Out-Law News 2 min. read

University pension scheme close to £3bn in deficit, valuation reveals


The Universities Superannuation Fund (USS) is £3 billion short of meeting its current liabilities to pension scheme members, according to press reports.

An article in industry publication Professional Pensions said that the scheme was 92% funded, with a deficit of £2.9bn, at the time of its latest actuarial valuation on 31 March 2011. The USS has not yet made the valuation public but said its funding level had increased slightly, from 91% in March 2010, in its latest annual report (100-page / 575KB PDF). At its last valuation, in 2008, the scheme was £707 million in surplus.

University pensions expert John Hanratty of Pinsent Masons, the law firm behind Out-Law.com, said that the size of the scheme's deficit had not been helped by poor returns from the stock market in recent years. The USS currently invests 77.5% of its funds in equities and alternatives, according to Professional Pensions.

"The USS is a relatively young scheme and is heavily invested in the stock markets. Conventional wisdom is that equity or share-based investments will provide higher returns over time, but those investments carry risk - and as a consequence, the USS has suffered from lower than expected investment returns linked to increasing life expectancy. This serves to diminish its asset base whilst increasing its liabilities," he said.

The USS was established in 1974 and is the principal pension scheme for academic and senior administrative staff in UK universities and other higher education and research institutions. As of 31 March 2011 386 institutions participated in the scheme, including all the 'old' universities established before 1992.

According to the rules of the USS, if one scheme defaults on its liabilities the remaining institutions enrolled in the scheme are liable to pick up a proportion of the deficit. Hanratty said that this could be a "worry" for the scheme as an increasing number of the newer universities, whose income is more dependent on tuition fees than research, went on to make up a bigger proportion of the scheme's funders.

"The USS is what is known as a 'last man standing' pension scheme – the remaining institutions pick up the tab if one defaults right down to the last remaining institution being liable for the remaining debts if everyone else is out. Over recent years, with staff moving between universities, the USS appear to have admitted some universities whose financing is more dependent on tuition rather than research and these universities may have to find additional funding for USS pension liabilities," he said.

The scheme began to pay benefits to its members on a defined contribution basis rather than a defined benefit basis as of 1 October 2011, and began to use the Consumer Prices Index (CPI) measure of inflation to calculate increases to benefits. Defined benefit pension schemes promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment, while in a defined contribution scheme the final value depends on the performance of the scheme member's individual contributions. Both changes were initially opposed by the University and College Union.

The scheme is currently reconsidering its funding arrangements, and is due to submit a report to the Pensions Regulator on how it intends to deal with the deficit. A source at the USS told Professional Pensions that it was unlikely to completely overhaul its strategy but would likely change its statement of investment principles.

University pensions expert John Hanratty said that member institutions would be "watching with interest" to see how the changes would affect the scheme's investment strategy.

"At one end of the scale, a wholesale change out of equities will lock in losses which will have to be funded over time by the institutions. At the other end, an aggressive equity strategy carries with it the risks of underperformance which could exacerbate the problem," he said.

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