1. Ian Wright Deputy Director of HR December 2017
USS – 2017 Valuation
Ian Wright
Deputy Director of HR
December 2017
Bit of background re pensions landscape and why things are getting more complicated/interesting in the sector and in pensions more broadly
Then talk a bit about USS and the valuation process, where we are now and what we should be aware of for the future.
At end will happily take any questions you may have.

2. Today Valuation What’s next? Why, what, where we are now
Latest proposals (what we know so far)
Timescales
What to expect next
Pensions key issue for us from a cost, reward and risk perspective. So we’ve engaged properly with the debate
Working group formed a long while ago
Aim to inform University responses
Want to ensure we seek what’s right for UoS – a challenge given no of employers and mutual nature of scheme
Also want to be open and transparent with what we’re saying and the process so all is on our web pages.
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3. Types of benefits Defined benefit (DB) Defined contribution (DC) £
USS Retirement Income Builder
Guaranteed pension income for life (based on a formula)
Risk rests with employer
Defined contribution (DC)
USS Investment Builder
Outcome depends on investment returns
Options to convert to an income at retirement – annuity
Risk rests with the member
Need to highlight fundamental shift in where risk lies.
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4. Benefits in USS USS Investment Builder (DC)
Automatic for salaries £55,550+
Option to make voluntary contributions & choose the match
£55,550
USS Retirement Income Builder (DB)
Option to make voluntary contributions & choose the match
Salary
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5. Current costs 26% University contributions 18% Deficit & expenses
Future benefits (Retirement Income Builder & Investment Builder)
Deficit & expenses
Member contributions 8%
University contributions
18%
26%
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6. What is a valuation? How much will future benefits cost?
Are there enough assets to pay for benefits built up to now?
Need to explain need to protect pension promises.
Ensure that we are on track to have enough to pay promised benefits
Balance assets (contributions, investment growth, physical and equity assets held) with liabilities (pensions promised and anticipated to be promised)
Requirement post Maxwell, keep a track on schemes so they don’t have hidden black holes in them.
Snapshot in time (31 March) every 3 years. Not perfect
No right answer
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7. Key parties JNC USS Trustee tPR UUK UCU Key players and roles
USS Trustee – responsible for the valuation – based on advise from their actuary – key statutory duty is to ensure benefits promised to date can be paid.
UUK – represents all employers – c350 of them (we are one of biggest). Key aim is to ensure employers interests are played out in terms of their appetite for risk, exposure and costs as well as wanting good quality benefits. Employers are consulted on the technical elements of valuation as they sponsor the scheme primarily
UCU – represents all members whether members or not. Key aim is to maximise benefits in a sustainable way for the members.
Together they form the JNC (equal members with independent chair) who are responsible for negotiating benefit changes etc
All have different interests so some friction in there too.
The Pensions Regulator has a role here too – they need to be comfortable that the valuation is based on sound principles etc and can intervene (ultimately can remove the Trustee if not content). Have done so in this valuation to articulate their view that the employer covenant is not as strong as USS think, that the assumptions are therefore arguably too risky and that some of their valuation methodology is too complex
Poss get into Test 1 and Covenant?
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8. Options Cost Risk Benefits
When considering a valuation, there are a number of dials that can be tweaks – cost, risk, benefits
Interplay between them is important.
If a scheme takes lots of risk in terms of the assets in which its invested, its assumptions on which the future returns are predicted, etc then it’s possible to keep current costs lower and benefits the same (though of course the risk comes with the greater chance that returns aren’t what’s anticipated in future in which case, employers have to stand behind them – hence it’s important to consider the employers’ appetite for risk)
If more money is put into the scheme by employers (and members) then you can take less risk and keep benefits the same.
If there is no appetite for increased risk and no ability or willingness to put more money into the scheme, then the only option is to change benefits – normally this is a reduction in benefits which cost less to promise in the future.
Reliance on “employer covenant” - the Employer’s ability to support the scheme – will determine how much risk trustee can expect to take though how much risk can the sector afford to / want to take is up for debate
Level of prudence will inform how much risk should the scheme take?
Expected returns from planned investments should be based on actual asset classes, along with considerations of market conditions – interest rates
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9. Our approach Working group formed
UCU, staff, HR, Finance
Robust challenge – what’s right for UoS
Transparency & openness
Pensions key issue for us from a cost, reward and risk perspective. So we’ve engaged properly with the debate
Working group formed a long while ago
Aim to inform University responses
Want to ensure we seek what’s right for UoS – a challenge given no of employers and mutual nature of scheme
Also want to be open and transparent with what we’re saying and the process so all is on our web pages.
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© The University of Sheffield

10. Key messages: The University does not wish to see costs increased
Risk exposure is at its limit – also confirmed by tPR & scheme actuary
We all want a high quality, affordable pension scheme for the long term
Future scheme change is a real possibility, though we should build in flexibility
All of this is on our web pages for people to see
More detail on some of the technical points
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© The University of Sheffield

11. £7.5bn Deficit So where are we with this valuation?
Lots of different numbers reported. £17bn - That calculation is based on accounting rules; it is not the figure that drives the benefit and contribution decisions for the scheme. The current accounting rules place a present value on the future cash flows required to pay the pensions promised by USS using a discount rate derived from the returns due on loans made by large, high quality businesses (“corporate debt”). For accounting purposes this provides a consistent and objective basis by which all such pension obligations can be measured.,
£12bn if use same assumptions as in 2014 and £5.3bn using the assumptions in the USS technical provisions consultation document. But following the consultation exercise £5bn may not be the final assessment either!
Different numbers not helpful and create confusion
Seems this time round everyone has an opinion and not all are based on facts.
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12. 37.4% Future cost: Combined rate: Deficit contributions (6%)
Career Average / Retirement Income Builder
Defined Contribution / Investment Builder
Scheme administration
Other benefits (death in service, ill health retirement etc)
What does that mean? If USS goes with the current valuation assumptions, it means a deficit of £7.5bn, more than in 2014 (despite the increased costs and changes) so past deficit reduction contributions will increase.
Cost of DC benefits above £55k salary threshold remains same, as does cost of admin and employer match (poss explain).
But cost of future DB (CARE) benefits increases by over 6% of payroll (a c33% increase in costs)
Each 1% of additional contribution = c£2m per year for UoS. i.e. an additional c£12m+
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13. Options? Cost Risk Benefits
If we’ve said we can’t accept more risk (and arguably need less, esp if consider tPR view), and can’t afford/don’t want to pay more money, only leaves benefit change to help remedy the position.
Think back to the future costs, deficit contribution levels expected to remain much the same, plus DC costs etc, it’s future DB benefits which have increased in costs.
How are benefit changes determined? Have to be negotiated with UCU via JNC – dispute?
What might we look for in benefit design? Future DB is expensive we know that. Pushes us towards DC. But think about messaging, we want flex in any new benefit design.
We know assumptions will be wrong – way built currently there is a 2/3rds change of achieving that outcome or better so there is every possibility that future economic outcomes will be better than expected, so if that’s the case, we think there should be a discussion in future about improving benefits. Key part of reward offer, though may not want it to be universal and want more flex for UoS.
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14. Current Proposal Maintain current hybrid arrangements
Reduce salary cap to £Nil
No accrual in the Retirement Income Builder section
Future benefits all build up in Investment Builder section (defined contribution)
Amount going into Investment Builder TBC
All benefits promised to date would be protected – changes to future benefits only
Don’t know how much of 26% can go to DC section until determined if will continue to have a DB section – if do have it then deficit contributions go up and remainder available goes down
Also looking to continue offering ill health and death in service benefits on a DB basis
Employers to continue to subsidise the admin and investment charges
Think about availability of financial guidance and support – financial education
Will NOT cut costs – committed to the 18%
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15. Proposed future benefits
USS Investment Builder (DC)
For members on all salaries
(Option to make voluntary contributions & choose the match?)
Salary
Structure of scheme is same but in practice
All future benefits in DC
Fundamental shift in where the risk lies – with individual not employer = Member reaps rewards or pays for
£NIL
USS Retirement Income Builder (DB)
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16. What’s next JNC Meeting 18 Dec 2017 Decision reached No decision
Member consultation in early 2018
New contribution structure imposed
These are things we’re considering and actions we’re taking now to prepare for what might come
Process ends 30 June 2018
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17. Decision reached Member consultation in 2018
60 day minimum
Opportunity to feedback views on proposed reforms
Employer & Trustee consider comments
Potential changes to proposals
Valuation process concludes 30 June 2018
Future benefit changes from a date TBC
These are things we’re considering and actions we’re taking now to prepare for what might come
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© The University of Sheffield

18. No decision reached Cost sharing rule applies
65:35 split (= 24.11%employer: 11.29% member)
Remove the 1% match
DC contributions above current salary threshold removed
Increased deficit recovery contributions
Valuation process concludes 30 June 2018
This is a distinct possibility and not one which any party really wants to see happen, I believe
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19. What do I need to do? Keep looking out for information (see web links)
Ask questions -
IF there is a member consultation, feed in your views re any proposals
This is a distinct possibility and not one which any party really wants to see happen, I believe
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© The University of Sheffield

20. Further information TUoS website USS website: E-mail:
USS website:
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21. Questions….?
Any questions?