The UK’s largest pension fund has reported an estimated shortfall of £5.7bn (€6.4bn), despite reaching assets under management of £68bn.

In its annual report for the 12 months to 31 March 2019, the Universities Superannuation Scheme (USS) said it was 92% funded, using estimates and assumptions based on its controversial 2017 valuation.

The scheme’s employer organisation and workers’ union are still attempting to reach an agreement over future contribution levels, after a threat to close USS’ defined benefit section triggered nationwide strikes last year.

In his introduction to the annual report, published today, chair of trustees Sir David Eastwood acknowledged that there were “no easy answers” to the scheme’s funding problems “but we are committed to working with our stakeholders to find a way forward that protects all that is good about USS”.

Sir David added: “It is a very difficult balance to strike in the midst of continuing low interest rates and uncertainty surrounding Brexit, tuition fees and university funding, and the global economy. These factors make both past benefits and the benefits being earned today more expensive to fund.

“While we might reasonably assume that conditions will be better in the future, we also need to weigh in the potential consequences of being overly optimistic in this regard, which could be severe.

“We acknowledge the challenges in levying higher contributions and have worked hard to find ways in which these can be escalated gradually, or made contingent on events.”

He also highlighted the performance of USS’ in-house investment team. Despite underperforming its internal benchmark by 1.6 percentage points during the year, over five years the scheme has added £389m of value.

It also maintained its cost base at 34 basis points for investment management costs, the same figure as last year. Bringing staff in-house over the past five years helped reduce costs from 47bps to 34bps, USS said.

Elsewhere in its annual report, USS said it would seek to improve its member communications in the months and years ahead. The pension fund has been criticised by some of its members for a lack of communication, particularly regarding the ongoing dispute around the calculation of liabilities.

Bill Galvin, USS’ chief executive, said he was “proud” of the pension fund’s work during the year, but added: “Nonetheless, it is clear that some members feel that we have not handled or communicated the complex issues we are grappling with as well as we might.”

USS’ latest “member perception” survey found that just 31% of members reported having a positive relationship with their pension fund, down from 38% a year earlier. Just under a quarter (23%) said they held a negative view of USS.

The pension fund said the valuation process and USS’ handling of it were “clearly… strong drivers of the outcome”.

In a bid to address these issues, USS said it would overhaul its website and member online portal, expand its direct interactions with members, and provide “enhanced support” to members about retirement options.

This article has been amended to correct the deficit figure – USS reported a shortfall of £5.7bn, not £7.3bn as previously stated.

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