UUK sees ‘merit’ of scheme trustee approach due to TPR concerns

Universities UK (UUK) has said it sees the “merit” in the approach to contribution rates being developed by the Universities Superannuation Scheme’s (USS) trustee, as it could be a “potential way to bridge the different perspectives” of stakeholders such as The Pensions Regulator.

Publishing its initial thoughts on the 2018 valuation of the scheme, which was re-evaluated following a report by the Joint Expert Panel (JEP) that found flaws in the 2017 valuation, UUK noted that the USS trustee has “developed its thinking” with regards to implementing a contribution rate close to the JEP recommendations.

The 2018 valuation more than halved the deficit of the USS to £3.6bn, down from £7.5bn. Published in January 2019, USS said that changes to realised asset return, mortality rates and expected investment returns helped reduce the deficit.

The JEP had proposed in September 2018 that contributions should total 29.2 per cent, significantly lower than the 36.6 per cent originally proposed by the USS. However, since the 2018 valuation, the USS trustee is now consulting on contribution rates of either “slightly below 30 per cent”, if satisfactory contingent support is given, or 33.7 per cent, if employers offer no formal contingent support.

UUK noted that a “potential influence” of proposing a higher rate contribution above JEP’s proposal is the regulator. It stated that in its December 2018 letter to the USS, the regulator stated that the “2017 valuation proposal on technical provisions … is at the limit of what we regard as being compliant with the requirement for prudence under the Pensions Act 2004”. The USS said the regulator had said it was concerned with the overall approach being used.

“This creates some tension with the JEP recommendations. TPR views the covenant as 'tending to strong' rather than 'strong', and this appears to be a key source of the tension,” UUK said.

As a result, the UUK said that while its preference would have been for the USS trustee to accept the JEP recommendations in full given the employer support, “we can see merit in the approach being developed by the USS trustee as a potential way to bridge the different perspectives of the various stakeholders including TPR”.

UUK noted that the “devil is in the detail” and contingent contributions will be more credible if they apply in more extreme scenarios rather than business as usual variations. However, it noted that the regulator, in its December 2018 letter, had been supportive of a lower contribution rate with contingent support offered by employers.

The Pensions Regulator declined to comment further.

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