With the USS on the up, we need to try to flatten the roller coaster

The lowest member contribution rate in the history of the Universities Superannuation Scheme came into effect on 1 January.

After the swiftest conclusion to a USS valuation in almost 15 years, the contributions made by participating employers also reduced significantly compared with where they have been over the past few years. Improved benefits are on course to be introduced from 1 April.

That’s a positive backdrop for USS heading into the 50th anniversary of its establishment. After coming through one of the toughest periods on record for private defined-benefit (DB) pension schemes, changes in economic conditions have driven a significant improvement in USS’ funding position.

So significant, in fact, that the Joint Negotiating Committee (JNC) has also recommended a one-off uplift to benefits (worth up to £215 a year at retirement, with an associated £645 retirement lump sum) for members who, subject to certain exceptions, actively paid or go on to pay into the scheme at any point between 1 April 2022 and 31 March 2024. (Retired eligible members will typically get an uplift of £241 per year.)

I am sure all this will be welcomed by employers and members.

Up to a fifth of people eligible to join USS currently opt out – and the most common reason is affordability. I hope the improving benefits, potential uplift and member contribution rates coming down from 9.8 per cent of salary to 6.1 per cent will prompt that group to reconsider. I’d encourage them to read the information on our website and speak to their employers if they have questions.

I am particularly pleased that the University and College Union and Universities UK have committed to considering how the scheme’s funding, investment and benefit strategies can be used to support its long-term stability. For me, that is the big prize.

The 2023 valuation may have been a sprint – befitting the pace of economic changes – but stability needs to be approached more like a marathon. Achieving it – in the funding position, the benefit structure and the required contribution rate – will necessarily involve some trade-offs because there are some things that are simply outside our control. Financial markets are inherently volatile and unpredictable – over the short term and certainly over the long term. There’s not much we can do about that. There is no crystal ball.

The turnaround from reporting a deficit at the 2020 valuation to reporting a surplus at the 2023 valuation is a case in point: a decade of declining interest rates reversed in 18 months as policymakers sought to tackle above-target inflation. And it’s not inconceivable that things could change again just as quickly. We could see the value of our assets and liabilities move in different directions – for better, as of late, or for worse – unless we made changes to our funding strategy, investment strategy or benefit structures.

There are things we can potentially do in the investment space to dampen the impact on the funding position, and we’re engaging with employers on some of the options and trade-offs. But the contributions required to fund the scheme’s DB pensions are still likely to fluctuate: simplified modelling around the likelihood of the contribution rate increasing shows there is a good chance that the overall combined contribution required will not need to rise above 25 to 26 per cent of pay at the next two valuations – but higher contributions remain a possibility.

Regulations will also continue to have an influence. We’ve made it clear to the Department for Work and Pensions and the Pensions Regulator that the unique features of open, multi-employer DB schemes such as USS must be taken into account in any planned changes to the regulations and associated DB funding code to avoid us being beholden to an overly restrictive regime. We hope we will be heard.

As an open DB scheme supported by a strong employer covenant, we take a long-term view of investment. Our strategy focuses on investing in “growth” assets alongside assets that help hedge against inflation and interest rate changes. Our globally diversified approach reduces the impact of any single investment, but inflation and interest rates can influence the value of our liabilities and so affect the funding position.

Being “open” sets us apart from many of our contemporaries: according to the Pension Protection Fund, around nine in 10 private DB schemes in the UK are closed to new members. USS members now account for almost a third of the fewer than 740,000 people in the UK still actively paying into private DB schemes. Most DB schemes are instead focused on the “end game” – typically involving paying an insurer to take on what remains of their liabilities. Their approach to investing will be very different from ours, with much shorter investment horizons and a greater focus on hedging assets like bonds.

After a destabilising decade, USS’ first healthy reported surplus since 2008 presents some levers that could be pulled to put benefits and contribution rates on a more stable long-term footing. It is right that we are collectively focused on doing that to best effect.

Carol Young is group CEO of the Universities Superannuation Scheme.