USS valuation discussions with TPR taking 'longer than anticipated'

Discussions between The Pensions Regulator (TPR) and Universities Superannuation Scheme (USS) advisers about the scheme's valuation are still ongoing and have taken "longer than anticipated", according to an update from USS group chief executive, Bill Galvin.

The update to sponsoring employers, seen by PensionsAge, noted that the actuarial report and contribution determination, which will include conclusions as to the cost of funding the scheme’s current benefits under different covenant support scenarios, are therefore not expected to be issued to the Joint Negotiating Committee (JNC) until February.

This will be accompanied by a fuller update on the key issues of interest to stakeholders, and will set out, among other issues, its position on the Joint Expert Panel recommendations, University UK's (UUK) response to the Technical Provisions consultation, the discount rates and prudence, the recovery plan, and the timeline and key milestones for progressing the valuation.

“Attention will then turn to the decisions University and College Union (UCU) and UUK will need to make, through the JNC, as to how any overall increase to contributions will be met: through the design of the scheme’s benefits and/or its contribution structure,” Galvin added.

“We stand ready to support our stakeholder’s discussions to this end and are committed to achieving the best outcome possible for our members and their employers in very difficult conditions.”

Galvin has previously warned that unless the JNC concludes an answer to the scheme's report "immediately on receipt", it was likely to miss the statutory deadline for its triennial valuation of 30 June.

The latest update also emphasised however, that the passing of time since the valuation date has “not mitigated the challenges” facing the scheme, stressing that, if anything, the funding position has deteriorated since 31 March 2020, and is now “even more pressing".

“Financial markets continue to signal that investment returns are likely to be lower in future than we expected in the past,” Galvin stated.

“If we expect investments to generate less income over the long-term than we assumed in the past, the pensions promised to our members by their employers are at risk of being under-funded."

Additionally, at the weekend, 3,783 USS members signed a letter to the scheme trustee, stating that they are "seriously concerned" over recent changes to the USS valuation methodology.

The letter warned that the changes, which were outlined in the recent USS Valuation Consultation, have “little empirical or theoretical justification” and could lead to members or employers of the scheme being overcharged.

There was particular concern around the proposed increases to the level of prudence, which the letter stated the trustee has not yet justified, warning that there was “potentially misleading and inaccurate statements” and a lack of transparency over the methods used to estimate key parameters.

In addition to this, it argued that there had been a “consistent failure” to meaningfully address concerns raised by stakeholders, pointing out that the valuation does not implement many of the proposals previously made by the Joint Expert Panel, which was convened jointly by UCU and UUK.

In light of these concerns, the letter has called on the trustee to provide full details of the evidence and justification as to why the level of prudence should be increased from the previous valuation, or return it to its previous level.

It has also requested full details for the justification for setting the pre-retirement discount rate on a gilts+ basis, rather than the CPI+ basis recommended by the Joint Expert Panel, as well as a "robust account" as to why a recovery period of 15-20 years, as again recommended by the JEP report, is not appropriate for the scheme.

Furthermore, it has requested full details as to how the mortality assumptions have been updated amid Covid-19, and how post valuation experience of asset values has or will be accounted for in the 2020 valuation.

Scheme members has also requested details as to how the proposed changes for the 2020 valuation would effect USS members who are differentiated by age, disability, gender, race, migrant status, or permanent or casualised employment

The statement echoes the concerns and requests outlined by representatives of Cambridge University, who previously highlighted "serious concerns" over the valuation approach.

USS Employers have also previously raised concerns over the "unhelpful" and "incredibly difficult" consultation process, highlighting "fundamental gaps" in the schemes approach.

In response to the letter, a USS spokesperson said: “We understand members are concerned about the difficult choices facing the scheme.

"The continued fall in interest rates, exacerbated by Covid-19, and the worsening outlook for investment returns, has made USS’s valuable pension benefits even more expensive to provide.

“We have engaged widely on the methodology for the 2020 valuation, including formally consulting with UUK, and will take advice from the scheme actuary before finalising our funding assumptions.

“We will thereafter publish a full update addressing current talking points and making clear the decisions facing UUK and UCU – including the cost of continuing to provide the scheme’s current benefits.

"We are committed to engaging with them as we work to achieve the best outcome possible in difficult circumstances.”

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