USS could lower contributions and/or increase benefits now
(i) A new valuation would not be necessary; (ii) 2020 valuation assumptions and funding principles could justify such changes in light of post-valuation experience
UPDATE 27 May 2022: Through application of Scheme Rule 34A (“Augmentation of Benefits”), the increase in benefits could involve a retroactive restoration of some or all of the cuts to DB accrual that took effect from 1 April 2022.
According to USS’s monitoring of their 31 March 2020 valuation of the scheme in the light of “post-valuation experience”, as of 28 Feb 2022 it would cost only 25.6% (17.7% employer, 7.9% member, assuming 65:35 cost-sharing) to fund UUK’s severely reduced pension provision. This is down from the 31.4% rate (21.6% employer, 9.8% member) USS is now charging for these cuts, where this price is based on 2020 valuation assumptions as at 31 March 2020 valuation date.
The indicative cost of funding UUK’s reduced pension provision has dropped 5.8 percentage points between March 2020 and February 2022, owing to:
(i) A £22bn growth in the value of the assets from £66.5bn to £88.8bn, which has significantly outpaced the growth in the value of the liabilities, thereby reducing required deficit recovery contributions from 6.2% to 0%.
(ii) An almost unchanged cost of future service, from 25.2% at 31 March 2020 valuation date, to 25.6% as at 28 February 2022.
The level of contributions to fund the UUK pension cuts was lower as at 28 February 2022 than at the end of every one of the previous five month (September-January) that USS has been monitoring since they submitted their 2020 valuation in late September 2021.
II. UUK’s mistaken claim that, absent a new valuation, there is no alternative to 31.4% contributions to fund their cuts
UUK’s CEO Alistair Jarvis has recently claimed that the 31.4% contributions “set out in the [current] schedule of contributions…are legally payable until superseded at a future valuation”.
This claim is false.
Even in the absence of a new valuation, USS could issue a new recovery plan and schedule of contributions now, which reflect the improved funding level of the scheme as indicated by their monitoring of the 2020 valuation.
Here is how this could be done, in a manner that conforms to pensions regulations and statutes:
Regulation 8(5) of the Scheme Funding Regulations says: “A recovery plan may be reviewed, and if necessary revised, where the trustees or managers consider that there are reasons that may justify a variation to it” [my emphasis added].
Regulation 9(2)(c) says: “Where a schedule of contributions has been prepared, it must be reviewed, and if necessary revised —
…(c) within a reasonable period after any revision of a recovery plan under regulation 8(3) or (5).”
Section 227(1) of the Pensions Act 2004 says: “The trustees or managers must prepare, and from time to time review and if necessary revise, a schedule of contributions.”
Any revised schedule of contributions must be certified by the scheme actuary under section 227(6):
The certificate must state that, in the opinion of the actuary —
(a) the schedule of contributions is consistent with the statement of funding principles, and
(b) the rates shown in the schedule are such that —
(i) where the statutory funding objective was not met [i.e., when there was a deficit] on the effective date of the last actuarial valuation, the statutory funding objective can be expected to be met by the end of the period specified in the recovery plan, or
(ii) where the statutory funding objective was met on the effective date of the last actuarial valuation, the statutory funding objective can be expected to continue to be met for the period for which the schedule is to be in force.
It follows from the above that, even in the absence of a new valuation, USS could revise the existing schedule of contributions by first revising the recovery plan in light of favourable post-valuation experience. The revised recovery plan and schedule of contributions would, however, have to be consistent with the existing statement of funding principles, which can be revised only after a new valuation. The scheme actuary would also need to certify the revised schedule of contributions.
Neither regulations nor statute rule out a revised recovery plan involving 0% deficit recovery contributions, and a revised schedule of contributions involving just 25.6% future service contributions, to fund UUK’s cuts, where these revisions reflect USS’s assessment of the improved funding position of the scheme as at 28 February, under their monitoring of the 2020 valuation.
III. It would also be possible to improve benefits, absent a new valuation
Of a piece with the error I have identified above involving the impossibility of lowering contributions, an employer has recently claimed that it would not be possible to improve benefits either, prior to a new valuation:
I responded to the above tweet as follows:
The scheme rules allow for a decision at any time to improve benefits, by means of JNC recommendation of amendment to these rules, which the USS trustee approves. [UPDATE 13 April: USS confirms that “The JNC can propose benefit changes at any time.”] Absent a new valuation, this improved package of benefits would need to be costed in accordance with the existing 2020 valuation. As mentioned above, however, the recovery plan and schedule of contributions of an existing valuation can be updated to reflect post-valuation experience.
Rather than issuing a schedule of contributions involving a 5.8 percentage point lowering of contributions to reflect the funding level of the scheme as at 28 February, the USS trustee could, for example, issue a new schedule of contributions at an unchanged level of 31.4% contributions, in order to fund JNC-recommended improvements to benefits that USS has costed at 5.8 percentage points. [UPDATE 27 May 2022: Through application of Scheme Rule 34A (“Augmentation of Benefits”), the increase in benefits could involve a retroactive restoration of some or all of the cuts to DB accrual that took effect from 1 April 2022.]
IV. Concluding thoughts
The USS trustee might offer various reasons to resist a call for a reduction in contributions and/or increase in benefits on the basis of post-2020 valuation experience as at 28 February 2022. They might insist that more in depth analysis of financial and economic conditions would be needed, before taking such steps. They might claim that financial indicators have been sufficiently volatile in recent weeks and months, and the economic effects of the invasion of Ukraine too uncertain, that it would be more prudent to wait and see whether recent improvements in the scheme’s funding position are more lasting. They might object that 28 February is a cherry-picking of a favourable date, while being more open to revisions as at 31 March 2022, given that this is the date on which they are required to base their annual actuarial report. They might claim that the Pensions Regulator would resist any reduction in contributions or increase in benefits — as no doubt tPR would, given its default stance that schemes should always pay more, rather than less, to fund a given level of benefits.
The purpose of this post is not to address any of these potential objections I have just listed. Rather, its purpose is the narrower one of correcting the employer claim that regulations, statute, or scheme rules preclude a lowering of contributions and/or increase of benefits, in the absence of a new valuation.