The Universities Superannuation Scheme (USS) recorded a £1.8bn surplus as at 30 June 2022, representing a £15.9bn increase from the £14.1bn deficit recorded at the last valuation in March 2020.

The latest USS Financial Management Plan Monitoring Report revealed that scheme assets totalled £77.6bn as at 30 June 2022, up by £11.1bn since March 2020, whilst liabilities on a technical provisions basis had fallen by £4.8bn to £75.8bn.

The fall in liabilities was attributed to rising nominal gilt yields, partly offset by higher inflation expectations and lower future expected returns relative to gilts, due to the high returns experienced to some extent.

In addition to this, the report revealed that the future service contribution requirement has fallen due to higher nominal gilt yields, while the 2.5 per cent cap on annual inflationary increases for benefits earned since 1 April 2022 limits the impact of changes in expected inflation on the future service cost.

It also confirmed that, if at the next valuation there is a significantly improved financial position relative to the 2020 valuation, it may be possible to increase benefits, decrease contributions or do a combination of both.

However, the report noted that market conditions have remained "highly volatile", since the assumptions were last looked at in more detail as part of the accelerated year-end review in March 2022.

In particular, the relative movement in the nominal and index-linked yield implies a potential change in the inflation risk premium.

For example, the outcome as at 30 June 2022 from removing the inflation risk premium and adjusting the pre- and post-retirement discount rates would be a deficit of £2.5bn, and a future service cost of 22.5 per cent.

In addition to this, the trustee clarified that the purpose of the monitoring is to indicate whether or not the scheme’s financial position is progressing as expected and does not lead to any direct action from the trustee other than potentially commissioning further analysis.

"The monitoring approach is not as thorough and hence does not give the same outcome as would be given by an actuarial valuation at the effective date," it stated.

"The monitoring position is relatively volatile from month to month, and in light of this the Trustee considers the overall history and trends since the valuation date rather than just the position at the monitoring date."

The USS has faced calls to reconsider recent changes to the scheme in light of the "vastly improved financial performance", having previously faced "unprecedented" strike action over the changes to the scheme.

However, the USS report also clarified that the latest figures are based on the benefit changes agreed by the Joint Negotiating Committee (JNC) and with the associated additional covenant support measures, which came in to effect from 1 April 2022.

A spokesperson for USS Employers, also highlighted the signs of improvement in the funding position of the scheme as "really positive news", suggesting that the recent market conditions, together with benefit changes and "substantial" employer covenant support have "helped to put the pension scheme on a better financial footing".

They stated: “Without these recent reforms, members would be paying at least 11 per cent of pay (up from the current level of 9.8 per cent) rising to 11.8 per cent of pay from October 2022, with all USS participating employers having to find at least the means to pay 23.7 per cent of contributions, increasing to 25.2 per cent from October 2022.

“Financial markets remain highly volatile, and the USS trustee believes that, given such volatility, it is unable to alter contribution levels or benefits outside of a new full valuation.

"We therefore want to work collaboratively with UCU to find ways to fast-track the next valuation – scheduled for April 2023 – so it can deliver positive changes for scheme members as quickly as possible.

“We also want to work collaboratively with the union to bring about meaningful reform by developing lower-cost options for members, considering alternative scheme designs, and conducting a thorough USS governance review.

"There is a real risk that any further industrial action may limit the union’s ability to engage with important discussions on the future of the scheme and impede efforts to accelerate the next valuation.”

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