Proposed assumptions for the 2017 valuation of the Universities Superannuation Scheme, London, could require an increase in employer and employee contributions of 6 percentage points to 7 percentage points of participant pay, to help fund future pension payments.
The USS trustee launched its consultation on proposed assumptions for the valuation with Universities U.K., a universities representative organization, on Sept. 1. The trustee reviews assumptions every three years.
A statement on the USS website said the trustee believes the £60 billion ($77.7 billion) pension fund is running a deficit of just more than £5 billion, based on proposed assumptions, similar to March 2014 figures. "However, the cost of funding future pensions promises has increased by 35%. The proposed assumptions result in an increase of 6% (to) 7% of pay, from the 26% of pay paid by employers and members now, for the current package of benefits offered," said the statement.
USS acknowledged that this increase "is a significant challenge for our stakeholders, UUK and University and College Union to address." A document on the USS website said employers contribute 18% to the fund, while participants add the remaining 8%. Details on how increases would be split under the proposed assumptions could not be learned by press time.
The trustee sets the required contribution rate following consultation with Universities U.K. on its proposed approach. The statement said decisions on future benefit levels and how the total required contributions are shared between participants and sponsoring employers are made by a joint negotiating committee, which is made up of an equal number of representatives from UUK and the Universities and Colleges Union. The committee has an independent chairman.
The most significant assumption is the expected rate of return on the fund's assets, said the statement.
"Since the last valuation, expectations for future returns have fallen significantly. This affects everyone saving for retirement whether in USS or another form of private pensions. If contributions made to the scheme are likely to grow at a slower rate than previously thought, then more money is required to fund a given pension promise. That is the main reason why the required contribution rate has increased."
The consultation period runs until Sept. 29, and a conclusion on the assumptions to be used is expected in late October. Any changes to future benefits or contribution levels will follow later in the valuation process, "and no changes can be made without a full consultation with all affected employees by their employers."
A statement provided by a USS spokeswoman said: "No one saving for retirement is immune to the changes in the investing environment; people buying retirement income from insurance companies have seen the price rise by nearly a quarter in the three years to March 2017. Despite the proposed increase, we believe USS offers the potential for considerably better value than buying retirement income at market rates from an insurance company."