"Universities under pressure over growing pension scheme deficit", Josephine Cumbo, pensions correspondent, Financial Times, 25 August 2017.
In this article, the pensions correspondent of the Financial Times, Josephine Cumbo, describes and explains the deteriorating funding position of the defined benefit (DB) scheme of the UK’s largest pension fund, the Universities Superannuation Scheme (USS).
In its annual report, published in July 2017, USS revealed that its deficit (calculated using internal accounting measures) had risen to £12.6bn at the end of March, up from £5.3bn in 2014 and £2.9bn in 2011. If measured using standard accounting rules, the deficit has doubled in a year to reach £17.5bn, the largest ever seen at any UK DB pension scheme.
Cumbo notes that the rise in the USS deficit has come about largely as a result of a jump in the scheme’s liabilities. USS promises its members an inflation-indexed retirement income based on their salary and length of service. The cost of providing such guarantees has soared as long-term inflation-linked interest rates have fallen and the life expectancy of scheme members has increased.
John Ralfe, an independent pensions expert, attributes USS’s funding problems to an aggressive bet placed by the scheme’s trustees on the equity markets. Although equity markets have risen substantially in recent years, they have not helped the assets of USS to increase by enough to offset the rise in the scheme’s liabilities.
The deteriorating financial health of its defined benefit pension scheme is not unique either to USS or to the UK. According to the UK’s Pension Protection Fund (PPF), the lifeboat fund for failed private sector pension funds, the average funding ratio for private sector defined benefit schemes with more than 10,000 members was 84% in 2016.
Over a quarter of EU occupational pension schemes could struggle to meet their promises to members, according to recent stress tests conducted by EU pensions regulator EIOPA. In the US, pension funds are funded only to an aggregate 85%, according to the Milliman Pension Funding Index.
The options for addressing such pension fund deficits all threaten to be unpopular: in the case of USS, they include a rise in tuition fees for students and the removal of DB pension benefits for new university employees (in favour of a defined contribution scheme). UK university staff have recently threatened to strike in protest at these proposed reforms. Meanwhile, university administrators with high salaries (leading to generous pension benefits) have faced increasingly hostile press comment.