USS deficit could mean all have to pay more

Multibillion-pound funding gap may leave staff footing the bill

October 31, 2013

Source: Alamy

Check it carefully: questions have been asked about USS’ accounting methods

The pension scheme for older universities has been accused of playing down the scale of its multibillion-pound funding gap, which could leave institutions and staff footing the bill.

However, universities have dismissed concerns – aired on the BBC’s Newsnight last week – that tuition fees may have to rise to cover the £7.9 billion shortfall in the Universities Superannuation Scheme.

Nicola Dandridge, chief executive of Universities UK, said there was “no question” of this happening despite the scheme’s problems, which were laid bare in its annual report published last week.

But the report has underlined concerns that the USS, which covers academics and academic-related staff in 67 pre-1992 universities, remains significantly underfunded.

In June 2013, the scheme had enough assets, £37.9 billion, to meet 83 per cent of the cost of all its promised benefits.

This was a slight improvement on the 77 per cent funding ratio in March 2012 and March 2013 but was well below the 92 per cent valuation recorded in 2011 and the 103 per cent figure in 2008.

Unless the deficit is substantially reduced by March, the date for the scheme’s next triennial valuation, the Pensions Regulator will require the USS to draw up a plan to improve its balance sheet.

Bill Galvin, the fund’s chief executive, has confirmed that experts are working on proposals to meet the gap for 2014. This will include a review of the USS’ employer contributions, the scheme’s investment strategy and its actuarial assumptions on factors such as life expectancy.

Any deficit reduction plan that called for higher employer contributions, which stand at 16 per cent of wages, would also require staff to pay in more (currently 7.5 per cent of final-salary scheme members’ wages).

Different discount rate

John Ralfe, pensions consultant and former finance director at Boots, said that questions needed to be asked about the “magic pencil” accounting methods used by the USS, which he claimed understate the cost of liabilities by using a different discount rate from other private sector pensions.

If the USS used the FRS17 method employed by other big schemes, its deficit would be £2.6 billion larger, he said.

Employer contributions would have to almost double to make good that deficit over 20 years, Mr Ralfe added, although that could be achieved by raising tuition fees by up to £1,000 a year.

Employee contributions would have to increase to 10 per cent of salary under FRS17, he said.

But Ros Altmann, former director general of Saga, defended the USS’ use of the more generous accounting method, pointing to the 148,000 members still paying into the fund, which has performed well in recent years.

However, Mr Ralfe argued that the USS pension promises for both active and retired members were too reliant on contributions from active members and amounted to “double-counting”. “USS should not be a massive Ponzi scheme, relying on contributions for new pension promises to pay current pensions,” he argued.

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