The Universities Superannuation Scheme has launched a consultation on raising member contributions to the higher education scheme by six to seven per cent.

The fund’s trustee board has said that it believes that it is currently sitting on a deficit of just over £5bn, similar to the figure that it was assessed to have in March 2014 at its last triennial pension valuation. However, the cost of funding future pensions promises has increased by 35 per cent according to USS. In order to maintain its pension promises, the scheme has said that contributions from its university members must rise by between six and seven per cent from the 26 per cent of pay that is currently paid by employers and members now.

It has acknowledged that the increase proposed is a significant challenge to its members.

“Since the last valuation, expectations for future returns have fallen significantly,” said USS in a statement.

“This affects everyone saving for retirement whether in USS or another form of private pensions. If contributions made to the scheme are likely to grow at a slower rate than previously thought, then more money is required to fund a given pension promise. That is the main reason why the required contribution rate has increased.”

The trustee board has said that the simplest indicator that future returns are likely to be lower is the drop in the expected return on index-linked gilts, by around 1.5 per cent per annum since March 2014.

USS currently invests half of its money in equities, one third in bonds and the rest in infrastructure, property and other assets. It says that the strategy has
returned substantially more than a portfolio of bonds or gilts over the last five years – generating £10bn more for the scheme than if it was invested purely in gilts for the last five years, for example.

“Over the next 20 years, as USS grows in size by an expected £30bn in assets, the trustee will continue its strategy to reduce the equity allocation proportionate to the growth in the scheme to ensure that the risks inherent in funding the scheme remain within affordable limits of all the employers,” it added.

Over the next 10 years the trustee board has assumed an annual return of CPI less 0.53 per cent, reflecting very high current asset values and expectations for a prolonged period of low long-term interest rates.

In the following decade, it has assumed a return of CPI plus 2.8 per cent, falling linearly to CPI + 1.7 per cent by year 21 as the scheme’s asset allocation changes. This reflects a period of expected higher interest rates and the proposed gradual reduction in allocation to equity-like investments.
After year 21, USS has assumed annual returns of CPI plus 1.7 per cent. It has said that this is a prudent view of long-term investment returns on the revised portfolio.

Overall, this is equivalent to an average annual rate of return to value future benefit payments of CPI plus 0.9 per cent, said USS.

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