The UK university pension scheme was taken to task by the Pensions Regulator for misrepresenting the watchdog’s views in a key document that proposed higher contributions by employers and members into the plan.
The regulator told the £63bn Universities Superannuation Scheme that it had used “incorrect” wording to describe the watchdog’s position on discount rates, which are used to value pension plans’ liabilities.
The regulator objected after the USS invoked the watchdog’s views to defend its stance on valuing the plan, in a move that served to help justify the scheme’s proposals for increases in contributions by university employers and members.
The proposals by the USS involve about 200,000 members of the scheme who are working paying hundreds of pounds extra a year in contributions, and add hundreds of millions to employers’ retirement benefit costs compared with payments in 2017.
The USS is the UK’s largest defined-benefit pension scheme in the private sector, with 420,000 members, and trade unions representing academics are threatening a fresh wave of industrial action over the proposed contribution increases.
The Pensions Regulator clashed with the USS after the scheme published a consultation document in January outlining how the plan had a deficit of £3.6bn.
The regulator sent an email that month to the USS to say that statements by the scheme in the document about the watchdog’s views on discount rates were wrong.
The discount rate is critical to valuing a pension scheme — the lower the figure, the higher the scheme’s liabilities.
This can in turn boost the size of any deficit, and therefore potentially increase the size of scheme contributions by employers and members.
In its January consultation document, the USS set out its approach to valuing the scheme, including the liabilities, and said the regulator “prefers measuring discount rates relative to gilts”.
But the regulator said in its email to Jeff Rowney, USS head of funding strategy, that this statement by the scheme was “incorrect” as the watchdog had no preferred approach to setting discount rates.
The regulator also took issue with another statement by the USS in the consultation document where the scheme said the discount rate used for a 2017 valuation of the plan — of gilts plus 1.20 per cent — was above the level the watchdog “views as appropriate”.
The regulator said this was “factually incorrect” as it had “not commented specifically” on the level of the discount rate.
At the time the USS published its consultation document, university employers and unions were pressing it to take on more investment risk.
They were effectively calling for a higher discount rate, which would have the effect of shrinking the plan’s liabilities and limiting or even negating the case for higher contributions to the scheme.
The regulator’s complaint about being misrepresented by the USS came to light after a union-appointed member of the scheme’s trustee board, Prof Jane Hutton, raised concerns with the panel in March.
She highlighted a discrepancy between the regulator’s published position on discount rates and how the watchdog’s views were presented in the USS consultation document.
The regulator’s January email to Mr Rowney was copied to David Eastwood, chair of the USS trustee board and Bill Galvin, group chief executive of the scheme and a former chief executive of the watchdog.
But the email was only shared with the entire USS trustee board in May after Prof Hutton sought confirmation from the regulator about its position on discount rates.
In the email, the regulator did not insist that the USS correct the wording in the consultation document, but asked the scheme to “consider doing so”. The document was not altered.
The regulator is separately probing claims by Prof Hutton that she was obstructed by the USS trustee board from establishing whether the scheme exaggerated the extent of the plan’s deficit in the 2017 valuation. The USS estimated the deficit at £7.5bn at that time.
This month the University & College Union, the main trade union for academics, threatened a new wave of industrial action over the USS’s proposals that members pay higher contributions into the scheme.
Academics went on strike last year after the university employers proposed replacing the USS defined-benefit scheme with a less attractive defined-contribution plan. The employers dropped the proposal after the industrial action.
Asked to comment on the regulator’s complaint that its views on discount rates had been misrepresented by the USS, a spokesperson for the scheme said: “The overview in the consultation document was a reasonable, high-level articulation of some of the regulator’s concerns, as they relate to the specifics of the scheme, but never a substitute for careful reading of its comprehensive position.”
The Pensions Regulator declined to comment.
A spokesperson for the University & College Union said: “This latest revelation will do nothing to calm the frustration felt by many members . . . It is essential that members’ trust in the scheme is restored and maintained.”