USS Consultation Response - October 2020

In previous consultation responses the University of Nottingham has stated that the scheme requires long term reform so that it provides benefits to its members in an affordable way – affordable for members as well as employers.   The University of Nottingham’s position on this remains the same and it does not believe that any of the illustrative examples provided for this technical consultation are affordable.  This strongly suggests that reforms to assure the long-term sustainability of the scheme as considered by the Joint Expert Panel now need to be seriously considered by the sector.

Furthermore the University of Nottingham believes that the significant range of illustrative contribution rates that are provided suggests that there is a high degree of uncertainty in the assumptions being made – this makes it extremely difficult to offer any specific feedback as part of the consultation at this stage.

The University of Nottingham also believes that the covenant strength, debt monitoring measures, recovery plan, costs and benefits should be considered together, rather than separately as is currently being planned, although it accepts that this makes the consultation more complex.    

The University of Nottingham questions if now is really the best time for the sector to be considering the valuation.  There is considerable uncertainty for the sector (and the country) including for staff and the focus of the sector’s limited time is on securing our collective objectives and protecting students and staff.  The combined impact of COVID and Brexit raises market uncertainty and economic performance in ways that will potentially have an adverse impact on USS performance, making any sensible valuation really challenging.  Any time required of universities to assess covenant will stretch resources further and the caveats that any advisors will bring to this assessment will make the value of the covenant conclusions limited.  If this requires the Trustee to take a more prudent view, this will in all likelihood increase the cost of the benefits further.

This valuation was agreed to be undertaken two (rather than three) years from the previous one with the expectation there would have been an opportunity to revisit what the sector believed were excessive rates for both the employers and the members from October 2021.  Deferring the valuation to 31 March 2021 would enable time to focus on scheme reform and present a more stable environment for covenant assessment, allowing that the step to the October 2021 rates would have to be accepted for a short-term.  

Taking each of the questions in turn our comments are as follows:

  1. The inputs and assumptions. 
    Pre-retirement discount rate: an overly prudent approach appears to have been taken and the University of Nottingham would support moving from a 67th percentile approach to a 78th percentile approach.  The University of Nottingham would also support exploring higher discount rates.
  2. The methodology.
    The University of Nottingham understands that moving to a dual discount rate changes the balance of the cost between younger and older members and wishes to see further information on the impact of this on the cost of benefit accrual for active members.  In order for the employers to consider the benefit levels, it is vital to understand what each year of accrual adds to the total liabilities – and how the different valuation method impacts the assessment of the value of future accrual.Is information available to explain the cost of the additional liabilities expected to be earned over the next three years, assuming there is no change in the valuation methodology and allowing for the different potential dual discount rates presented to date? The University of Nottingham requests that the Trustee should provide clarity on how the funding position will be monitored.
  3. The risk management framework. 
    The University of Nottingham requests more information on a) how the Trustee will use the metrics to drive decision-making on contributions and investment strategy, b) What would be the implications for employers of preferring a different approach or different parameters and c) is moving to a dual discount rate likely to result in a de-risking of assets that ignores the strength of covenant of the employers?
  4. The figures for the Technical Provisions. 
    The University of Nottingham believes that the Trustee should take into account affordability and supports the Joint Expert Panel recommendations for the Recovery Plan.   
  5. Whether employers are willing to agree to debt monitoring and pari passu arrangements and the long-term rule change required to support a strong covenant.
    The University of Nottingham reiterates the position that it took in its last submission - it is not against debt monitoring, but believes any debt monitoring that is put in place needs to be balanced, should not stray into debt control, should not be overly burdensome and should not constrain Universities from getting on with their day to day business.  The University of Nottingham does not believe that the proposals that were put forward in the summer meet these criteria.The University of Nottingham believes that any rule changes need to be made in conjunction with agreeing the valuation and the detail should be considered as an overall package which should involve a review of the cost-sharing with members, exclusivity and flexibility for the employers and benefit reform more generally.  If the USS Trustee has a significant increase in the powers, there is a distinct possibility this reduces the Trustee’s ability to agree future benefit changes.  A shift in the balance of powers may be detrimental to the original function of USS:  to provide pension benefits fit for purpose for the sector.  
  6. Whether employers have any further feedback on the possibility of additional contingent support.
    The University of Nottingham would not support any additional contingent support.
  7. The level of financial support employers are collectively able to give the Scheme, and their affordable risk capacity (and risk appetite, if different), specifically: 

    a. the percentage of payroll available.

    The University of Nottingham has previously said that employer contributions that are more than 20% (or 20.1% as per the Joint Expert Panel proposal) are not affordable in the long term for the University of Nottingham.  

    b. the length of time over which that is available (USS assume 20 years under a tending-to-strong covenant, and 30 years under a strong covenant).
    The University of Nottingham requests more information on how different recovery plans would impact on the contribution rates before being able to offer an opinion on this.

    c. the cost of future pension provision to employers acceptable to the sector in an adverse scenario (USS assume 15% of payroll. This is on top of the 10% of payroll available for deficit recovery contributions. This gives a total rate of employer contributions of 25% of payroll). 
    The University of Nottingham requests more information on the consequences of different scenarios before being able to offer an opinion on this.

    d. the growth of the sector payroll over the longer term (CPI+2% has been used by USS before, but they have shown alternatives).
    This is very difficult to predict currently given the unknown impact of COVID in the medium to longer term.  This further supports the proposal for deferring the valuation to 2021.
  8. How USS should determine employers’ collective risk appetite, and any alternatives if you don’t think the approach based on affordable risk capacity is reasonable.
    The University of Nottingham believes that the focus should be on what contributions employers need to pay and under what circumstances might lead the Trustee to focus on funding the scheme on a self-sufficiency basis, and what actions would the Trustee then take.

    The cost-sharing mechanism that underlies previous valuations and the passing on to members of increased costs is much more obviously unfair.  Current active members paying for deficits arising from past generations is not fair.  The range of potential total rates demonstrate how this is an additional feature of the USS funding arrangements that needs to be addressed before the valuation is completed. The University of Nottingham wishes to explore expressing the discount rate as the two separate components for future accrual and for deficit recovery.  More information and consideration of the implications of this is required for employers to consider further.  For example, the accounting of USS in the financial statements will be impacted by the valuation and should be part of these considerations.

    The University of Nottingham is considering ‘fairness’ between all employees: those in USS, those who have opted out on grounds of affordability, and those who are not eligible.  Fairness to all of these groups is an important objective.

In conclusion, the University of Nottingham reiterates its position that an affordable solution should be found for the provision of pension benefits and none of the illustrative examples provided are in the view of the University of Nottingham affordable.  This suggests that options for reforms to assure the long-term sustainability of the scheme as considered by the Joint Expert Panel now need to be seriously considered and the sector needs time to address this properly