Pension Deficits are USS: Universities’ pension scheme teeters on the edge

August 9, 2020

3 min read

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What's going on here?

The UK’s largest private-sector pension fund, the Universities Superannuation Scheme (USS), revealed in late July 2020 that it has a staggering £13bn deficit.

What does this mean?

The USS is a fund that pools the pensions of more than 400,000 university and higher education employees from over 340 UK education institutions. It has £67bn worth of assets which comprise investments across private and public markets, i.e. in shares, private equity, property and an array of miscellaneous assets.

The fund has been struggling for some time now, but its poor fortunes have been compounded by the economic policy induced by the COVID-19 pandemic. The headline deficit figure of £13bn represents the difference between the sum that the USS needs to pay to retired pensioners and the money it has available to pay out.

What's the big picture effect?

Pension fund performance is intrinsically linked to stock market performance. When the pandemic took hold, financial markets around the world experienced plunging share prices which, coupled with the Bank of England’s decision to issue bonds with negative interest rates (i.e. the BoE pays you back less than you lent it), meant that the USS could no longer profit from buying debt from the government (as it usually would) because it would stand to lose money.

The outlook for the USS wouldn’t be so bleak if they ran a different type of pension scheme. At present, the majority of their members have defined benefit (DB) pensions. These are pensions that promise the recipient a specific income each year after retirement, either equal to their final annual salary or the average of their salaries over their careers. These schemes are exceptional in the modern day, with most pensions these days being defined contribution (DC) schemes. The pay out of DC pensions depends on how much you and your employer contribute and then on the performance of the investments made with this money. DC recipients choose when to withdraw and in what amounts. Crucially, an employer who has a DB scheme is responsible for ensuring that there is enough money in the pot to pay out when employees retire. In contrast, under DC schemes an employer’s liability is limited to making contributions during your career.

Recent graduates will recall teaching strikes by university staff unions, which have occurred every year since 2018. One cause of protest has been the attempt by the USS to move from DB to DC schemes, which unions see as a betrayal. The USS has not yet been successful and is instead now asking employers to increase their contributions to bridge the deficit. The fund and the unions were at loggerheads prior to the pandemic and the intensity of negotiations will now rise with the startling new deficit figures. Unions will be embittered by the news that the USS chief executive who has overseen the fund’s underperformance has received a £30,000 pay rise (to £486,000) and a bonus of £212,000, double the bonus he received last year.

Universities now face a tough choice. Prior to this news they were already facing down increased contributions, but with the increased deficit what is demanded may be too much. They may alternatively consider exiting the fund, as Trinity College, Cambridge did in 2019 citing the risk of its collapse. The price for this withdrawal was a cool £30m however, which would outprice many universities in a sector that is anticipating a reduction in fees from foreign students who may stay away during the pandemic. The remaining option would be for unions to lobby to take control of the USS’s investment strategy. They’ve done this with success in the past, forcing the USS to divest from tobacco and weapons but a move towards green investments may now be within reach, especially against the backdrop of the reduced dividends from fossil fuel companies. Whichever path is taken, anxious times await students and staff as further strike action is foreseeable.

Report written by Sam Denison

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