News & analysis
USS PUSHES FOR VALUATION, DESPITE COLLAPSE IN ASSET PRICES
The UK’s largest final salary scheme’s deficit is rising, the value of its assets is falling and it has failed to secure higher contributions, so why is it proceeding with its valuation. Catherine Lafferty reports.
The Universities Superannuation Scheme (USS) is to go ahead with its scheduled valuation despite the stock market sell-off caused by the Coronavirus crisis. In March the scheme reported itself to The Pensions Regulator (TPR) because it was unable to pay its pension promises with- out further employer contributions. The fund said that in March the value of its assets had fallen from £74bn to £64.3bn in just 18 days.
USS said its technical provisions deficit had also risen from £3.6bn under the 2018 valuation, to more than £11bn in a mat- ter of weeks and that the figures understated the situation as they did not allow for the impact of RPI reform on market in- terest rates.
In a note to the heads of USS’ participating institutions, the scheme’s chief executive, Bill Galvin, said its funding position had been “very volatile” but that proceeding with the valuation meant it would not need to take more immediate action in re- sponse to the affect the crisis was having and would allow it to consider the support for the fund from sponsoring employers in the near and long term. “In common with our peers, we are dealing with extremely dif- ficult short-term conditions – but any decisions we take now should be consistent with our long-term strategy to secure members’ benefits and protect the sustainability of the scheme,” a USS spokesperson said. “We believe the most balanced approach to these competing pressures is not to take immediate, short-term action but to go ahead with the valuation,” the spokesperson added. However, the current stock market sell-off has also seen a dra- matic fall in liabilities caused by the significant increase in cor- porate bond yields, which could potentially offset some of the decline in asset prices.
In updated guidance issued at the end of March, TPR said trus- tees should take legal and actuarial advice not only on whether a suspension or reduction of deficit repair contributions (DRCs) is appropriate, but also on the most appropriate meth- od to suspend or reduce those payments.
TPR said it expects suspended or reduced contributions to be repaid within the current recovery plan’s timeframe and that the recovery plan should not to be lengthened unless there is sufficiently reliable covenant visibility.
In line with FRS102 reporting standards, the scheme’s asset 8 | portfolio institutional April 2020 | issue 92
values will be calculated based on a snapshot of asset prices on 31 March 2020. Given the current performance of stock mar- kets, the results are unlikely to be flattering. In its most recent valuation update, USS, which last year had £69.4bn of assets under management, acknowledged that it had breached its internal self-sufficiency measure on five con- secutive days in March and subsequently reported itself to the regulator.
USS uses the self-sufficiency measure to estimate the level of low risk “self-sufficiency” deficit at the current levels of 10% employer contributions annually over the next 30 years. With the referral to the regulator, USS’ board is likely to make the case for an increase in deficit contributions. The fund has faced a slew of problems in recent months as it has attempted to increase deficit contributions and faced oppo- sition from universities and the Universities and College Un- ion (UCU) to proposals to shift the fund from a defined bene- fit to a defined contribution scheme model.
A spokesperson for UCU said: “The board decided last week that there would be no immediate contributions increase, but that they are pressing ahead with the current valuation. We are unconvinced that pushing ahead now in the current circum- stances is the best move and have asked for more details be- hind the decision.”
USS’ decision to go ahead with its valuation comes as defined benefit schemes have approached the regulator to request a break for their pension contribution payments. With stock markets across the world on the slide and yields on UK government bonds falling, defined benefit pension schemes across the country are facing a double whammy of falling asset values and rising liabilities. Trustees are receiving requests from pension schemes to tem- porarily halt pension contributions to alleviate short-term cash constraints, the Financial Times reported.
The move could free up cash for employers in a challenging market environment, but risks widening the pension deficit. Schemes with high deficits or those exceeding the market cap- italisation of the sponsoring employer face the biggest chal- lenges. Examples include retirement schemes sponsored by BT, Centrica and British Airways.
Defined benefit schemes sponsored by FTSE100 companies have stepped up their efforts to cover funding shortfalls with sponsors paying almost £8bn in contributions during the past year, according to JLT Employee Benefits. Nevertheless, pensions contributions are still dwarfed by divi- dend payments. More than a third of FTSE100 firms could have settled their pension deficit if they decided to cancel one year’s worth of div- idend payments and channel those funds to their defined ben- efit scheme, JLT Employee Benefits said.
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