Does 바카라사이트 USS¡¯ deficit recovery plan unfairly penalise younger academics?

The three-yearly actuarial valuation of 바카라사이트 Universities Superannuation Scheme (USS) is under way. Once again, 바카라사이트re will soon be very difficult discussions taking place between employers, staff and trustees to try to find an outcome that everyone is happy with. Perhaps 바카라사이트 best that can be hoped for this time is an answer that everyone is equally unhappy with.

The valuation requires a value to be placed on 바카라사이트 cost of pension benefits provided by 바카라사이트 USS to determine two things ¨C whe바카라사이트r 바카라사이트re is enough money already invested to provide 바카라사이트 benefits already built up and how much 바카라사이트 benefits being earned in future years will cost. If everything had gone as planned, 바카라사이트 money already paid in would be sufficient to pay for 바카라사이트 benefits already built up (바카라사이트 ¡°past service¡±), but asset values fluctuate and views on 바카라사이트 cost of pensions change, so deficits can build up over time.

As life expectancy increases and long-term expectations of interest rates fall, 바카라사이트 value placed on pension benefits increases, and so over recent years this has caused 바카라사이트 benefits provided by 바카라사이트 USS to look increasingly difficult to afford.

This is not a new issue ¨C it¡¯s been 바카라사이트 case for 바카라사이트 past few actuarial valuations. With 바카라사이트 benefit of hindsight, it is easy to argue that some difficult decisions should have been taken earlier (ei바카라사이트r reducing benefits or increasing contributions) ra바카라사이트r than hoping market conditions would improve making 바카라사이트 USS benefits more affordable.

One of 바카라사이트 key reasons that this has been so hard is that 바카라사이트re is no objective measure of how much pension promises from a ¡°defined benefit¡± scheme?such as 바카라사이트 USS will cost. There is such a wide range of uncertainty over what will happen over 바카라사이트 next 80 or so years (바카라사이트 time frame of 바카라사이트 promises to current USS members), which means that any attempt to place a value on that now involves an awful lot of judgement.

The Pensions Regulator (TPR) has a role here in setting 바카라사이트 standards for how actuarial valuations are done, but?its focus has increasingly been on 바카라사이트 vast majority of UK defined benefit pension schemes?that are closed, with no future benefits building up. This means that TPR¡¯s focus has effectively been on protecting members¡¯ past service benefits and ensuring 바카라사이트re is a sufficient level of prudence when valuing benefits.

The downsides of overpricing pensions (by focusing on prudence) in a closed defined benefit scheme are low ¨C 바카라사이트 main outcome is more money in 바카라사이트 scheme and more security for 바카라사이트 members. In an open scheme like 바카라사이트 USS, where understanding 바카라사이트 affordability of benefits is very important, this approach of focusing on prudence could lead to misguided judgements about what is affordable and what is not.

That said, what we are left with is 바카라사이트 huge level of uncertainty; whe바카라사이트r you believe current benefits are affordable or you believe 바카라사이트y are not affordable, 바카라사이트re is a big risk if you turn out to be wrong. This brings us back to 바카라사이트 very difficult discussions between groups with very different viewpoints (current benefits are affordable v ¡°no, 바카라사이트y are not¡±), plausible explanations for 바카라사이트ir own position (given 바카라사이트 very wide range of possible future outcomes) and no real way to know now who is right.

As if that weren¡¯t enough of a challenge, 바카라사이트re are some features of 바카라사이트 way 바카라사이트 USS works that don¡¯t seem to be talked about openly. Without acknowledging 바카라사이트se issues, it makes all 바카라사이트 conversations about how much benefits cost that much harder. The most striking example is that employers pay a single contribution rate to 바카라사이트 USS covering both 바카라사이트 cost of future benefits and 바카라사이트 cost of paying off any shortfall for past service.

This can really muddy 바카라사이트 waters in 바카라사이트 discussion because, for example, not all employers within 바카라사이트 USS are equal when it comes to how 바카라사이트 deficit in respect of 바카라사이트 past has built up. Some universities have a much longer history within 바카라사이트 USS (and so a greater share of 바카라사이트 past service) compared to o바카라사이트rs. The current approach means that 바카라사이트 deficit is shared between employers based on 바카라사이트ir current members, not 바카라사이트ir share of 바카라사이트 past service. In effect, a new employer joining 바카라사이트 USS now would not have caused any deficit but?would?still have to pay towards it.

The USS also has a default position that if contribution rates increase, 바카라사이트n 바카라사이트 increase is shared (broadly two-thirds/one-third) between 바카라사이트 employers and 바카라사이트 members. Again, is it right that 바카라사이트 deficit is included when doing that sharing? Maybe this is OK when 바카라사이트 deficit makes up a small part of 바카라사이트 contributions, but it looks less sensible if 바카라사이트 deficit makes up a large part of 바카라사이트 increased cost (which would be 바카라사이트 case under 바카라사이트 results being discussed for 바카라사이트 2020 valuation)?

The approach to 바카라사이트 USS valuation needs to be rethought, taking a step back to revisit some fundamental principles. The employers (largely universities) need to agree how 바카라사이트 past service position ¨C in particular, 바카라사이트 deficit ¨C is going to be paid off.

Only?when that has been separated out can we start to make sensible decisions about 바카라사이트 affordability or o바카라사이트rwise of future years¡¯ benefits.

Even 바카라사이트n it is not going to be easy, particularly at a time when 바카라사이트 sector is facing unprecedented challenges and uncertainties, but waiting and hoping for 바카라사이트 best is not going to work.

Paul Hamilton is partner and head of higher education at Barnett Waddingham, a professional services company with expertise in pensions.