The Universities Superannuation Scheme (USS) deficit declined from £12.9bn in March 2020 to £2.9bn as of the end of January 2022, although the scheme warned that the challenge remains steering an "appropriate course" for the long term.

Whilst the scheme's latest funding update showed that assets had recovered to pre-pandemic levels, standing at £89.3bn as of January 2022, it clarified that "asset values are only part of the picture”, emphasising that there had been a “great deal of volatility”.

Indeed, the update showed that the scheme’s assets stood at £87.5bn at the end of September 2021, implying a deficit on a technical provisions (TP) basis of £3.2bn, which would require contributions of up to 26.3 per cent of pay under the proposed new benefit structure.

However, whilst assets increased further to £93.1bn in November 2021, the implied TP deficit more than doubled to £6.8bn, suggesting that the new benefit structure would require contributions of 28.7 per cent of pay.

Assets had since fallen again to £89.3bn at the end of January 2022, although the implied TP deficit had also fallen to £2.9bn, meaning that contributions of 25.8 per cent would be required under the new benefit structure.

In light of these figures, the scheme argued that the implied costs of the new benefit structure have "consistently indicated a potential need for higher contributions than the ‘future service cost’ set under the 2020 valuation" of 24.9 per cent.

Members of the USS scheme currently contribute 9.8 per cent of salary to the scheme, with employers' 21.4 per cent contribution bringing this to a 31.2 per cent total.

Under proposed changes to the scheme, from April around 6.3 per cent of that total rate will go towards recovering the TP deficit, in respect of benefits already promised, with new benefits requiring contributions of 24.9 per cent of pay.

The USS's latest funding update argued that without these new arrangements, it could not afford to be as optimistic in its funding assumptions, suggesting that "the outcome would be very different".

For the current benefits and a far more limited package of covenant support measures, for instance, the TP deficit would stand at £18.4bn, with liabilities at the valuation date valued at £84.9bn instead of £80.6bn.

Employer contributions would also rise over time to 38.2 per cent of pay, according to the update, and member contributions would steadily increase to 18.8 per cent of salary, for a 57 per cent total, with new benefits requiring contributions of 37 per cent of pay and 20 per cent going towards repairing the deficit.

However, UUK recently launched a consultation on potential changes to these proposals in light of member feedback, with the application of a 2.5 per cent cap on inflationary increases potentially to be deferred until 2025.

Whilst the funding update acknowledged that inflation is expected to be higher than 2.5 per cent in the short to medium term, it emphasised that the proposed cap would limit the impact of the cost of new benefits, arguing that, without the cap, the indicative position at the end of January would be "quite different".

Without the changes, analysis from the scheme showed that there would have been an implied TP deficit of £7.3bn in January 2022, with the existing benefit structure potentially requiring contributions of 42.2 per cent of pay.

Reflecting on the figures, the scheme trustee emphasised that “it is very difficult to reach any definitive conclusions as to the true direction of travel based on the last few months alone”.

The update stated: "The TP deficit is almost certainly lower today than it was at 31 March 2020. But the ‘future service cost’ – the contributions required for promising a set, inflation-protected income for life in retirement, paid no matter what happens to the economy or the higher education sector in future – has continued to rise.

“Financial markets have exhibited significant volatility, and the challenge remains steering an appropriate course for the long term,” it stated.

“We are completely focused on the security of the benefits promised to USS members, and the sustainability of the scheme.”

The proposed changes to the scheme also remain at the centre of ongoing university strike action this month, after University and College Union warned that these proposals could represent a 35 per cent cut to members DB benefits.

The UCU have instead urged employers to back its own proposals, which USS recently confirmed were viable, prompting UUK to launch a consultation on the proposals with sponsoring employers of the USS.

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