USS Employers call for review of scheme valuation and TPR influence

Universities UK (UUK) has written to both the trustee of the Universities Superannuation Scheme (USS) and The Pensions Regulator (TPR), calling for a review of the scheme's recent valuation amid concerns there may be an "unjustified" level of reform.

The group has also stated that it is "particularly concerned" as to the level of influence TPR had on the valuation, warning that this perception could "erode trust in the process".

UUK raised concerns that the trustee’s position has taken “very little account” of the group's initial response to the technical provisions consultation response, and that it was also “largely unaffected” by evidence presented by both UUK and the University and College Union (UCU) at the Valuation Methodology Discussion Forum.

This follows previous warnings from the group that the contribution increases would be “unaffordable for employers”, with UCU urging UUK to "step up the pressure" on the scheme, after it was revealed that pension contributions may need to increase to as much as 56.2 per cent.

Despite this, UUK stressed that “employers are not arguing that the scheme’s status quo can be maintained”, but rather are looking to work “collaboratively” in order to consider a revised approach and assumptions that bring headline costs down, and ensure “proportionate, justified” reforms.

However, it stated that it has not received “strong or clear justification for the very high pricing decisions”, with employers “very concerned” that the scheme is facing an “unnecessary and unjustified level of reform”.

In addition to this, the group highlighted concerns about the USS trustee’s positioning that the valuation is down to the employers, stating that there is a "clear implication" that all employers need to do is to provide further covenant support, and that if employers do not provide this "then employees need only blame employers".

UUK argued that this was "unreasonable", as employers are concerned that the latest approach does not fully take into account the strength of the package of covenant supporting measures, and that there is "no clear justification" for why the covenant requests have such a material impact on the contributions requested.

“We find this pitting of stakeholders against each other to be unhelpful and opportunistic given market conditions at 31 March 2020," it stated.

The letter, addressed to USS trustee chair, Kate Barker, continued: “We understand the nature of the legal powers which exist and believe that a request for a review is appropriate before the crucial next steps are progressed on the valuation.

“Employers need a sound platform for the decisions to be made over the coming period, especially on the basis of the changes needed for the scheme to be affordable and sustainable to all stakeholders, while ensuring that the reform is proportionate and based on a reasonable assessment of the covenant strength.

“During the review which we ask that you undertake, which we hope and expect could take place ahead of our consultation with employers later this month, we would welcome continued engagement with the USS trustee, and would wish to offer our constructive support and input – and that of our advisers.”

In addition to this, it has also requested that the trustee focus on identifying and defining benefit packages that could lead to the current contribution rate being maintained.

“We would also need to look at different approaches to contributions, as part of a move away from a one-size-fits-all approach, to address the high opt-out rate by junior staff in the lower paygrades, and the intergenerational unfairness this is causing," it stated.

“We would request that the USS trustee works constructively with UUK and UCU to determine the optimal options which could be achieved."

Commenting in response, a USS spokesperson stated: “As we acknowledged when publishing our trustee update, material changes to benefits and further covenant support from employers will need to be agreed if we are to avoid significant further increases in contributions, beyond levels the sector would find acceptable.

"We are highly sympathetic to the challenges facing our stakeholders, and we will work with them closely as they confront the decisions that need to be made.”

UUK's concerns around TPR, meanwhile, focused on the extent of the regulator's influence in this valuation compared with previous ones, with UUK stating that the potential contributions levels discussed in detail before Christmas were “very different” from those recently published following the period of "intensive discussions" with TPR.

“These perceptions erode trust in the process and make agreement across the stakeholders harder to achieve. It would be beneficial if the USS trustee could provide further comfort on the process followed, for stakeholders to have confidence in the results,” it stated.

“Given that TPR does not have a formal role in setting employer or employee contributions for the USS, it is vital that you allow the stakeholders enough space to find a solution – rather than imposing any hard constraints ahead of stakeholder discussions and consultation.”

The group has also requested TPR share what analysis it performed and what evidence was compiled in reaching its view that some scenarios in the valuation were at the limits of compliance.

Alongside this, UUK warned that the practical consequence of TPR's input "may well be seen to cause what we believe would be unnecessary damage to employer" if the increased pricing leads to widescale industrial action, with UCU recently confirming that "cannot rule anything out".

The letter stated that whilst it understands that TPR will take what action it sees fit to protect members benefits, it has seen "little evidence to date" that there is focus on its statutory objective of minimising any adverse impact on the sustainable growth of employers.

However, the letter acknowledged that the regulator had previously seen “some room for manoeuvre on the approach” if the facts change, such as a new benefit structure or a different covenant package, highlighting this as encouraging.

Commenting in response, a TPR spokesperson stated: “We are working with USS and UUK whilst they agree a long-term solution to the funding challenges faced by the scheme.

“Our role is to ensure that the trustee and the employers sponsoring the USS understand the risks in the scheme and are able to agree an outcome for the valuation which manages these risks appropriately so the scheme is sustainable over the long-term.

“We have discussed our views on the recent funding proposals with the USS, and earlier this month followed this with a letter to clarify these points in detail (which has been published on the USS website). We are also engaged with the UUK and UCU to discuss our approach and will continue to do that.

“We will not be commenting on these talks or our letter.”

    Share Story:

Recent Stories

Are current roads into retirement delivering member value?
Laura Blows explores HSBC Master Trust’s recent report, Converting pension pots into incomes, with HSBC Retirement Services CEO, Alison Hatcher.

Savings and finance at retirement
Laura Blows is joined by Claire Felgate, Head of Global Consultant Relations, UK, at BlackRock, to discuss savings and finance at retirement. Please click here for an edited write-up of the video

Making pension engagement enjoyable through technology
Laura Blows speaks to Nick Hall, business development director and Chartered Financial Planner at UK-based Wealth Wizards about the opportunities that technology provides for increasing people’s engagement with pensions and increasing their retirement wealth. Please click here for an edited write-up of the video

Pension portfolios – the role of asset-backed securities
Laura Blows is joined by Royal London Asset Management (RLAM) head of sterling credit research, Martin Foden, and its Senior Fund Manager, Shalin Shah to discuss the role of asset-backed securities (ABS) within pension fund portfolios
Incorporating ESG into fixed income
Laura Blows is joined by TCW head of fixed income ESG, Jamie Franco, to discuss incorporating environmental, social and governance (ESG) strategies into fixed income portfolios