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University of Warwick feedback on the JEP report

Warwick’s response to the Joint Expert Panel (JEP) USS report

The Joint Expert Panel (JEP) was set up by the University and College Union (UCU) and Universities UK (UUK) following industrial dispute over the Universities Superannuation Scheme (USS). The JEP’s first report reviews the USS 2017 valuation and makes a number of observations and recommendations. The University has read and responded to the report – find out more below.


The University welcomes the JEP report and believes that it should be given the fullest consideration by the USS board, not only because it makes some pertinent points but also because its membership comprises some well-respected personnel in the field of pensions.

USS is the largest funded pension scheme in the UK and has changed much in recent years, undergoing many changes in its benefit structure so adding to the complexity of what was already a complex pension arrangement covering some 350 employers, the bulk of the liabilities resting with the pre-92 institutions. This increase in complexity and the sustained cuts in benefits/increased costs since 2011 has not helped members’ understanding or appreciation of the benefits on offer. At the heart of the dispute that led to the forming of the JEP, at least amongst members, was a loss of faith in USS so the JEP report presents an opportunity for a fresh perspective on scheme funding. It is hoped that this new perspective will spur the stakeholders to assist the JEP in their phase 2 work which focuses on the long term provision of pensions. Everyone wants a sustainable pension scheme in place that is understood and valued by its membership.

We set out below answers to the questions raised and then follow it up with some commentary on some of the points made by the JEP and its recommendations.

Would your institution support the JEP recommendations regarding the 2017 valuation (see Table 2-page 10), in overall terms, subject to the acceptance of such a position from the USS Trustee (and the Pensions Regulator/tPR) as appropriate)?”

Answer: Yes, we do support the JEP recommendations regarding the 2017 valuation in overall terms but since being issued with these questions it would appear that USS (their letter of 9 October 2018 refers) are intending to sign off the 2017 valuation using their existing approach and instead are looking to a 2018 valuation to consider “any developments on risk and related contingency to be addressed as envisaged by the JEP report”. Whilst USS’s nervousness in delaying the 2017 valuation any further is understandable given that the 2017 valuation has passed its statutory deadline, they should remember that the response to the JEP report is something that needs to be handled sensitively given the collegiate approach adopted by UUK and UCU. We do not wish the work of the JEP to be undermined and as the JEP point out on page 65 of their report that “…the Panel believes that Phase 2 should start as soon as possible. However, this work requires a firm foundation and cannot be concluded until the 2017 valuation has itself been concluded”. Therefore the critical phase 2 work is predicated on phase 1 being given serious consideration by both USS and tPR. The wording in the USS letter of 9 October could be read as referring back to the sector the question of risk appetite rather than deal directly with the cogent points raised by the JEP.

What further information would you need to provide a final view for question 1?”

Answer: The employers are being asked for a view on the JEP recommendations but it would have been preferable if the sector had a clear view from both USS and tPR as to what parts of the JEP report are acceptable to them and if/where they have disagreements providing a clear evidence based analysis of the situation in as readable a format as the JEP report. This is very important since the membership has shown an increased interest in pensions but less so when looking at USS material, for example the extremely poor response levels to the USS cost sharing consultation. It is also well understood that USS have to make difficult judgements but the involvement of tPR seems to be leading them to put the sector as a whole on the same footing as an ordinary Limited Company with a focus on short term horizons for funding and ultimately investment decisions.

Employers currently pay 18% towards the USS scheme, and the mandate agreed immediately following the Acas discussions was 19.3%. If the recommendations of the JEP were accepted in full by all parties, the outcome would be that existing benefits-minus the employer match of 1%-could be provided at an indicative employer contribution of 20.1% of salary (with a member contribution of 9.1%)”

(a) Would you accept employer contributions at that level?

(b) If not, what balance of risk, higher contributions and/or benefit change would you prefer to see as an outcome?

Answer: Yes we would accept contributions at that level. However, the risk for employers is of further increases in employer and employee rates so we would need modelling that enables us to better understand these risks.

The covenant

At the core of the valuation is the view of the covenant and the fact that the regulator views it as tending to strong rather than strong, the latter being the view of USS’s covenant advisers.

As it is unlikely that tPR will change their view on the covenant it would be helpful if they could properly explain and provide the necessary evidence for their different point of view. This is important because the USS valuation has become very high profile and if their view of the covenant is preventing the USS board from adopting any of the JEP recommendations then the rationale needs to be understood. It is noted that tPR set out some rationale in their letter to Sir David Eastwood dated 15 September 2017 but their analysis focussed on the scheme risks for the sector rather than a critique of the USS covenant work. In fact some of the points cited by tPR in their letter are open to question, for example their reference to membership growth of 40% between 2011 and 2017 failed to recognise the advent of auto enrolment in 2013 when variable time employee membership sharply increased and in reality these are “fractional memberships” so we are now seeing lots more deferred pensioners (high turnover) and actives with small pensions. Furthermore when referring to scheme liabilities increasing more than assets in the period 31 March 2014 to 31 March 2017 they used the term “significant” when the difference was 10%. Some might be forgiven for suspecting that tPR had already made its mind up about the covenant and so have not considered the USS covenant work undertaken by EY-Parthenon and PwC.

We need to be clear if tPR would use their statutory powers, should the USS board relax their assumptions in adopting the JEP recommendations. If the tPR were to intervene or in effect do so by proxy (via providing negative views/threats to the USS board) then it is clear it is supplanting the role of the USS board.

There has been a reluctance by employers to offer contingent assets to support the view of the covenant and this has probably been seen by tPR as a negative. This is naturally because of the multi-employer nature of the scheme and the practicalities of making such arrangements given existing financing arrangements. However, it appears to have been overlooked that USS has in their power the ability to raise additional funds as evidenced by the invocation of rule 76.4 i.e. cost sharing.For the avoidance of doubt the University’s view of the covenant is in accord with the JEP, and USS’s covenant advisers, however we believe it is necessary to explore the points made earlier in order to make the necessary progress with tPR and the USS board.

USS tests

The JEP has made some pertinent points in relation to the USS tests. Taking each in turn:

  • Test 1: We totally agree with the JEP that Test 1 should be used to inform rather than dictate investment strategy. Test 1 does indeed provide a valuable optic on the funding strategy but relying on it without duly considering other key variables (for example USS is cash flow positive, open with benefits linked to CPI etc) then it could lead to some perverse and dangerous outcomes. The methodology underwriting Test 1 is more akin to a closed, negative cash flow scheme which USS is not.
  • Test 2: This test monitors the likelihood of increases in contribution rates within certain bands but the discount rate used to make this determination is largely dictated by Test 1 and so in practice Test 2 has less resonance than originally expected when it was designed.
  • Test 3: This test manages the extreme tail risks outside those covered by Test 1 to make sure that the employers’ collective balance sheet is sufficient to cover the benefits promised to date. As mentioned before the scheme liabilities as a proportion of the sector is likely to diminish over time since the scheme liabilities are limited to a salary threshold which is linked to CPI. Furthermore scheme benefits have been markedly changed over recent years, for example closure of the final salary section and earlier 2011 changes to Normal Pension Age and others which means that the more generous liabilities built up in the past will eventually disappear. Given this point and the comments made by the JEP we believe that there is scope to increase target reliance from £10bn to £13bn.

Allowing for outperformance to maintain deficit contributions at 2.1%

  • We support the JEP recommendation to keep deficit contributions at 2.1% because
  • We view the sector covenant as strong, the scheme is open and still has a positive cash flow.As noted by the JEP, following previous benefit changes the scheme is projected to grow at a slower rate than the sector as a whole.

Moving to the CMI 2017 mortality data and updating to market conditions at 31 March 2018

We find this proposal to be reasonable and is a reflection of more up to date and reliable data.


In conclusion we welcome the JEP report and thank the panel members for their hard work and diligence in producing such a clear well written report that challenges some fundamental points. It may not be accepted in full by all the parties but it is deserving of some cogent arguments where any disagreement exists, otherwise members will continue to distrust the information arising from USS and such a state of affairs is destabilising both for USS and the sector.


How should pension liabilities be valued? Risk aversion and demographic uncertainty
(25-26 March 2019, London)

Join a scientific discussion meeting organised by Warwick's Professor Jane Hutton and Professor Saul Jacka. Find out more