The 2017 USS valuation
Every three years’ schemes must undergo a valuation in line with pension law. The Universities Superannuation Scheme (USS) is required to carry out its valuation as at 31 March 2017 and the outcome of this should be submitted to the Pensions Regulator by 30 June 2018. Over the coming months, USS in conjunction with employers (through Universities UK (UUK)) and scheme members (through the University and College Union (UCU)), will work to understand the scheme’s funding position and determine what has changed since the last valuation in 2014 and the implications of these changes.
13 December 2017
The story since 2014
The last USS valuation took place at 31 March 2014. This was followed by changes to employer and member contributions, and also to the benefit package, from 1 April 2016. The changes had the effect of reducing the deficit from £12.3bn to £5.3bn with a 17-year recovery plan in place to eliminate the deficit over time, and with employer and member contributions increased to 18% and 8% respectively.
Since the last valuation challenging economic conditions mean that the outlook for the scheme is expected to have worsened. Continually falling UK gilt yields combined with lower expectations for investment growth in the future have resulted in a widening of the gap between the value of assets held and the estimated value of the liabilities reported by USS.
There is a 15-month process from the valuation date which will include time for the USS Trustee - following consultation - to decide the assumptions underpinning the valuation and whether any changes to future contributions are needed. This may lead to a discussion between UUK and UCU about future benefit provision.
While the deficit persists at the 2017 valuation, it is accompanied by a more apparent increase in the cost of future benefits. This presents a challenge which will need careful consideration by all scheme stakeholders. More information is expected in the coming months as discussions between the employers (through UUK), the members (through UCU) and USS continue.
For further information on the USS valuation visit the dedicated area of the USS website: https://www.uss.co.uk/how-uss-is-run/valuation.
Why is USS undertaking a valuation of the scheme?
Under UK legislation, the trustees of defined benefit (DB) and hybrid pension schemes such as the USS are required to undertake an actuarial valuation at least every three years. The next USS valuation must be carried out as at 31 March 2017.
What is an actuarial valuation?
An actuarial valuation is a formal assessment of the scheme’s financial health including establishing the future required contribution rates. This is done by estimating the cost of paying current and future benefits as they fall due (the scheme’s liabilities) and comparing this with the value of the assets that the scheme holds in order to fund those liabilities at a set point in time. These values are calculated using a number of economic and demographic assumptions.
When will we know the results of the 2017 USS valuation?
The Pensions Regulator requires the completion of a valuation within 15 months from the valuation date (31 March 2017). This gives the USS Trustee time to consult upon and decide the assumptions underpinning the valuation, and to consider whether any changes to contributions are needed. This also provides time for the stakeholders to consider whether to make any changes to future benefit provision. The final valuation report should be submitted to the Pensions Regulator by June 2018. Work on the valuation is still underway so the final deficit figure is not yet confirmed. However, the deficit is expected to be at least £5.1bn and in addition the cost of future pensions has increased (by a third) making benefit reform necessary.
What is the current funding level of USS?
Work on the valuation is still underway so the final deficit figure is not yet confirmed. However, the deficit is expected to be at least £5.1bn and in addition the cost of future pensions has increased (by a third) making benefit reform necessary. More detail from the Trustee on the funding level at 31 March is expected in the coming weeks.
What was the result of the last valuation?
The 31 March 2014 actuarial valuation of USS indicated a £12.3bn shortfall between the value of the scheme assets and the estimated liabilities. This required action to be taken to reduce the deficit (with benefit changes to reduce the deficit to £5.3bn, with also a 17-year recovery plan in place to eliminate the deficit over time), which resulted in employer and member contribution increases, effective from April 2016.
What does the valuation process look like?
The employers’ representatives (Universities UK) and the member representatives (the University and College Union) have are in discussions with USS for the 2017 valuation. A formal consultation with employers on the assumptions that the Trustee intends to use to value the liabilities (called the technical provisions) concluded on 6 October 2017 and the USS Trustee is now considering the response to that consultation. Once those actuarial parameters are set, the funding situation at the valuation date can be calculated and the scheme stakeholders (through the Joint Negotiating Committee (JNC)) and the USS Trustee can consider how to respond to the expected increase in the cost of the scheme.
The outcome of the valuation process will also be reviewed by the Pensions Regulator, and will need to be acceptable to it. There are many difficult decisions which scheme stakeholders will need to make to ensure the best outcome for scheme members and employers now and in the future.
Who sits on the JNC?
The JNC is made up of employer and member representatives (appointed by Universities UK and the University and College Union) with an independent chair.
What would need to be done to address an increase in the cost of USS?
Latest indications are that the 2017 valuation will show that the cost of providing the current pension benefits has increased significantly. If this is the case, then benefit changes may be needed, if increases in employer and member contributions are to be avoided. A range of options would be considered by the JNC and the USS Trustee, and consulted upon as appropriate with employers and members before any changes, if indeed changes are required, are finalised.
USS has just been reformed in 2016, why are we back here again?
The scheme changes that came into effect in April and October 2016 were required to reduce the scheme deficit following the 2014 valuation. However, since then falling bond yields and lower expectations of future investment returns have resulted in the value of the liabilities increasing faster than the value of the assets (which have performed well). This means that the scheme is facing a substantial deficit at this valuation together with increased costs for providing future benefits at the current level.
Do scheme stakeholders need to act now?
The cost of providing future benefits is expected to increase at this valuation. Therefore, difficult decisions may need to be made to ensure the scheme is sustainable for the long-term. We cannot ignore any increase in costs until a future valuation for regulatory reasons, but also as that would place greater risk on both employers and members. The role of the stakeholders is to understand the risks associated with funding the scheme for the long term and decide on the best solution for the future. Those changes could mean modification to benefits, an increase in contributions and/or greater risk being taken by both employers and members. More details are expected to be available later in 2017.