Almost 200,000 staff working in UK higher education face major changes to their future pensions after the deficit of the sector’s main provider soared to £12.6 billion, an expert has warned.
Despite achieving investment returns of more than 20 per cent in the past financial year – adding an extra £10.2 billion to its assets in 2016-17 – the Universities Superannuation Scheme has seen the hole in its balance sheet increase substantially.
According to its latest annual report published on 25 July, the USS had assets of £60 billion on 31 March 2017 against liabilities (the value of its pension promises to staff) of £72.6 billion, which increased by £12.8 billion. This put the scheme’s “funding level” at 83 per cent, significantly worse than the 89 per cent valuation in March 2014 that precipitated the closure of final salary pensions for future service.
If the latest mortality figures are used, reflecting improved life expectancy among USS members, the deficit rises to £17.5 billion, the company's annual report also states.
About 184,000 university staff – mainly at pre-1992 universities – currently contribute towards a USS pension, as do another 6,500 non-university staff working in the higher education sector.
The latest report on the health of USS – the UK’s largest private pension scheme – is significant because it gives an indication of the size of deficit at the next triennial valuation, which is likely to be announced later this year.
To ensure that the pension scheme remains solvent, the USS will be required to submit a plan to the Pensions Regulator to reduce the deficit. This could include proposals for universities to increase their contributions from 18 per cent of salary, staff to pay more towards the cost of pensions, the value of future pension payouts to decrease, or a mixture of all three options.
John Ralfe, an independent pensions adviser, said he believed that “drastic action” was required to address the multibillion pound shortfall in the USS scheme.
“Money will need to come out of teaching and research for many years to shift this huge deficit,” said Mr Ralfe, who added that “new future pensions will have to change to reduce cost and risk”.
The £12.6 billion shortfall is more than twice the £5.3 billion deficit measured in March 2014 and includes savings from the closure of final salary pensions for future service. USS members now receive a defined benefit pension up to a £55,000 salary threshold, with a new defined contribution scheme available for contributions on salary above this level.
Commenting on the USS’ latest results, Bill Galvin, its chief executive, explained that “historically low gilt yields and reduced expectations for future investment returns present challenges, which we are working with stakeholders to resolve”.
“We don’t yet know the outcome of the 2017 valuation but I have no doubt that USS will continue to provide high-quality pension arrangements tailored to the needs of the sector,” he added.