile. The value of the scheme’s assets stood at £93bn at the end of November, for example. Recent months with positive funding indicators need to be viewed alongside more negative indicators from the pre-Christmas monitoring period.

This volatility emphasises that these monitoring metrics are not a predictor of the likely outcome of a valuation, where the task of the trustee and advisers is to look through market volatility and make long-term judgements. As we made clear in our recent blog, a full valuation requires substantial first principles analysis and overlaying judgement by the trustee.

The report also indicates the cost of retaining the scheme’s prior benefit structure, without the additional covenant support that has been provided by employers through the outcome of the 2020 valuation. At the end of February, the indicative contribution rate required on this basis would be between 44.7% and 46.9% (a future service cost of 40.6% and a deficit of £6.3bn).

Even allowing for the same level of covenant support as is supporting the revised benefit structure from 1 April 2022, the indicative contribution rate required for the pre-1 April 2022 benefits would be between 38.9% and 41.5% (with a future service cost of 38% and a deficit of £3.6bn).

This is set out in a new note published by USS on 1 April 2022 following a request by Universities UK.

These contribution rates are still well above the current contribution rate being paid (31.4%) and illustrate the extent to which the scheme’s revised benefit structure is limiting the impact of higher-than-expected inflation and a reduced outlook for future investment returns.

This information has been shared with, and explained to, our stakeholders. The trustee is concerned that the information contained in the monitoring statements is being used to draw conclusions that are not warranted by the nature and context of the information. Definitive statements are being made without the full context and caveats to the metrics illustrated, which could well be misleading to members.