Expert panel could be ‘game changer’ in UK pensions dispute

Analysts are optimistic that the expert panel convened to reassess the USS deficit could deliver significant change, although others are less convinced

April 21, 2018
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An expert panel charged with reviewing the deficit of the Universities Superannuation Scheme could be a “game changer” in UK higher education’s pensions dispute if it can successfully challenge key assumptions about the fund, analysts have claimed.

As part of a deal to suspend strike action at about half of the UK’s universities, a panel composed of actuarial and academic experts nominated in equal numbers by Universities UK and the University and College Union will be set up to assess the valuation of the USS and how it was reached. It will also draw up proposals on contributions and benefits aimed at maintaining defined benefits, which guarantee scheme members a set level of income in retirement.

Some critics of the deal have dismissed the panel as a short-term fix that will merely postpone the inevitability of severe cuts to the pension received by about 190,000 staff currently working mainly in pre-92 institutions. Under the deal, the status quo on pension contributions and benefits will remain until at least April 2019.

“This is no more than a truce – the war has certainly not been won by either side,” said John Ralfe, an independent pensions adviser, on the battle to preserve staff pensions at a level broadly comparable to current arrangements.

However, other pension experts are more optimistic that the expert panel can help to deliver a better future deal for USS members, particularly if it can convince universities that they are in a financial position to pay more towards the scheme, under what is known as the employers’ covenant.

Nick Foster, a lecturer in actuarial science at the University of Leicester, said that any improved pension offer “would hinge on universities’ assessment of the covenant”, adding that “this is likely to be the most fruitful area for change”.

Revisiting universities’ willingness to pay more, however, may lead universities and the USS to clash again with the Pensions Regulator, which wrote to the USS in October 2017 to question what it saw as the scheme’s overly optimistic view of university balance sheets. In particular, it questioned whether USS employers could pay an additional £500 million a year to protect existing benefits, according to the letter seen by the Financial Times.

“I think the regulator is concerned about the sector’s capital borrowing going up as it has,” said Mr Foster, who added that the threat of further intervention might hamper any bold reassessments.

However, John Clancy, a pensions consultant, said that he believed a radically improved deal could be reached if the USS and the Pensions Regulator could be persuaded to take a longer view on interest rates, as current low base rates of 0.5 per cent had led to an artificially high estimate of the deficit.

“If the panel has the confidence to fundamentally review assumptions, this could be a game changer for the USS,” said Mr Clancy.

“For instance, if interest rates return to about 5 per cent in the near future, then the deficit will not only be wiped out but there will be a surplus,” said Mr Clancy, adding that “rates are already starting to creep up”, with two rate rises likely to take place this year.

“We might start to see deficits disappearing as soon as the end of 2019, which is why it’s a real problem to use current rates to calculate liabilities over the next 30 to 40 years,” he added.

Pressing on with drastic cuts to the USS could rebound on the scheme if it found itself in surplus at a valuation in the near future, said Mr Clancy.

“People would have the right to ask for their money back if this happened – either as a pension holiday or in the form of PPI [Payment Protection Insurance]-style claims,” he added.

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