Universities UK, the representative organisation for UK Universities (UUK) has recently asked for employer views on the 2017 valuation assumptions as proposed by Universities Superannuation Scheme (USS). USS is the corporate trustee responsible for the management and administration of the scheme and is made up of representatives from both UUK and UCU together with five independent directors.
At Warwick, we believe that employers and USS have to take a measured approach that takes into account the long term investment plans of USS and its expected cash flows, the promises to members and the risks relating to the assumptions made. Having reviewed the dynamics of the scheme and the risks associated with the employing organisations that underwrite the pension promises, we broadly support the assumptions proposed by USS as part of this consultation. We recognise that the approach proposed by USS is much in line with what we argued for at the 2014 valuation.
We understand that many employers are concerned about the risks associated with USS and wish to move away from the USS hybrid model to a purely defined contribution basis. We believe that any such move would be counter-productive because of the negative effect this would have on the expected cash flows. If USS were to suddenly move to a purely defined contribution scheme, this would then likely lead to a more conservative investment approach by USS and a rebalancing of the investments away from return seeking assets to more gilts, precipitating a significant increase in employer contributions as USS would have to recognise and deal with a much larger deficit. On ceasing defined benefit accrual, member contributions would cease, so adding to the negative effect on the cash flow.
It’s also important to remember that employers would still be obliged to offer a competitive defined contribution scheme in its place. More information on the USS employer consultation can be found on their website. If you’d like to know more about USS investments there is an article by Roger Gray, the USS Chief Investment Officer, that provides a fuller explanation of the USS stance.