The USS now runs in deficit. Many other defined benefit schemes have gone to the wall in such circumstances
The Universities Superannuation Scheme, one of the biggest pension funds in the UK, has been making headlines on Newsnight and the Today programme. “University pensions black hole ‘even worse than thought’,” the BBC’s website reported at the end of last month. Why the sudden fuss?
The key issue is that, although the USS has a fund of assets valued at about £38 billion, these are insufficient to meet its estimated liabilities under any of a number of ways of valuing those liabilities.
At 31 March, the scheme had an estimated funding level of 77 per cent – or, more technically, its assets were valued at only 77 per cent of the estimated present value of the projected future pension liabilities already accrued to members.
Is this new news or old news? On 31 March 2005, the funding level was also estimated at 77 per cent.
The funding level is not as stable as these figures suggest. A 2002 valuation showed a 1 per cent surplus of assets over liabilities. In March 2011, the assets were valued at 92 per cent of the liabilities. This fell to 77 per cent at 31 March 2012 but by 30 June 2013 had bounced back to 83 per cent.
The USS now runs in deficit. Many other defined benefit schemes have gone to the wall in such circumstances. Others accept no new members and many have reduced members’ benefits. The USS has started to head down this road by introducing pension benefits based on a career-average salary instead of a final salary for new contributing members.
So is the USS running out of cash? Straightforwardly, the answer is “no”. It maintains a small cash balance of about 1 per cent of its assets to cover its pension payments and administration.
More significantly, in the year to 31 March 2013, contribution income from members and university employers exceeded expenditure on pension benefits and administration by £190 million. The USS also had dividends, interest and other investment income of £1.05 billion, and a net gain in the market value of its investment assets amounted to £3.54 billion. Overall, its assets increased by £4.77 billion (after rounding).
Despite this, however, the deficit also increased – in absolute terms by £1.7 billion. This is because the scheme’s liabilities increased by £6.47 billion.
Why have liabilities increased so rapidly? One reason is that the number of current contributing members grew by more than 7,000 to almost 150,000 in 2012-13. Another is that pensionable pay per person rose by about 3 per cent, while the level of pension rates payable increased by the same proportion. Meanwhile, the lifespan of pensioners continued to increase at a rate of about two to three years per decade (about 12 to 18 minutes per hour).
Other factors may work in the opposite direction. As interest rates rise again from today’s very low levels, liability valuations will fall. So, therefore, will pension deficits. This started to happen between March and June this year, reducing the USS deficit by more than £4 billion in just three months.
The USS has a “multi-period recovery plan”. Contributions from universities and from individual members (already 23.5 per cent, split roughly 2:1) are likely to be increased. Some pension benefits may be reduced for new members – the career-average salary basis is one example. The scheme’s investment policy will probably continue to move towards more risk for greater return.
Is your present or future pension safe? Most USS members are staff in pre-1992 universities. The USS deficit is held collectively on behalf of these institutions. It does not appear in whole or in part in the balance sheet of any individual university. Members are protected against the possible vagaries of local financial management, but are subject to any system-wide change in the terms and conditions of the scheme.
The USS is not cash-constrained in the short and medium term, nor do the scheme’s huge “liabilities” have to be paid out in whole this year, next year or in the next decade. So USS members should not panic. There may be more to worry about, though, with some of the other pension schemes run by universities themselves or through the Local Government Pension Scheme.