Changes to the Universities Superannuation Scheme (USS) could be reversed after recent funding improvements, with the latest monitoring update suggesting that the next scheme valuation in March 2023 could provide scope to improve benefits and reduce contributions.

The changes to the USS scheme were previously agreed in 2022 amid concerns that the deficit recorded in the 2020 valuation could result in "unaffordable" pension contributions for both employers and employees.

However, UK universities have since faced unprecedented strike action across both the pensions dispute, as well as pay and working conditions, with the University and Colllege Union (UCU) recently confirming plans for further strike action in March.

Change could be on the horizon though, as the latest monitoring update from the trustee suggested that the forthcoming 2023 valuation could reveal a high probability of being able to improve benefits and reduce contributions.

In particular, the Financial Monitoring Plan (FMP) update showed a scheme surplus on a technical provisions basis of £5bn, marking a £19.1bn increase on the £14.1bn deficit recorded at the last valuation in March 2020.

Based on this, the update estimated a future service cost of 17.9 per cent, down 7.3 percentage points since March 2020, and 0 per cent deficit recovery contributions, down from 6.2 per cent in March 20220.

Commenting on the update, USS group chief executive, Bill Galvin noted that, market movements since the end of December have been more on the downside, warning that all else being equal, these movements can be expected to reduce future investment return expectations and increase the required future service contribution rate.

However, Galvin also clarified that while "there could yet be more ups and downs before the valuation date", the latest update has provided “grounds to look forward with cautious optimism”.

Indeed, Galvin suggested that, based on the end-of-December position and how market conditions have changed since, stakeholders might want to plan for the 2023 valuation on the basis that the overall contribution rate required for the current level of benefits is unlikely to be in excess of 20 per cent of payroll.

He also suggested that they plan on the basis that the rate that would be required for the pre-1 April 2022 benefit structure going forward is unlikely to be in excess of the current cost of future service (25.2 per cent).

He continued: "The latest FMP report suggests a technical provisions surplus could be emerging, but this will only become clear as we work through the various stages of the valuation and as the trustee’s assumptions and stakeholders’ preferences are confirmed.

"The conclusions we go on to reach will ultimately reflect that we want USS to be the best scheme it can be – fit for the future, and offering secure, valuable, high-quality pensions and good retirement outcomes for decades to come.

"So, we look forward with cautious optimism, intent on working collaboratively and pragmatically with UCU and UUK with the shared aim of making any changes decided by their representatives on the Joint Negotiating Committee (JNC) by 1 April 2024."

Galvin also stated that the proposed timeline for the accelerated valuation is "ambitious, but it is achievable", as long as those involved "work together constructively".

In line with this, Galvin confirmed that the USS trustee has been discussing the key assumptions for the valuation with UCU and Universities UK (UUK), on behalf of USS Employers, and their advisors through the Valuation Technical Forum (VTF) since November.

UUK and the University and College Union have also since issued a joint statement on the funding improvements, confiming plans to prioritise returning benefits to a comparable level as seen prior to the April 2022 changes, should the recent funding improvements continue.

In the joint statement, the UCU and UUK stated: “The latest information provided by the USS trustee suggests that the forthcoming 2023 valuation is likely to reveal a high probability of being able to improve benefits and reduce contributions.

“Should this be confirmed, this would allow for a return to a comparable level of future benefits as existed before the April 2022 changes, as well as achieve a reduction in costs for members and employers.

“We jointly agree to prioritise the improvement of benefits in this way, where this can be done in a demonstrably sustainable manner.

“We are committed to working together so that this, and future, valuations are undertaken on a moderately prudent and evidence-based basis, taking account of the open and long-term nature of the scheme.

“We will explore together a long-term solution for managing risk which can provide more stable and sustainable defined benefits and contributions, whilst protecting scheme members’ long-term interests, and so that we do not return to dispute at each valuation.

“We agree, in relation to these aspects, to work together on a constructive dialogue with The Pensions Regulator and the Department for Work and Pensions (DWP)."

Both UUK and the UCU also agreed to work in partnership on USS governance reform, with particular plans to target low-cost options and consult employers and members, once it is confirmed that the priority of improving main scheme benefits can be achieved.

"Any such low-cost option should not undermine the viability of the main scheme, and will be subject to analysis and review," the statement clarified.

Indeed, Galvin also highlighted the provision of a low-cost option for USS members as a "important area", stating that the USS trustee "remains very keen" to see progress on this work, and"encourages the JNC to move forward with its decision making".

More broadly, the statement from UUK and UCU suggested that further action to address climate issues could be seen in future, stating: “We agree on the urgent need, with the USS trustee, to examine the case more fully for divestment from fossil fuels and that a greater visibility of climate crisis action and mitigation should be a feature of long-term USS planning.

“Our negotiations have been constructive, and we commit to joint collaboration through the 2023 valuation process to achieve the optimum outcome for all stakeholders after appropriate consultation.”

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