The deficit of the Universities Superannuation Scheme has more than doubled to £13bn following the financial havoc wrought by the Covid-19 pandemic.
The chief executive of the country’s largest private-sector pension revealed on Wednesday 29 July that the USS funding gap had widened to £12.9bn at the end of March from £5.4bn the same time last year.
The USS, which has more than 400,000 members, has been affected by a cut in interest rates that was introduced to support spending and consumption in the aftermath of the outbreak.
The change in rates has inflated the cost of defined benefit pension promises. As a result, the scheme’s liabilities have increased from £72.8bn to £79.4bn, according to the scheme’s annual accounts published today. The increase means the scheme’s funding ratio, which measures its ability to meet its ‘defined benefit’ promises to members, has fallen from 93% to 84% in 12 months.
The annual report concluded the funding ratio had worsened as a result of interest rates changes “and the devastating impact of coronavirus on global markets in the final quarter”.
The depth of the economic shock brought about by the pandemic has highlighted the long-term challenges facing open DB pension schemes like USS
– Bill Galvin, USS
The USS’s total assets have also devalued in the last 12 months from £68.4bn in March 2019 to £67.6bn; defined benefit (DB) funds now stand at £66.5bn and defined contribution (DC) assets total £1.1bn. The scheme has almost 460,000 members across 340 institutions.
Despite the small 1.7% slip in asset value last year, investment returns for the scheme’s DB fund averaged 6.19% per annum over the five years to 31 March 2020 and have grown by £17bn since 2015.
The pension scheme was under pressure before the pandemic hit, according to USS group chief executive Bill Galvin, who said: “Even before Covid-19, historically low interest rates, increased life expectancy, greater regulation, and volatile financial markets had already made promises of a set retirement income for life more expensive.”
These long-term challenges have forced the scheme to request higher contributions from employee and employers in recent years, sparking long-running industrial disputes across the sector. The percentage of USS members reporting a good relationship with the pension provider declined in 2019-20 to 24% from 31% the preceding year.
“Our 2020 report outlines the position of the scheme against this challenging backdrop. Five-year investment performance was strong in absolute and relative terms, and we retained our cost advantage versus peers,” Mr Galvin said.
“The depth of the economic shock brought about by the pandemic has highlighted the long-term challenges facing open DB pension schemes like USS; challenges that we intend to work with our stakeholders – Universities UK and University and College Union –to address through the ongoing 2020 valuation.”
Jeremy Harris, pensions lawyer at Fieldfisher, said: “With the misery for the finances of universities never ending, another blow came with the revelation that USS funding deficit has grown to £13 billion as of the 31 March 2020. This is a staggering figure that is emphasised by the unfortunate timing of the USS 2020 triennial valuation date.
“With an increased deficit, it’s likely to result in further reductions in USS benefits, since the only other alternative would be to increase employer contributions for universities. However, this will be an unpopular choice as most universities are already faced with Covid-19 related threats to their tuition income, particularly those dependent on international student fees.”
USS also announced the appointment of a new chair of the trustee board. Dame Kate Barker joined in April as chair-elect and assumes her full responsibilities from September. Prior to her role, Dame Kate was chief economic adviser at the CBI before becoming a member of the Bank of England’s Monetary Policy Committee from 2001 until May 2010.
“It is a real privilege to be invited to take up this role. I am well aware of just how important this pension scheme is to university staff past and present,” she said. “In addition, the performance of the scheme and its effective management is significant for much of the university sector.”
Professor Sir David Eastwood, who has been on the Trustee Board since September 2009 and chair since April 2015, will retire from the board in August.