Please find below a series of Q&As issued to support the consultation which ran from 16 March 2015 to 22 May 2015.
What is your question about?
Select a question below to see the answer
- What is a valuation?
A valuation is a legal requirement of defined benefit occupational pension schemes, and it must take place at least every three years. It’s an assessment of the scheme’s assets (the investments it holds, the contributions it expects from employers and members and the returns it expects to make on its investments) and the liabilities (the amount it needs in order to pay the benefits already earned by members). It also determines the cost of continuing to provide the current benefits in the future.
You can find out more about the USS 2020 valuation at https://www.uss.co.uk/about-us/valuation-and-funding/2020-valuation.
- What is a funding deficit?
A funding deficit is the difference between the amount of assets held by the scheme, and the amount of money necessary to pay all of the benefits which have been built up by members.
Pension scheme deficits can occur in defined benefit schemes.
- Why does USS have a deficit?
The costs of providing defined benefit pensions are influenced by things like investment returns, inflation and how long people are living and drawing pensions – so they change over time.
One of the biggest factors influencing costs is expected future investment returns. Changes to the investment outlook since the last valuation in 2018 have contributed to the deficit. These include factors such as historically low interest rates, secure investments like UK government bonds (gilts) offering lower future returns and a rise in the cost of buying investments that will deliver returns.
This rise in cost has boosted USS asset values but means the price of the assets the Scheme can buy has increased, making future investment returns weaker. This combination has resulted in the cost of providing benefits to members outstripping the growth in USS assets.
Based on maintaining the current level of benefits and contributions for future service, the trustee estimated that there was a funding deficit of between £14.1bn and £18.4bn, on a Technical Provisions basis. This means the scheme has enough assets to pay around 80% of the pensions built up by members.
Finally, it is important to recognise that the cost of providing the current benefits in future has also risen – it is not just the deficit that has increased the costs of the scheme.
- Does the deficit mean I won’t get my pension?
No. A deficit does not mean benefits already built up won’t be paid out in future. While the level of benefits offered for future periods of service may be subject to change, defined benefits that members have already built up are protected by law. The Trustee takes its responsibility to secure these accrued benefits very seriously.
In addition the government established the Pension Protection Fund (PPF) in 2005 to provide benefits in the event that a pension scheme’s sponsoring employer or employers become insolvent without there being sufficient funds available in the scheme to pay the benefits due to be paid.
USS is recognised by the PPF as a multi-employer scheme with a joint, or shared, liability. This joint liability is based on the ‘last man standing’ concept, which means that it would only become eligible to enter the PPF in the extremely unlikely event that all of the scheme’s employers were to become insolvent.
If such circumstances were ever to occur, the PPF would take over the payment of pension benefits to members, but the benefits received might be less than the full benefits earned within USS. The precise amount that the PPF would pay to each member would depend on the member’s age, status, the period over which the benefits were earned and the total value of benefits.
Further information and guidance about the PPF is available on its website at pensionprotectionfund.org.uk.