UK higher education’s biggest pension scheme has outlined proposed changes to its valuation methodology, which the University and College Union has said “ignores the views” of key players.
In the discussion document, published on 9 March, the Universities Superannuation Scheme proposes changing “Test 1”, designed to measure whether the long-term risk of the scheme is within suitable risk appetite levels, and moving to a dual discount rate, which would mean a different level of risk for active and retired members.
USS will base the 2020 valuation on a snapshot of the scheme on 31 March, using the revised methodology.
USS chief executive Bill Galvin said that no decisions had been made yet, as USS would be gathering feedback from employers first on the critical issues. He said that the most important of those is “the risk appetite of employers based on the trustees’ assessment of the amount of risk they might reasonably take”.
The 2017 USS valuation found a £7.5 billion black hole in the scheme, leading to staff contributions increasing to 9.6 per cent of salary and 21.1 per cent for employers to cover the deficit.
Staff at 52 UK universities are currently on strike over the change in contributions, which were previously 8 per cent for employees and 18 per cent for employers.
UCU has argued that because the 2017 calculation was based on flawed methodology, highlighted, as it saw, by a joint expert panel set up in the wake of the 2018 industrial action, “additional contributions for members are both unnecessary and unfair”.
In December, the JEP published its second report, which said that the trustees’ approach was “overly prudent” and recommended changes to the scheme’s valuation.
Sam Marsh, UCU branch president at the University of Sheffield, said that the new methodology was “a very close match” for the old methodology.
“It is hard to overstate the importance of the consultation over the valuation methodology that has just launched. The decisions made over the coming weeks will be critically important in setting the future direction of the scheme,” he said.
However, “members of the scheme have made clear that they need this valuation to be conducted on a sound footing, based in a thorough analysis of evidence. So far, the information provided by USS is nowhere near sufficient to allow employers to make sound decisions on behalf of their institutions,” he said. “Employers must demand better analysis to enable them to respond fully.”
UCU general secretary Jo Grady said that the union was “disappointed that the valuation discussion document circulated by USS does not fully reflect the views of many stakeholders involved in recent discussions. By continuing to ignore the views of UCU and others, there is a real danger that the valuation will continue to be overly prudent and unaffordable.”
She said that the increased contributions “constitute a pay cut for staff and we are concerned that those on low salaries may decide they cannot afford to pay for a pension anymore, putting the future of the scheme at risk”.
The documents also revealed that last week the impact of the coronavirus on the global economy meant that USS “narrowly avoided a formal trigger”, that would have meant referral to The Pensions Regulator.
If the ratio between the scheme’s self-sufficiency deficit and the present value of 10 per cent of employer payroll contributions over 30 years exceeds 85 per cent for five consecutive business days, a response must be considered. Last week, the fifth day’s measure was 84.6 per cent.
Mr Galvin said that he was aware that with the state of the financial markets it could happen again. If so, “we will have to get around the table and discuss what is driving it”, he said. “Is it the volatility or something more? Markets can overreact…it wouldn’t be prudent to rush to conclusions.”
Mike Otsuka, professor of political philosophy at LSE, tweeted that “given the dramatic falls in stock prices & bond yields arising from a coronavirus that won’t go away between now & the 31 March valuation date, it shouldn’t be a matter of controversy that no detriment 8% member contributions (or ‘compromise’ 8.4%) is now a pipe dream.”