Report and analysis by branch pension officer following reports in the media that USS has breached one of its funding measures as a result of the downturn in financial markets over the measures to halt the spread of coronavirus COVID-19
- Colleagues may have seen reports in the media that "USS has breached one of its funding measures as a result of the downturn in financial markets over the measures to halt the spread of coronavirus COVID-19" (https://www.ipe.com/news/uss-breaches-funding-measure-amid-covid-19-turmoil/10044387.article). The timing of this breach is particularly unfortunate, given the ongoing negotiations about the proposals (e.g. dual discount rate) put forward in the JEP's second report and the imminent (as of 31/3/20) valuation of USS.
- What appears to have happened is that falling equity prices have reduced the book value of USS's assets to the point where it has breached one of its funding measures and it has reported itself to the Pensions Regulator for doing so. The Twitter feed of the journalist who broke the story gives some additional information (https://twitter.com/JosephineCumbo/status/1240305336872992769) as does the report on the IPE website (https://www.ipe.com/news/uss-breaches-funding-measure-amid-covid-19-turmoil/10044387.article).
- USS has moved to reassure us that the pensions benefits we have built up so far in the defined benefit (DB) section of the scheme are secure and are protected by law (https://www.uss.co.uk/members/members-home/retirement-articles/2020/covid-19-update). What is at issue, therefore, are future benefits (incl. the DB/defined contribution (DC) balance of the scheme) and contribution rates.
- I don’t think anyone really knows how long Covid-19 restrictions are set to last, nor how long or how severe the decline in financial markets will be. In this regard it is notable that, in its reassurances to its 'investment builder' (i.e. DC) section members, USS states that "current market conditions should not be a long-term concern" (https://www.uss.co.uk/members/members-home/retirement-articles/2020/covid-19-update). So, as the actuary Henry Tapper put it in his blog on March 19th (https://henrytapper.com/2020/03/19/the-state-of-uss-is-the-state-of-us/), it might be sensible for USS to sit tight and ride out the storm.
- Henry Tapper also set out four scenarios for what USS could do. The one that caught my eye was his comment that de-risking (the USS go-to strategy for several years now) may not help. I have argued for some time that USS's efforts to de-risk are actually efforts to shift risk onto us and our employers. There is a chance that USS will use the current difficulties as a justification for sticking to their de-risking strategy in consultations and negotiations over the 2020 valuation and JEP proposals. If they do so, it is possible that they will seek to close the DB (retirement builder) section and/or force employers to side with them in doing so by setting contribution rates so high that most could not afford them.