All aboard the USS pension deficit

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Read all about it! There’s a pension scheme in deficit. No, wait, that’s not news. We know that people are living longer (a good thing), and we also know that final salary pension deals offered to those same people in the past are now unaffordable (a bad thing). We also know that interest rates are at all-time lows which reduced the rates of return of pension funds’ investments.

We should also get ‘universities have biggest pension debt in UK’ in perspective: the Universities Superannuation Scheme is one of the very biggest, jostling with BT for top spot in the league table of most valuable schemes and so it’s not a particular surprise that it has one of the largest absolute deficits. Not a surprise, but still worrying.

Every three years, pension schemes have a formal revaluation to establish the gap between the assets (how much they have invested to pay pensions) and the projected liabilities (what they expect to pay out to pensioners). USS had its triennial in March which showed a funding shortfall of £12.6bn (or £17.5bn if you count it differently – but what’s £5bn between friends?). To put that in context, the scheme’s 350 members have £50bn in assets and contribute £2.1bn a year to USS. Total spending across the HE sector was £31bn in 2015.

Who is affected?

USS is (mostly) the scheme for older universities and sector agencies, and usually for more senior professional staff and for academics. It’s a ‘last institution standing’ scheme which means that if a member organisation goes bust, the liability for continuing contributions is shared by everyone else in the scheme. To put it another way: if members of the scheme close in order of poorest to richest, the final debt would be borne by Trinity College, Cambridge.

The security of the scheme is good news for USS pensioners and those contributing to the scheme, but also something of a throwback to more collegial, less competitive, times in the HE sector (the Federated Superannuation System for Universities, USS’s predecessor, dates back to 1911). The changes to accounting rules (snappily named FRS102) now mean that individual institutions have to show the scale of the pension deficit in their own accounts which should make sobering reading for some.

There’s been talk of student fees having to increase in order to cover the deficit. They probably won’t increase in order to pay more into pensions, but as half the money universities get comes from fees, it’s that money which is paying salaries and pensions. USS, like other schemes with deficits, has to have a plan in place to address the gap. Higher contributions is one way to do it, as is reducing benefits.

A couple of years ago, USS switched to a ‘career average’ approach to pensions which shut the door to existing staff from the most generous final salary versions of the past. New staff have only been allowed to access a career average scheme for a few years and there’s now a cap to the ‘defined benefit’ part of the scheme for everyone with a ‘defined contribution’ option thereafter. One can assume that future iterations of the scheme will be successively less generous. That’s another point chalked up to intergenerational inequality.

It’s very unlikely that USS would be able (or willing) to do something totally radical and cut the benefits of existing pensioners, those on the most generous versions of the scheme. That would essentially be the only way to cut those future liabilities without the burden falling on higher contributions. Obviously there’s also a plan to make more from investments, but it seems unlikely that the scheme is going to see overnight growth of 25%.

It’s the children who are screwed

Generous pensions are part of the package for USS-member institutions. Increasingly the student-debt generation has no hope of receiving a decent pension (and probably isn’t saving for one either, despite auto-enrolment), and a portion of their fees will be spent on pension schemes. The story here is of private sector organisations (albeit not-for-profit ones) enjoying the pension benefits of the public sector. But how many of universities’ public sector comparators have customers in the way universities do, with a clear (and well known) annual price tag? And how many people in the private sector are getting 18% employer contributions to their pension pots?

The taxpayer-in-the-street isn’t complaining about civil service pensions, but students are increasingly asking questions about where their tuition fee money goes. Answering those questions with ‘retirement benefits the likes of which you can only read about in history books’ doesn’t smack of great public relations. Pensions probably aren’t the topic likely to bring rioters to the streets, but it’s part of the sequence of bad news stories for the sector. HE needs a hole in the balance sheet as much as it needs a hole in the head.

7 thoughts on “All aboard the USS pension deficit”

  1. Josh says:

    I think you’d be hard pressed to find a person on the Clapham omnibus who’d describe universities as being private sector.

  2. Richard Dockrell says:

    Third sector, surely. Aren’t universities charities?

  3. Michael Otsuka says:

    “USS had its triennial in March which showed a funding shortfall of £12.6bn….”

    USS has not yet even completed, let alone proposed and offered for consultation, its triennial full actuarial valuation for 31 March 2017. The consultation will open on 1 September. The £12.6 bn is an interim figure that carries over the assumptions of the 2014 valuation. The valuation assumptions for 2017 will probably differ in significant respects from the assumptions of the 2014 valuation.

    “A couple of years ago, USS switched to a ‘career average’ approach to pensions which shut the door to existing staff from the most generous final salary versions of the past. New staff have only been allowed to access a career average scheme for a few years…”

    Actually, all staff are now on career average DB. Final salary was closed on 31 March 2016, and those who had been members will receive ‘final salary’ pensions based, not on their final salary at retirement, but on their salary as of 31 March 2016.

  4. Mark Richardson says:

    A few points:
    How can liabilities go up by 33% in a year? It is an absurd statement.
    Why shouldn’t existing pensioners who contributed the least and often reitired in their fifties experience cuts, instead of young people who will receive a fraction of the amount?
    Finally, the pension is one of the few things keeping us working for these institutions, it definitely isn’t the salary.
    This needs addressing fast as many lower tier universities will be going bust over the next few years.

  5. Ursula Kelly says:

    They are formally ‘NPISH’ non profit institutions serving households, like friendly societies. And most are registered charities. So closest to ‘3rd sector. ‘

  6. Ant says:

    Fair points re: ‘third sector’; it’s not the description most often used (commonly a simple public/private binary) but could be one which could perhaps get more traction. See VCs’ salaries compared against charity leaders’?

  7. Butthead says:

    USS should outsource their fund management and stop paying 110 employees an average of £250k p.a. each – redundancies at USS would be better value than from Universities, as nobody I am aware of in financial services can’t be replaced by well-managed algorithms for a fraction of this cost.

    USS should change its accounting rules and value (discount) its liabilities using corporate bond yields and not index linked gilt yields which are in a QE bubble and even less representative of expected long term costs of money. Better yet, the accounting standards for pension funds should revert to valuing long-term pension liabilities with reference to the yields expected in non-crisis eras (when QE has stopped and interest rates return to free floating).

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