UK Universities See Rise in Pension Deficit Due to Coronavirus-led Crisis

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 UK Universities See Rise in Pension Deficit Due to Coronavirus-led Crisis
                                 

Summary

  • The Universities Superannuation Scheme’s funding deficit for the end of March 2020 has increased to £12.9 billion
  • The major reasons behind the rise in deficit numbers are increased fall in interest rates due to the Coronavirus-led pandemic
  • Rising pension deficit has resulted in some universities facing the risk of insolvency

The universities in the UK have witnessed a significant rise in their pension fund deficits which as per the latest estimate have reached £12.9 billion. The Universities Superannuation Scheme (USS), serving as the largest principal private pension schemes for universities & other higher education institutions in the UK, reported that its funding deficit for the end of March 2020 has increased to reach £12.9 billion, which is more than twice recorded at a corresponding period in 2019 at £5.7 billion. The gap in the deficit became evident as many universities are facing a significant loss in their revenue due to the outbreak of Coronavirus pandemic and hence are under pressure to increase the contribution towards pension.

Citing the main reason behind such an increase, USS said that there had been an increased fall in interest rates due to the Coronavirus-led pandemic. Based on the monitoring of key financial measures since the 2018 valuation, the £12.9 billion deficit number is on a technical provisions’ basis.

Key elements from USS’s annual report and accounts

The USS released its annual report and accounts on 29 July 2020 and reported that the estimated value of its defined benefit (DB) liabilities on a monitoring basis is up by 9 per cent from £72.8 billion to £79.4 billion during the year under review. Given the negative performance of 1.7 per cent, compared with negative 5.4 per cent for the scheme’s benchmark, there is a fall in the assets in the DB fund, which reduced by £900 million to £66.5 billion over the year. At 31 March 2020, USS’s total assets under management (AUM), which consist of its defined contribution section, amounted to £67.6 billion.

The funding ratio of the scheme also posted a fall from 93 per cent to 84 per cent over the year to the end of March. The annual report of USS mentioned that the investment returns for the scheme’s DB fund over a five-year period averaged 6.19 per cent per year and is reported to outperforming the strategic benchmark by 0.91 per cent.

The USS said that the latest monitoring figures revealed that in case the market conditions at the end of June were read directly into the assumptions of the 2018 valuations, the technical provisions deficit would be £20.2 billion, the self-sufficiency deficit would be £34.4 billion, and the future service cost 40.1 per cent of USS payroll.

Regarding the impact that Covid-19 has brought, Bill Galvin, group chief executive of USS stated that the open DB pension schemes like USS sees long-term challenges and pointed that the pension fund aims to work in close coordination with its stakeholders including Universities UK and University and College Union to cater to the ongoing 2020 valuation. Regarding period before the outbreak of the Coronavirus pandemic, he stressed that factors such as historically low- interest rates, increased life expectancy, greater regulation, and volatile financial markets had made the promises of a set retirement income for life costlier.

It is to be noted that earlier in July 2020, Galvin had written to USS’s sponsors indicating on the financial development of the scheme and some tough decisions could be taken in autumn and over the course of the 2020 valuation. Experts believe that though several universities have large asset bases, they would need to bring in an innovative approach for using their balance sheets to offer increased security to the members of the USS.

Impact of the Coronavirus outbreak on British universities – study by IFS

The London-based Institute for Fiscal Studies (IFS), an organisation that does economic research and specialises in the UK’s taxation and public policy segment, in its recent study on the impact of the Coronavirus outbreak on British universities, estimated that around 13 of them could face bankruptcy. Two of the major reasons for the fear are a significant increase in pension deficits and reduction in the number of international students in the wake of the global pandemic. It is predicted that in one year’s time the university sector will incur losses of around £11 billion or more than a quarter of income and attributed it to a considerable reduction in the number of students from abroad enrolling for various courses besides increase in balance sheet provisions relating to pension deficits.

The research elaborated that in the long run losses that the higher education sector will see could range between £3 billion and £19 billion. In percentage terms, these numbers translate between 7.5 per cent and approximately 50 per cent of the total income that the sector generates in a year.

The institutions that have a higher number of international students and the ones having extensive pension obligations are more likely to experience higher losses. The report from IFS highlighted that such institutions are generally the universities that are ranked higher, those who offer only postgraduate courses or programmes, besides the prominent arts schools. The institutions or universities to face most of the risk would be the ones that started to overcome the pandemic-led crisis with weak financial positions, are considered less prestigious, and have lesser net assets or financial reserves.

The IFS study also presented suggestions on a target-oriented bailout package of £140 million by the government to assist the universities to come out of the crisis. It added that there should be a correct focus in the scheme as helping some failing universities may provide lesser rescue money for others to better deal with their finances in coming times.

About USS

The USS was formed in 1974 and has around approximately 460,000 members across 340 higher education institutions. According to the data from Pension Protection Fund, it accounts for a third or 34 per cent of the people who still actively pay into the private DB schemes(open to new members), besides approximately a fifth or 18.4 per cent of the people still actively contributing into the private DB schemes.

Conclusion

It has been a proven fact that despite holding significant importance, pension and the liabilities that come with that debt is an often-unnoticed element when any institution undergoes financial loss. The present case of the higher education sector currently facing such problems necessitate the need to assess the pension-related costs and risks once again. This evaluation will help in making the pension provision sustainable and help to tackle the related concerns that hit the sector in recent years.

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