Little cause for celebration from USS valuation

USS – no time for complacency

The headlines are good. USS is wearing a surplus of over £7bn rather than a deficit of £14bn, it is proposing a contribution schedule that makes pensions affordable to employers and (if the 65/35 balance of costs is maintained) to members.

But this valuation is telling employers and members what we knew all along, that the March 2020 valuation priced assets at a point in the market where they were massively depressed and valued liabilities with a prudence that was totally unnecessary. Whether that prudence was forced upon them by a paranoid regulator or by a paranoid ex regulator is unimportant.

What is important is that the 2020 valuation led to industrial action that made a generation of students pay tuition fees without much tuition.

It has led to universities facing unexpected pension bills and unwanted strike action from staff.

It has brought an open defined benefit scheme to a position where it has lowered benefits through pensioning less salary and decreasing the accrual rate while massively increasing the cost of participation to beneficiaries and sponsors.

This value-destruction now turns out to have been quite unnecessary. That should not be a cause for celebration.


Amidst the carnage of the last three years, the employers (UUK) and the members (UCU) have been looking at ways to stabilize the scheme so teachers get on and teach, students get on and learn and universities can budget without exceptional pension costs.

There are three ways to stabilize scheme funding, each more radical than the next

  1. Conditional indexation; this means that increases in future pensions are linked to what the scheme can afford  and not to a formula – such as the rate of inflation. This might give more or less indexation but it would control the contribution rate. UUK has asked for a report from USS on how this might work. It is a first step to CDC- the tiller for CDC is the indexation rate
  2. Smoothing valuation assumptions; moving away from the tyranny of the gilts based discount rate, schemes could move towards a consistent long-term discount rate, linked to the fundamental accrual rate assumed in scheme design (the CAR described by Keating and Clacher).
  3. Move to CDC; Currently, only the first £40,0000 of pensionable pay is used for DB pension accrual, this is likely to go up as the 2022 benefit cuts are lifted , but it means that much of salary receives a defined contribution into a pot. The scheme might eventually break with DB and run on a CDC basis , where all future  earnings accrued a pension but none of that pension was guaranteed.

It takes an innovative executive, imaginative trustees and co-operative unions and employers for these ideas to be discussed. It also takes a Pension Regulator responsive to the changing needs of the stakeholders.

In March, in a letter to the Pensions Regulator,  the £73bn (formerly £90bn) Universities Superannuation Scheme said its stakeholders had “deep misgivings” about proposed changes to the funding code for defined benefit pensions.

It included a direct challenge to the central plank of TPR’s pension strategy, its DB funding code

“A DB funding regime which does not appropriately reflect USS’s open status and long-term horizons, and which does not recognise the strength and nature of the higher education sector that supports it, may reduce its ability to support such objectives, place unnecessary demands on our sponsoring employers and be to the detriment of our members.”

The Mansion House reforms encourage large open schemes that provide pensions and invest productively. USS is the largest corporate pension still open and , along with Railpen, could be the poster child for a new breed of self-confident, innovative pension schemes that encourage people to teach in UK universities and allow universities to invest in people , in research and most of all in teaching.

But for this to happen, TPR must radically re-write if not scrap its DB funding code and accept that the powers given to it in the Pension Schemes Act 2021 are by and large unnecessary. This has yet to happen.

This is why I am not joining in the general celebrations about the new-found solvency at the USS. If the USS is solvent now, it was solvent in 2020. It has lost nearly £16bn of assets between March 22 and March 2023, more if there are still write-downs to come on private assets held  (such as Thames Water). That’s a loss of around 20% of the asset base, a loss that will become clearer when accounts are published in the next couple of weeks.

Heaving a sigh of relief and returning to managing the scheme as it has been, is not going to turn USS into a world class pension scheme . Running on with the DB funding code is not going to make the Pensions Regulator a world class regulator. The Mansion House reforms depend on schemes like USS stepping up, and TPR letting them.

Stepping up

Watch this webinar from Derek Dobson, CEO and Plan Manager of Canada’s CAAT for an example of someone doing just that)

USS has a new CEO starting in September, Carol Young is fresh from an arduous time at RBS/Natwest, managing its pension scheme. She inherits a scheme that could become great, and a scheme that cannot return to the bad practices of the past.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Little cause for celebration from USS valuation

  1. byronmckeeby says:

    One observation on the proposed use of Clacher & Keating’s fundamental accrual rate is to ask whether it meets the accounting standard requirements of IAS 19?

    Under IAS 19, an entity must use an actuarial technique (the projected unit credit method) to estimate the ultimate cost to the entity of the benefits that employees have earned in return for their service in the current and prior periods.

    IAS 19 of course also restricts the discount rate to be used for accounting (not necessarily for funding purposes, I agree).

    IAS 19 requires an entity to determine the rate used to discount employee benefits by reference to market yields on high quality corporate bonds at the end of each reporting period. However, when there is no deep market in such bonds, IAS 19 requires an entity to use market yields on government bonds instead.

  2. Con Keating says:

    We proposed the contractual accrual rate as the discount rate for technical provisions valuation calculations rather than as a substitute for IAS19’s rate. It is the technical provisions which are required by law and the Pensions Regulator and it is these which determine what actions need to be taken by the scheme and any demands it may make on the sponsor employer. There is actually no need to do anything with the IAS basis, though sponsor companies would probably find it advantageous to report as a note, the technical provisions valuation calculated using CAR.

  3. byronmckeeby says:

    If I may play back one of the points you both made in a submission to the Work & Pensions Select Committee:

    “As reported in the Financial Times, the first Liability Driven Investment (LDI) construction was executed in 2002/2003 in response to a change in the accounting standard for pensions. The motivation for pension funds using LDI strategies was in response to an accounting standard embedding a market yield as the discount rate to be used in the estimation of the present value of pension liabilities for the purpose of scheme valuation. This has the effect of embedding both trends in market yields and their idiosyncratic variability into these valuations.”

    Would it not help the case for reform at USS and elsewhere (a) to have the actuarial profession in the UK acknowledge that CAR is a form of the projected unit credit method, and (b) to increase pressure on IFRS to introduce some scheme-specific flexibility into the setting of discount rates, at least for open schemes?

  4. Allan Martin says:

    Many universities will however still see a significant increase in their pension costs next April in respect of staff in the Teachers’ Pension Scheme. This unfunded public sector scheme (and others) will see the effect of the reduction in the underlying actuarial discount rate (SCAPE) from CPI+2.4% to CPI+1.7% pa. The reduction reflects lower future expected GDP growth. The total public cost is ~£8bn pa but it is mostly lost in fudged government department budgets. Luckily (?) there are no past service deficit reduction contributions for participating universities and independent schools.

  5. Dr Robin Rowles says:

    It looks like the problem with USS is much the same as with BP (linkedin bp pensions) in that management are desperately backpeddling to avoid giving staff the pensions they promised them. Are management worried that their bonuses will be cut if to much money goes out the pension scheme I wonder.

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