There is no silver bullet in the UK’s pension dispute

The latest USS valuation may have been conducted amid crashing markets, but there is no escaping the need for changes, says Kate Barker

November 26, 2021
Bar chart with a bullet, symbolising the USS dispute
Source: iStock

Passions are running high in the debate over UK university pensions. This is wholly understandable: pensions are an important influence on the financial security of members and their families and on the financial stability of many academic institutions. We all wish to provide the best possible outcome, but we must deal with the world as it is, not as we wish it would be.

Some opponents of the proposed changes to the Universities Superannuation Scheme (USS) have focused on a particular issue: the valuation date of 31 March 2020. They believe the solution is a 2021 valuation – which would be the scheme’s fourth full actuarial valuation in five years.

It is argued that the 2020 valuation was fatally undermined because it was carried out in the early days of the pandemic, when global markets were crashing. 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, of course, wish to carry 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 are required to compare the scheme’s assets against its liabilities at a date in time. But the prudent conclusions and outcomes we have reached regarding the contributions required of members and employers do not hinge on the lottery of what happened in the markets on one day in March last year. The ensuing 18 months have been spent making balanced decisions that are informed by subsequent developments.

At all times, assets and liabilities need to be looked at together.

The scheme’s deficit had quadrupled from £3.6 billion on 31 March 2018 to more than £14 billion on 31 March 2020. Some of this deterioration occurred pre-pandemic, although the value of USS assets did fall sharply when Covid-19 struck – from £74 billion at the beginning of March 2020 to as low as £64.3 billion by 18 March, before recovering to £66.5 billion by 31 March.

Despite this, the contributions required from employers to close the deficit for the 2020 valuation have been set at 6.3 per cent of payroll – just 0.3 per cent higher than under the 2018 valuation. This is made possible by a long recovery plan, taking 18 years to get to full funding (eight years longer than under the 2018 valuation), and by assuming higher returns over that period as asset values recover.

Two key factors support this outcome. Over two years, we’ve negotiated hard with Universities UK to secure very substantial commitments from employers to the scheme. This gave us the confidence to consider more optimistic assumptions, knowing that the employers would be there to pick up the difference if required. Second, the value of the scheme’s assets has more than recovered, giving confidence in the assumptions in our recovery plan.

However, the stock market turmoil on 31 March 2020 also meant that asset prices were low. If you invest when an asset is relatively cheap, you can expect to make more of a return on it in future. That meant the outlook for future expected investment returns was unusually high on 31 March 2020. Higher expected future investment returns lower the cost of funding new benefits in the scheme.

While the deficit is lower today than on 31 March 2020, the price of the assets we can buy with today’s contributions are that much higher. This means we expect to get proportionately lower returns on them in future. An outlook of lower expected future investment returns is now a widely held view among actuarial firms and investment consultants.

Inflation is also key. Members’ benefits increase in value every year to and through retirement, broadly in line with the consumer price index (up to certain caps). So, in relying on investments to pay the benefits promised to members, we need to have sufficient confidence in the returns we can achieve relative to inflation. Expected inflation is also now higher than it was on 31 March 2020. These twin effects increase the prudently assessed cost of funding new benefits, known as the future service cost.

In July 2021, we thoroughly assessed how things looked a year on from the valuation date. If existing benefits continued to be offered, and assuming that the substantial commitments from employers could be carried across, we estimated a deficit on 31 March 2021 of £7.1 billion, deficit recovery contributions of 6 per cent and a future service cost of 36.7 per cent.

Other schemes serving the higher education sector have seen similar issues. Superannuation Arrangements of the University of London (SAUL) reported in 2021 that its future service cost stands at 35 per cent of payroll; it was 21.6 per cent in 2014. In September 2019, employer contributions to the Teachers’ Pension Scheme, of which many employees of post-92 institutions are members, increased from 16.48 per cent to 23.68 per cent. It is also conducting a 2020 valuation.

The Joint Negotiating Committee (JNC), made up of an equal split of representatives from UUK and the University and College Union (UCU), recommended changes (now being consulted on) that would see total contribution to the USS remain at the current overall rate of 31.2 per cent of payroll. In September, the Pensions Regulator shared its view that “the appropriate overall contribution rate should be at least 1 per cent to 2 per cent of salaries higher”.

It should be clear that the prudent conclusions and outcomes we have reached regarding the overall contribution rate required under the 2020 valuation do not rest on the market values of one day. It is incorrect and misleading to claim otherwise.

As trustee, we need to have sufficient confidence that the benefits being promised to members can be paid when due. We hope that the costs of these promises might come down in future, which could potentially allow benefits to improve – but we cannot today depend on it.

Dame Kate Barker is chair of the Universities Superannuation Scheme’s trustee board.

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Reader's comments (6)

It's clear that USS (whose ridiculous strapline "for members, for the future", is akin to the oil companies claiming to be green saviours rather than the planetary death machines we know them to be) and UUK (a collective union of universities brought together, ironically, to crush real unions) are in cahoots with each other. Both are licking their lips at the prospect of being able to extract large portions of the pay promises enshrined in the work contracts of a tired and embattled workforce. Dame Kate "don't give an inch" Barker's argument that the cynical timing of the valuation does not matter is complete hogwash. If it were so unimportant then she and those she represents should be happy to listen to those they are supposed to represent and commission a fresh valuation, but they dare not countenance it, because they know that doing so will significantly erode any case they have for further eroding our pensions in the manner that they have been doing over the last decade and more. By all sensible estimations, the scheme is in rude health. A recent article in the FT by Martin Wolf, an impartial observer of these latest developments, argues that the current imperative of the financial whizzes at USS to be overly prudent and pessimistic is attempting the impossible, to insure against the end of our world. This is not how we want our scheme to be managed.
oh please... the USS 'deficit' is entirely a moveable feast; just dependent on the choice of assumptions made. And many academic experts ( far more expert than those 'advisers' at USS) have already crawled all over this, pointing out the flaws in the USS position. Yes, we could agree that the date of valuation is only ONE of many factors in the current mess over which the Trustees should be ashamed to preside - in itself it is ridiculous, using a valuation date when assets were known to be at their lowest is just as bad as using a date when they are artificially high. But if USS has really travelled that long journey from being one of the most well funded and secure pension schemes in the UK to what the Trustees now portray as perilous deficit , well there should be mass Trustee resignations in acknowledgement of their own abject failure. And, call me a cynic, but the woes of USS only really seemed to start once it was no longer the same pension scheme shared by the VC alongside the most junior researcher. Am assuming that was partly due to the government's 'Lifetime allowance' restrictions. But the best safeguard IMO was the old one - that the VC's pension shared the same fate as everyone else's. But all in all there is something rotten in the state of USS Management.
As trustees, is it not your duty to ensure that fund managers perform well? What have you done about their abject failure? For failure it is: a well-funded pension scheme that was the envy of many has turned into a shambles in deficit - or so you claim - potentially unable to meet its obligations to those preparing to draw their pensions, telling us that we shall have to contribute more and STILL receive lesser benefits that we contracted to when we joined the scheme. We need some explanations, not some garbled account of why you think the valuation is correct. Pension scheme trustees are there to ensure that pensions deliver, not to defend poor management, mismanagement even, of the scheme.
There are respectable academic arguments for saying that the current actuarial approach to valuing fund liabilities is radically unsound. The very difficulty of explaining the discount rates used to value liabilities shows how little they have to do with intuitive common sense. However, that longstanding approach represents custom and practice and is the only one recognised by the law/Pensions Regulator. So the trustees have no option. The UCU is playing the role of King Canute's advisors, effectively urging the trustees and employers to defy the law. Their strike can serve only to damage education and the UK's international reputation. It will also aggravate negative perceptions of the academic profession as politicised and unworldly.
Am not a fan of UCU, which has to be one of the least effective Trades Unions in history, largely being self indulgent and close to puerile in their ' demands' against the wrong 'enemy' ( Blaming your VC who is hamstrung by gov policy is just stupid ). However there is a real scandal going on with UCU , and something very smelly in the set up of advisers from finance companies who surely must have enormous conflicts of interest etc ( ie in their interests for all to be switched to dc scheme ) I don't agree with you that Trustees have little option, they are supposed to be acting in the interests of members and they really do need to be held to account. There has been a lot of smoke and mirrors over what is legally permissable... I have a very healthy scepticism. The fact is that USS is one of the largest pension schemes in the UK and it is not a distant memory from when it was also regarded as one of the most solid and well funded. "Something rotten in the state of USS" over how it has led to where it currently is portrayed as weak....
I meant, of course, real scandal with USS, not UCU....