By Jak Ali
The University Superannuation Scheme (USS) is the largest private-sector pension system in the UK and the issues surrounding the scheme continue to cause mass uproar amongst academia professionals.
There has been a complete mismatch between the money currently held and the amount that needs to be paid out. The USS boasts more than 390,000 members, of which 140,000 are deferred members.
Since 2011, members and trade union representatives have walked out in protest at changes and proposed changes to their retirement fund. Firstly, the decision to close the Defined Benefit Scheme opting to change to a Defined Contribution Scheme. Secondly, the alteration of investment strategy to assist the USS to plug the soaring deficit. Thirdly, raising the contribution levels by university employees. And more concerning, the annual report in July 2017 announcing the scheme’s deficit had grown by a mammoth £9 billion in 12 months!
Let’s discuss some of these issues:
A retirement plan racks up a deficit when the liabilities outweigh the assets. The USS currently have an alarming liability of £17.5 billion. Simply put, this means that the cash needed to cover future retirements is not available at this current time and could also mean members may not receive the promised benefits.
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So – what caused this deficit? In a response to Frank Field, the Chairman-elect of the House of Commons Work and Pensions Committee – the USS blames the falling long-term interest rates. Essentially, low interest rates mean paying members’’ pensions costs more. However, although true, the severe issues did not surface overnight – the trustees have been attempting to tackle the problems for years – evidently with no luck.
Benefits for your family
As with many defined benefit pensions – spousal entitlement and benefits for children are never paid in full.
Currently, spouses are entitled to 66% on death of the member and children are entitled to approximately 10% on death of the member (up to the age of 18 or 21 if they are in full time education)
The remainder will be returned to the USS fund. If you are single with no children, your pension will return to the USS fund.
Back when the deficit sat at £2.9 billion in 2011, the USS’ remedial action was to alter the retirement age to 65 (from 60) and then pegged it to the UK state pension age. This change, coupled with the increase in contributions from employees (7.5%) caused a major walk out from the academia industry in protest of the pending changes.
Moving on to 2014 – one would assume the prior changes would have had a positive impact. The USS announced that despite the changes in 2011, the deficit continued to grow and now sat at £5.3 billion. As expected – more walk-outs and strikes developed across the country.
In 2016 it was deemed imperative to cease operating two separate schemes. The USS implemented a single scheme with a contribution rate of 8%.
More importantly, for those with the defined benefit element of the scheme, the USS has implemented a £55,000 limit of a member’s salary.
There is no investment element within a defined benefit (final salary) scheme. A defined benefit member will receive a fixed income each year from the date of retirement which will increase (not grow) in line with inflation.
Nevertheless, it is important to consider the investment strategy implemented by the USS as they look to protect the pension fund in order to sustain payments to their members.
The past nine years has seen numerous changes in the investment strategy with one core aim: reduce the liabilities by outperforming the benchmark.
According to Bill Galvin, the USS Group Chief Executive Officer, the investment portfolio outperformed the benchmark over a five-year period. The portfolio returned 21% in 12 months ending March 2017 – in isolation, this is a good year.
However, this must be assessed against the liabilities to paint the whole picture. Although the portfolio might have grown by 21%, the total liabilities increased by 33%.
Since March 2017, the asset allocation has once again been changed to 55% equities, 16.5% inflation-linked market bonds, 14% credit and emerging market debt and 7.5% in other developed market government bonds. The remainder of the portfolio is invested in cash, property and other assets.
Bill Galvin has acknowledged that over a one-year period, the investment return has fallen short and blames the UK index-linked gilts and North American equities for the underperformance over the year.
What are the official figures?
The figure that has made the headlines is £17.5 billion – this is measured by the Financial Reporting Standards issued by the UK’s Accounting Standards Board and Financial Reporting Council.
Although the USS have an obligation to report this figure in its annual report, the USS deny the accuracy as they claim the £17.5 billion reported deficit takes into consideration a much lower return by assuming all investments are in AA corporate bonds.
Nevertheless, the smaller estimate of £12.6 billion that is reported in the USS report and accounts still makes it the largest deficit in the UK.
As expected, the USS remain optimistic and reassure members there is a remedy – even though the past nine years have done very little to stimulate confidence.
Frank Field, Chairman of the House of Commons Work and Pensions Committee, commented that the previous plans to remedy the deficit had failed adding that he is not optimistic about the forthcoming actuarial valuation.
It was also commented that there are “serious concerns” about how the USS proposes to tackle the deficit.
The USS will continue discussions with the Pensions Regulator to ensure they will be able to meet with the requirements.
More importantly, what options do you have? The timing to review your USS pension has never been better.
Feel free to contact me for a discussion.
All the views expressed in this article are my own. I can be contacted for further information here –> https://www.linkedin.com/in/jak-ali-141893129/