USS proceeds with valuation ‘in the middle of a crisis’

Concerns raised over pension scheme’s ability to judge its health after virus crisis market plunge

April 15, 2020

The Universities Superannuation Scheme has begun its 31 March 2020 valuation, despite reporting itself to the Pensions Regulator after breaching a sustainability metric.

The University and College Union has expressed concern about the methodology used for the scheme’s valuation.

The USS will base the 2020 valuation, which analyses its financial position and assets, on a snapshot of the scheme on 31 March, using revised methodology published this year. Some USS members had called for the valuation to be postponed because of the extraordinary financial circumstances caused by the coronavirus outbreak.

The market volatility resulted in the scheme reporting itself to the regulator after it breached a self-sufficiency measure on 12 March.

USS group chief executive Bill Galvin has since said that pushing forward with the valuation was the best form of action, “because it gives us time to look at things and ask some pretty important questions”.

He added that this meant there was no need for short-term actions which could “have much broader consequences”, and that “we have to take a long-term view”.  

In a letter to the heads of participating USS institutions, he also revealed that the scheme’s deficit had risen to more than £11 billion in March. In 2018, the deficit was estimated to be £3.6 billion. The size of the deficit has led to the USS announcing that both employee and employer contributions must rise and to an industrial dispute, with strikes at 52 UK universities starting in 2018.  

The UCU said it was “concerned that the current discussion document out for consultation with employers still incorporates conservative assumptions and doesn’t recognise inputs from key stakeholders about how to improve the methodology”.

In a document published on 9 March, the USS proposed changing “Test 1”, designed to measure whether the long-term risk of the scheme is within suitable risk appetite levels, and moving to a dual discount rate, which would mean a different level of risk for active and retired members.

“If USS does press ahead with the valuation, it should make full use of the Pension Regulator’s newly announced provisions relaxing its requirements with regard to deficit recovery contributions and post-valuation market experience,” a UCU spokesman said in a statement to Times Higher Education.

Sam Marsh, the UCU-elected member of the USS’ joint negotiating committee, said that “while it is good that the USS board are not responding in a knee-jerk fashion to recent market movements, it is hard to see how it will be possible to assess the long-term health of the scheme in the middle of a crisis.

“The ideal methodology for pension valuations would look through market volatility to get at the long-term economic implications of the virus,” he said. “If USS settle on methodology that is able to do that, then great. Otherwise we could be looking at more controversy down the line if decisions over contribution rates are made on abnormal market data.”

John Ralfe, an independent pensions adviser, said that the problems with the scheme run deeper than the current crisis and that this valuation would be likely to show that big changes are necessary.

“Even the pension schemes that were strong before the current crisis are weaker today, but USS started off fundamentally weak, with annual contributions not meeting the cost of new pension promises, a very large deficit and continuing to recklessly bet on equities,” he added.

He said that the fixation on the breach was “a red herring” because it was something that the USS had imposed on itself and “it’s now been overtaken by the March 2020 valuation”.  

Nearly every other private sector pension fund has realised that with low interest rates and people living longer, defined benefit pensions are unaffordable, and have moved to defined contribution to reduce cost and reduce risk, Mr Ralfe argued.

“This valuation will underline the need for USS to do the same,” he said. “Moving to defined contributions – with generous employer contributions – was the original plan, only stopped because of the 2018 industrial action. And the outlook for UK universities does not look good, with Brexit and the current pandemic discouraging overseas students, who are vital to balancing the books.”

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Reader's comments (2)

As a deferred member in my 50s this is obviously a concern. I am tempted to start my pension immediately (I was intending to wait until I retired from my current post (non-USS)), however, at least this way I can get a lump sum and some return. What I am not clear about is what are the possible worse scenarios and who can provide appropriate advice (on the USS scheme).
The problem here (as has been the case for decades) is that the pension promise is part of the remuneration package - reduce the pension on next year's contributions compared to this (or make it less reliable aka based on return on investment) and you have de facto reduced the overall financial benefit attached to the employment. The Teachers' Scheme at post '92s is unlikely to be made less generous, so a significant reduction in USS benefits hits the relative employment attractiveness of its member institutions. USS should be wrapped up into the Teachers' Scheme in my view and solve this dilemma once and for all.