1. Why are we being asked to contribute more money to the USS scheme when the benefits are staying the same?
A defined benefit scheme is one in which the value of future payments to retired staff is guaranteed – and therefore the value of contributions to the scheme required to fund those future payments varies. This is in contrast to a defined contribution scheme in which the value of contributions is set, but the value of future payments to retirees is dependent on the returns on investment of those contributions.
The value of employee and employer contributions required to fund future payments to retirees in a defined benefit scheme is dependent on two main variables:
- The life expectancy of members: the longer the life expectancy, the more years of payment need to be funded
- The expected return on assets where contributions are invested, relative to inflation: when inflation exceeds the return on assets, the scheme will be in deficit even if life expectancies remain constant.
In order to minimise the risk of pension schemes having insufficient assets to finance pension payments, the Pensions Regulator is increasingly referring to long-term government bonds or ‘gilts’ to inform the expected rate of return on investment assets: while equities and other assets tend to generate a higher return, their value is more volatile. Volatility in the source of funding is considered by the regulator to be risky when the value of liabilities – the future payments to retired staff – is always certain.
We have experienced several years in growth of life expectancy in the UK and the return on Government gilts has been at or below the level of inflation. For both these reasons, the USS Trustees are requiring higher contributions today to finance payments to future retirees.
2. Can the University find the funds elsewhere? For example the bond for £750m or the recent donor gift of £150m.
Gifts from donors – which collectively make up the majority of the University’s assets - are subject to heavy restrictions on their use in the form of trust deeds. These deeds prohibit the University from spending the money on anything other than the purpose set by the donor. To cite the Charity Commission’s guidance for Trustees: ‘Spending charity funds on the wrong purposes is a very serious matter; in some cases trustees may have to reimburse the charity personally.’ In the case of the recent gift to fund a centre for Humanities, the University must demonstrate that it is spent solely on the planning and construction of such a centre, as agreed with the donor.
The University committed to investors in the recently-issued bond that the proceeds would be used to fund University assets – ie items which have a future value – so that investors could take a view on the University’s ability to repay the bond. Use of the bond to finance additional pension contributions would contravene this commitment.
The University is unique amongst USS employers in having such a long-dated bond (100 years): many other USS employers have taken credit secured against specific buildings and assets. If they were to use this credit to finance pension payments, they would be in default of their loan agreements.
The status of credit of other USS employers is relevant because the USS scheme is a multi-employer one: no one employer can unilaterally change its contributions to the scheme.
3. I understand why the University can’t fund the deficit long term. But is there any way it can pay for my increased contributions just for the current valuation period?
The split between employers’ and employees’ contributions is defined under the terms of the USS scheme – to which all members and employers are bound. Under the scheme, the increases which are due to come in October 2019 are split 65% to the employers and 35% to the employees. This will already place a heavy burden on the University – it has to pay £4 million more for every extra 1% in contributions. Even at paying 65% of contributions, the University will be under tight budgetary pressure next year.
Further, as noted above, it is every Trustee’s duty to ensure that money which has been donated or borrowed for specific purposes is spent only on those purposes. Paying for contributions on employees’ behalf is not eligible expenditure for the University as a charity.
Notwithstanding these legal restrictions, there is also an issue of equity. Not all University employees are members of the USS scheme. Topping up USS employee contributions would mean the University is paying pension contributions on behalf of some staff, but not others.
4. Why is the financial sustainability of other USS employers relevant to a university like Oxford?
The USS scheme operates on a ‘last man standing’ basis: if one participating employer becomes insolvent, its liabilities are passed on to the remaining members. This is a key driver of the Pension Regulator and the USS Trustees’ perception of risk in the scheme: the least financially viable employer in the scheme risks triggering further increases to the contributions of remaining members in the future.
5. The media are reporting real problems at USS – they misrepresented the Pensions Regulator and trustees have not been given access to all the data they want. How can we trust that the scheme is in deficit?
The dispute reported in the media centres on the Pension Regulator’s view of USS’s use of discount rates in calculating liabilities. The Regulator’s position was communicated to UUK earlier this year; UUK reflected the Regulator’s position in the valuation data it provided to universities in January.
The dispute relates to one variable used in the calculation of the deficit value. Neither the Pensions Regulator nor Trustees of the scheme are disputing that the scheme is in deficit. Nor are they disputing that there is a need to increase contributions from current levels. It is worth noting that the Pensions Regulator wrote to USS before Christmas to state the following:
- the 2017 deficit valuation was ‘at the limit of what we regard as being compliant with the requirement for prudence under the Pensions Act 2004’;
- it had concerns regarding ‘the significant increase in borrowing in the sector which, without a commensurate increase in income, will weaken the covenant in future’; and
- it was of the view that ‘if weaker assumptions were adopted for the 2018 valuation, these would need to be accompanied by contingent support measures’.
The University is confident that, along with other USS employers, it has received valuation data which does reflect the Regulator’s position on discount rates correctly. We are also therefore confident that the University’s responses to the options put forward by USS have been based on modelling which the Pensions Regulator supports. Internal governance matters at USS are a matter for USS to respond to.