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Coronavirus pushed USS within moments of breaching covenants

Pension fund has been battered by market volatility with increased contributions a possibility

Financial markets rocked by the fear of coronavirus pushed the Universities Superannuation Scheme to the brink of a covenant breach last week, which would have required it to formally report itself to the Pensions Regulator. The scheme has warned it is “reasonably likely” it will have to consider drastic action such as raising contribution levels in the near future.

The effects of “very volatile financial markets” in the last week on the USS has been laid bare in a letter to vice-chancellors from USS chief executive Bill Galvin and trustee board chair David Eastwood. The letter was sent to Research Professional News as the scheme opened a consultation on the 2020 valuation on 9 March.

In the letter, Eastwood and Galvin explain that the global financial shake-up—which has seen markets around the world reporting their worst performances since the 2008 financial crash—had almost pushed the USS to a "trigger event", which would have caused the Trustee Board to report the scheme to the Pensions Regulator.

If the ratio between the scheme’s deficit and 10 per cent of employers’ contributions over the next 30 years breaches 85 per cent, the scheme must “consider the appropriate response”. “Last week we narrowly avoided a formal trigger only because the fifth day’s measure was 84.6 per cent”, wrote Eastwood and Galvin. “It is therefore reasonably likely that the Trustee Board will have to respond to such a trigger event in the near future, and perhaps even before the March 31 valuation date.”

They wrote that it was “highly likely” that financial instability will continue, and warned that it could be forced to ask for increased contributions to the scheme before they are due in October 2021, bring the 2020 valuation forward or accelerate its “de-risking” strategy to pull cash from equity investments and put it into gilts, or bonds.

Eastwood and Galvin said that trying to determine the longer-term challenges of the current volatility was “more challenging when running very close to our risk limits, as we are now”.

Staff at 52 universities are on strike over a hike in contributions to the USS. Fourteen days of declared industrial action is due to finish on 13 March. Striking staff could be returning to work just as the pension fund reaches a trigger event.

Before the 2017 valuation found a £7.5 billion black hole in the scheme, staff paid in 8 per cent of salary and employers paid 18 per cent. Since then, contributions have grown to 9.6 per cent for staff and 21.1 per cent for employers. This is already set to grow to 11 per cent and 23.7 percent respectively in October 2021.

The letter was revealed as USS launched a consultation on its approach to the 2020 valuation, in which it said it would consider moving to a dual discount rate—meaning the scheme would assume a different level of risk for active and retired members—and replacing “Test 1” with a check that funding risk “remains within appetite”.

“Given the challenging timetable we need to work to, your input at this stage is critical,” wrote Eastwood and Galvin.

The University and College Union said "we would have been very alarmed" had the USS taken action last week. A spokesman told Research Professional News, “we have long argued that the scheme should not take snap decisions about its funding and investment plan on the basis of short-term views of risk.

“USS’s unique multi-employer covenant is strong and there is no sign of the pre-92 UK university sector suddenly collapsing. This is the view which our negotiators and actuarial advisers are urging employers and the Trustee Board to take as our dispute continues“.

The consultation is open until 17 April.