Contributions to the Universities Superannuation Scheme (USS) may need to increase to as much as 56.2 per cent of payroll in order to combat the scheme's deficit, according to an update from the scheme trustee.

Its update report confirmed that increases in pension contributions would be necessary to maintain the scheme’s existing benefits, in light of “persistent low interest rates” and reduced expectations of future investment returns.

Pension contributions for the scheme currently stand at 30.7 per cent, and are due to increase to 34.7 per cent from this October, as per the 2018 valuation terms.

However, it stated that “even in the most favourable scenario considered”, which would require enhanced financial commitments from USS employers to strengthen its covenant, the overall contribution rate would need to rise to 42.1 per cent payroll.

Meanwhile, a lack of any further financial commitments from employers would result in the overall contribution cost rising to as much as 56.2 per cent.

Alongside this, the USS update has also priced the contribution cost of an illustrative package of commitments suggested by Universities UK (UUK), which would result in contributions from employers and members rising to 49.6 per cent of payroll.

The update also confirmed that the scheme's deficit on a technical provisions basis at 31 March 2020 ranged from £14.9bn to £17.9bn, representing a three-fold increase since March 2019, when the deficit was £5.4bn.

Whilst the report also acknowledged that there has been recent recovery in some asset values to pre-pandemic levels, it warned that the outlook for expected future investment return has “If anything” deteriorated since the valuation date of 31 March 2020.

Indeed, whilst the value of scheme’s assets has increased to £80.5bn as of the end of December 2020, compared to £66.5bn in March 2020, the deficit and future service cost were £27.9bn and 46.9 per cent respectively, which it attributed to the poorer outlook for future investment returns.

In a letter to the scheme, The Pensions Regulator (TPR) confirmed that the proposals, other than the scenario assuming no further financial employer support, were “at the limit of what [it] considers to be compliant”.

In particular, in relation to the UUK illustrative covenant support package, TPR stated that it was comfortable with the discount rate and resulting prudence, clarifying however, that it had concerns around the level of the additional investment return over the recovery plan assumption.

Meanwhile, in relation to the enhanced level of covenant support proposals, TPR highlighted the 15-year recovery plan as being longer than expected for a scheme with an employer covenant rated as “tending to strong”.

Furthermore, it also stated that the assumed additional investment return over the recovery plan of 0.5 per cent per annum was “too high”, highlighting this scenario as the limit of compliance with legislation.

TPR also confirmed that its view of the employer covenant remains "tending to strong", despite calls from the scheme employers that this should be improved to "strong".

USS Trustee Board chair, Dame Kate Barker, stated in the introduction of the report that other proposals were raised with TPR, but that the regulator felt these "would not be prudent enough to comply with Part 3 of the Pensions Act 2004", having previously confirmed that these discussions were taking "longer than anticipated".

Commenting on the update more broadly, Barker stated: “We fully recognise the scale of the challenge facing the scheme and sympathise with our employers and members in light of the difficult decisions that lie ahead.

“Trends in financial markets have made the valuable pension promise offered by USS – a set inflation-linked income for life in retirement, regardless of what happens to the economy in future – much more expensive today than in the past.

“I believe everyone involved with USS wants to find a way forward, consistent with our legal and regulatory duties, that provides valuable and secure pensions, and that puts the scheme on a sustainable footing.

“We are committed to being as collaborative and constructive as we can in supporting UUK and the University and College Union (UCU) discussions to this end.”

Indeed, the report also flagged UUK plans to consult employers on covenant support measures, contributions and benefit options, confirming that it will review the funding assumptions if different covenant support measures or benefit structures are proposed by the stakeholders as a result of this.

However, UUK has already raised concerns over the “unaffordable” pension contributions suggested in the document, with the UCU also warning that USS "must do better" with a special sector conference to be held to decide next steps.

In light of the need to consult with employers and employees on the likely changes, the scheme has now informed TPR that it will not be possible to complete the valuation by the statutory deadline of 30 June 2021, as previously predicted, with the current expectation that the process will not conclude until late 2021 or early 2022.

The scheme's 2017 and 2018 valuations were also filed "well after the statutory deadline".

In its letter to the scheme, TPR acknowledged that the deadline is unlikely to be met, stating, however, that it “understands the reasons for this”, and that, provided there are no undue delays, believes the interests of scheme members will be “best served by a valuation which has been fully considered and is complaint”.

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