The Trustee of the £80 billion Universities Superannuation Scheme (USS), the UK’s largest private pension fund, has warned that contributions by members and employers “will need to rise sharply if existing benefits are to be maintained.”
USS said estimates for the pension fund’s deficit at March 31, 2020, ranged from £14.9 billion to £17.9 billion.
The USS is the UK’s largest defined-benefit pension scheme in the private sector with about 420,000 members.
USS said: “The Trustee update confirms that a separate actuarial report (the section 76.1 report) and contribution determination have now been shared with USS’s Joint Negotiating Committee (JNC) which represents employers and scheme members.
“It sets out the increases in pension contributions that would be necessary to maintain the scheme’s existing benefits, in light of persistent low interest rates and reduced expectations of future investment returns.
“Even in the most favourable scenario considered, which would require further financial commitments from employers to strengthen the scheme’s covenant, the overall contribution rate would need to rise to 42.1% of payroll.
“It currently stands at 30.7% and is already due to rise to 34.7% under the 2018 valuation.
“The section 76.1 report also prices the contribution cost of an illustrative package of commitments suggested by Universities UK (UUK), which represents employers.
“Under this scenario, contributions from employers and members would need to rise to 49.6% of payroll.
“Of the three scenarios included in the section 76.1 report this is the scenario on which the Trustee based its contribution determination that has been shared with the JNC.
“Without any such commitments from employers, the overall contribution cost would rise to 56.2%.
“The illustrated increases reflect the need to make a substantial amount of deficit recovery contributions in every scenario, with the fund’s deficit at 31 March 2020 ranging from £14.9bn to £17.9bn (on a Technical Provisions basis), and to address the rising cost of members building up new defined benefits within the scheme.
“This reflects that expectations of future investment returns are now lower than assumed in the past.
“The report notes that, while employers have indicated that current contribution rates are at the limit of being sustainable, UUK plans to consult employers on covenant support measures, contributions and benefit options.
“The Trustee will review the funding assumptions if different covenant support measures and/or benefit structures are proposed by the stakeholders as a result of this consultation.”
Kate Barker, chair of the USSL Trustee Board, said: “We fully recognise the scale of the challenge facing the scheme and sympathise with our employers and members in light of the difficult decisions that lie ahead.
“Trends in financial markets have made the valuable pension promise offered by USS – a set inflation-linked income for life in retirement, regardless of what happens to the economy in future – much more expensive today than in the past.
“I believe everyone involved with USS wants to find a way forward, consistent with our legal and regulatory duties, that provides valuable and secure pensions, and that puts the scheme on a sustainable footing.
“We are committed to being as collaborative and constructive as we can in supporting UUK and UCU’s discussions to this end.”
In response, the University and College Union (UCU) said the USS “has produced a report that risks endangering a healthy pension scheme.”
UCU pointed to “flaws in the valuation of the scheme, which include USS having an overly pessimistic view of the higher education sector and not taking proper account of its growing asset base.”
UCU general secretary Jo Grady said: ‘USS is trying to spin the fundamentally flawed assumptions which its valuation of the pension scheme relies on as objective matters of fact.
“In doing so it risks endangering a healthy scheme.
“Problems with USS’s methods and assumptions have not been properly addressed despite widespread dissatisfaction among members and criticism from across the pensions industry and the higher education sector, including the universities of Oxford and Cambridge.
“Universities UK now needs to step up the pressure on USS to change its approach.
“USS’s asset base is huge and has doubled in size since 2011, yet it continues to revise assumptions down.
“The rationale for this remains unclear to many, even those of us closest to the process.
“It has also proceeded with a valuation date of 31 March 2020, so the value of its assets has been measured during a global pandemic as markets were crashing.
“The scheme receives more in contributions annually than it pays out, making it able to ride out any bumps.
“USS chief executive Bill Galvin was awarded an eye-watering bonus last year, but USS members who have worked so hard during the pandemic are being told that either contributions have to go up or benefits must go down.
“After a decade of pay and conditions being degraded, many precarious and low paid higher education workers can no longer afford to be USS members.
“Even more will quit if contribution rates go up further and this will endanger the health of the scheme as a whole.
“USS and employers must do better.
“For their part employers need to show higher education staff that their commitment to USS is serious by working with UCU and USS on covenant support measures and to get key aspects of the JEP implemented.
“UCU will be holding a special sector conference for higher education branches to decide our next steps and cannot rule anything out.”