TPR publishes USS valuation Q&A following stakeholder concerns

The Pensions Regulator (TPR) has published a Q&A document in response to stakeholder concerns as to its role in the Universities Superannuation Scheme (USS) 2020 valuation process, providing further details on a number of key issues around the scheme.

The document included information as to how TPR approached the assessment of employer covenant, after stakeholders, including Universities UK (UUK), previously raised concerns that this was being underappreciated by trustees.

TPR, however, emphasised that the overall assessment of the USS covenant strength is that it is "tending to strong", explaining that this conclusion was "heavily influenced" by the significant size of the scheme in the context of the sector, and noting that this opinion was also shared by the trustee covenant adviser’s recent assessment.

Furthermore, whilst TPR acknowledged that the higher education sector is financially successful and has the capacity to ensure the scheme’s funding requirements are met, the employers in the sector, it warned that there are conflicting demands on resources.

"The employers in the sector, as with many not-for-profit institutions," it stated, "seek to use most (if not all) of their income and capital resources to meet educational objectives and to help retain their competitive position."

The regulator also recognised the resilience demonstrated by the sector amid the pandemic, and the value that the covenant support measures currently being negotiated could have on the scheme, stating that these could enable some flexibility in relation to the valuation approach.

Despite this, it clarified that these are protective of the current covenant position, and would not change its view that the covenant strength is ‘tending to strong’.

Instead, it highlighted a number of ways in which the covenant strength could be improved, including additional cash contributions, or through the use of contingent contributions or contingent assets.

More broadly, TPR emphasised that the latest USS report has revealed a "substantially increased deficit", warning that, without action, there is an increased risk that member benefits may not be paid in full, with sharp increases in contributions potentially needed to provide an equivalent level of benefits.

In light of this, it emphasised that the continuation and continued affordability of the scheme is a decision for employers, together with employees and unions as appropriate.

Commenting in the document, TPR stated: "Our primary role as a regulator is to ensure that the outcome for the 2020 valuation is compliant with the law, and, as part of that, that the level of risk is appropriate in relation to the strength of employer support for the scheme.

"We are aware that there is significant stakeholder interest in the scheme and we are keen to support and continue an open and constructive engagement with the trustee, with UUK, representing the employers, and with UCU, as the trade union representing members in the scheme, throughout the 2020 valuation process.

"Our letter in response to the Rule 76.1 report will help stakeholders understand our position and how we have reached our views. We hope that this Q&A document will help stakeholders understand our role in the valuation process more generally."

UUK previously wrote to both the regulator and the trustee of the USS to call for a review of the scheme's recent valuation approach, which employers have previously described as "unhelpful", after the rule 76.1 report suggested that contributions may need to increase to 56.2 per cent.

However, the USS rejected this request, stating that until new information or an alternative proposal is published, there is no justifiable basis on which to review the outcomes of the previous report.

UUK has since launched a consultation on an alternative path to the 2020 USS valuation, which it argued could help bring costs down and lower the number of staff being 'priced out' of the scheme.

Despite this, the University and College Union (UCU) has accused UUK of proposing "unnecessary and damaging cuts", warning that industrial action is "likely", with individual UCU branches also passing motions in relation to the issue, which call for industrial and legal action.

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