USS deficit rises despite savings from end of final salary pensions

The prospect of further cuts to the sector’s largest pension scheme has been raised after its deficit rose sharply despite savings from the closure of final salary pensions.

Removing the link to final salary and other changes being brought innext year will cut about £5.2 billion from the Universities Superannuation Scheme’s deficit, its latest annual report and accounts say.

However, those savings have been more than offset by adverse market conditions that have pushed up liabilities by a total of £10.7 billion since 2011.

It means that the £2.9 billion deficit in 2011 almost doubled to £5.4 billion at the 2014 triennial valuation, despite assets increasing from £32.4 billion to £41.6 billion.

The scheme, which has about 147,000 active members mainly at pre-92 universities, was 88 per cent funded in 2014 compared with 92 per cent funded in 2011.

That fell to 86 per cent funded in 2015 as the deficit worsened to £8.3 billion as a result of difficult market conditions, the report adds.

Asked if further changes to the USS may be required to address the growing shortfall, a spokeswoman said that its “trustee is alert to the continued challenging investment environment and anticipates that the deficit will continue to be volatile”.

It will “continue to monitor all aspects of scheme funding closely”, she said.

Without the changes that are due to come into effect after 31 March 2016, the deficit in March 2014 would have been £12.4 billion, she added.

Its liabilities have “increased due to the historically low yields on government bonds and the continuation of a more pessimistic outlook for long-term growth”, she said.

However, the massively increased liabilities are likely to prompt further scrutiny from the sector about how they are calculated.

Many economists and statisticians have claimed that “unreasonably pessimistic” assumptions have been used by the USS to “artificially create a high deficit” and justify next year’s closure of the final salary scheme.

Dennis Leech, emeritus professor of economics at the University of Warwick, believes that the way liabilities are calculated by the USS is “more or less arbitrary”.

“They are calculated by processes that are not rooted in reality, but based on fantastical theories about the economy,” said Professor Leech.

“The liabilities figure is going through the roof because it is computed using gilts, which are very low due to quantitative easing together with very unrealistic assumptions about the future the employers are insisting on imposing, such as unprecedented pay rises, unreasonably high mortality rates among members, high inflation rates, and – most shockingly – the assumption of a short employer covenant, treating old established universities in the same way as [businesses which may collapse],” he said.

“What is astonishing is that Universities UK has apparently been prepared to go along with this reasoning applied to universities and not even post-92 institutions,” he added.

The University and College Union, which coordinated industrial action against pension changes last year, is holding a meeting with its branch pensions officers next month to start a campaign to persuade the employers to change the assumptions that underpin the liabilities calculation, Professor Leech said.

jack.grove@tesglobal.com