UK’s biggest scheme 'could take more risk to cut deficit' – expert panel

A panel of experts scrutinising the valuation of the UK’s biggest pension scheme has recommended a series of changes that could reduce its reported deficit significantly and cut planned contribution increases.

The Joint Expert Panel (JEP) – appointed earlier this year to assess the 2017 valuation of the £64.4bn (€73bn) Universities Superannuation Scheme (USS) – yesterday published its first report, in which it argued that the scheme had been too cautious with assumptions used to value its liabilities and set contribution levels.

The panel also criticised the Pensions Regulator (TPR) for not recognising the collective strength of the 350 higher education establishments that sponsor USS. This had also encouraged an overly cautious approach as USS’ trustee board worked to keep the scheme in line with changing regulations.

According to the report, the expert panel’s suggestions, if implemented, could result in combined contribution levels rising from 26% of salary to 29.2%, a significantly smaller rise than under USS’ current plan, which will see the contribution rate hit 36.6% in 2020.

“As suggested by other commentators, alternative ways of arriving at a valuation of technical provisions are open to USS and should be explored,” the JEP’s report said.

The panel questioned one of the key building blocks of the controversial 2017 valuation – which resulted in proposals to close the defined benefit section of the scheme, prompting nationwide industrial action.

A test that informed the future investment strategy and discount rate for the scheme was given too much weight and had been used as “a constraint on benefit design and a driver of investment strategy”, according to the panel.

The test used by USS – part of which involved a detailed survey of the 350 employers – drove the scheme towards a low return investment strategy “that results in a higher deficit and higher contributions than would be the case if the current investment strategy were maintained”, the panel said.

It questioned whether employers’ appetite for risk had been assessed appropriately, saying that the way in which it had been applied through this test had contributed to the adoption of strong risk aversion.

More risk-taking possible

The panel argued that the unique features of USS and the higher education sector had not always been consistently considered, either by TPR or by USS itself.

“In particular, the panel believes that insufficient weight has been given to the fact that USS is a large, open, immature scheme which is cashflow positive and cap adopt a very long-term time horizon.

“By giving this strength and diversity a greater weight, the panel believes that the trustee and the employers may be able to agree a larger risk envelope.”

“Our observations, conclusions and recommendations are intended to be constructive and should be read in that spirit.”

Joanne Segars, chair of the joint expert panel 

The scheme is three years into an investment strategy that is set to de-risk the portfolio over the course of the next 20 years.

The report unanimously recommended “four areas where adjustments to the valuation should be considered”:

• re-evaluating employers’ attitude to risk;
• adopting greater consistency between the 2014 and 2017 valuations;
• smoothing future service contributions to ensure fairness and equality between generations of scheme members; and
• ensuring the valuation used the most recently available information, such as the latest data on mortality.

Joanne Segars, the expert panel’s chair, emphasised that the JEP – unlike the trustee – had had the luxury of the benefit of hindsight and had not sought to be critical of any party involved in the valuation.

“Our observations, conclusions and recommendations are intended to be constructive and should be read in that spirit,” she said.