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
- 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
- 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).
- 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.
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.