Tumbling markets push USS to a ‘trigger event’ requiring review of contribution rates
Plunging stocks and shares have forced the Universities Superannuation Scheme to declare a trigger event, meaning the USS must now report itself to the Pensions Regulator and that contribution levels could be hiked sooner than expected.
Continuing volatility in global financial markets as a result of the coronavirus pandemic has pushed the USS trustees to signal to employers backing the scheme that increased support may be required. The pension fund narrowly avoided such action earlier this month.
The report was triggered on 12 March when the ratio between the scheme’s deficit and 10 per cent of employers’ contributions over the next 30 years breached 85 per cent over five consecutive days—one of the metrics for sustainability agreed with the Pensions’ Regulator. The trustee board and the regulator must now “consider the appropriate response”.
The USS said the ratio was important because “uncertainty for the scheme’s future funding means an increased dependency” on the support of the sector to underpin the pension fund. The USS board will “formally review the scheme’s funding position” at a meeting on 26 March.
Responses the USS are considering include: raising contribution levels for staff and employers before the expected October 2021 date, accelerate its “de-risking” strategy to pull cash from equity investments and put it into gilts and bonds, or move the 31 March 2020 valuation date.
The 2020 valuation would offer a “calm and considered approach to assessing current conditions and any changes to the long-term outlook” but the timeline will “remain under review” as a result of breaching its covenant, USS said.
In a letter to vice-chancellors on 17 March and seen by Research Professional News, USS chief executive Bill Galvin wrote: “it is impossible to be confident at this point on the long or short-term impacts; the Trustee is focused on the challenges of managing the funding position for the long term, but with an eye on the short term”.
Galvin added: “We will not rush to judgement on how to deal with the current circumstances. We will remain vigilant and continue to monitor market indicators; we will continue to monitor the way in which the sector’s potential support for the scheme in the long and short term might be affected; and we will keep you informed of the Trustee Board’s considerations.”
In a press conference on 10 March—following the previous close brush with a trigger event—Galvin told Research Professional News it was unlikely that the 31 March valuation date would be changed. However, he also said that under “certain circumstances” USS would have to consider whether planned contribution rises in October 2021,“is early enough or those contributions would be sufficient enough” in the event of a covenant breach.
Staff at 52 universities ended 14 days of strike action over rising contributions to the USS on 13 March. Contributions have already grown to 9.6 per cent for staff and 21.1 per cent for employers as a result of a multi-billion pound deficit in the USS at its last valuation. Contributions are set to grow to 11 per cent and 23.7 percent respectively in October 2021.
A USS spokesperson said: “Our pension promises are secure because they are supported by the strength and longevity of employers in the UK higher education sector. It is important these sponsors are clear on the funding position and on their commitment to the scheme should our assumptions prove inadequate.
“Our current view is that Covid-19 will have a very significant near-term impact but is less likely to have a material impact as we look further out. However, market conditions mean that any forward look is challenging, and will take time to work through, which is the focus of the 2020 valuation.”
The news comes as governments across the world announce fiscal stimulus packages to combat the threat to the global economy of the coronavirus pandemic. On 17 March, chancellor Rishi Sunak announced a £350 billion package to aid the UK economy.
Industry experts suggest that a pension fund invested on the FTSE 100 share index will have lost 25 per cent of its value since the crisis began. 41 per cent of the assets of USS are currently invested in global stocks and shares.