Detailed briefing on funding and reviewing University of Sussex Pension and
Assurance Scheme
Introduction
1. As an employer which values its staff, the University wishes to engage in active dialogue
with its Council, the USPAS Trustees, scheme members and trade unions to protect
past service benefits built up by members and develop a model of funding which
provides a secure and affordable pension provision for what is a significant proportion of
University staff.
2. This document sets out the background to pension provision at the University of Sussex,
provides an update on the USPAS triennial valuation and future actions.
Background
3. Employees of the University of Sussex are covered by one of two pension schemes.
Academic and academic-related staff are covered by USS (the Universities
Superannuation Scheme) and all other staff are covered by USPAS (the University of
Sussex Pension and Assurance Scheme). USS and USPAS are both final salary
pension schemes.
4. In recent years, a key issue for all universities is the potential impact of pension scheme
valuations which take place every three years. This is because of an increasingly
stringent pension regulation environment, a healthier population and changes in
investment performance (all factors outside the University’s control). Recognition of this
risk is also made through the FRS17 adjustments made to the University’s accounts.
5. As at 31st March 2006, one of the pension schemes in which University staff are
members (USPAS) had its triennial valuation and this revealed a worsening gap between
the assets held by the scheme and the cost of future benefits to be paid out under the
scheme.
USPAS March 2006 Triennial Valuation
6. Triennial valuations of the USPAS scheme have taken place in 2003 and 2006. At the
time of the 2003 valuation, a shortfall of £14m was identified – between the value of the
assets held by the scheme, and the value of the benefits due to be paid out in the future.
The University reached agreement with the scheme’s Trustees to repay this cost over a
25 year period by raising the employer’s contribution from 8.8% to 19.5% from April
2004, with employees contributions unchanged at 6%.
7. The 2006 valuation shows that the shortfall had grown to £25.5m. This valuation and the
underlying performance assumptions were confirmed by the scheme’s Trustees at a
meeting on 7th March 2007. The University has also commissioned independent pension
advisers who have confirmed the robustness, fairness and prudence of the underlying
performance assumptions.
Why is there a Growing Shortfall?
8. Despite the agreed recovery plan in 2003, the USPAS shortfall has grown by £11m over
the past three years. The factors associated with this increase are essentially outside
the control of the University and include:
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improving life expectancy, outstripping projections made in 2003;
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low investment returns relative to past performance, even though there has been
some recovery of the stock market;
the impact of the national Framework Agreement and recent national pay
settlements, leading to pay rising faster than inflation;
a new legal requirement for pensions to adopt a more prudent approach to valuation.
9. The scheme actuaries have indicated that had the basis of valuation for 2003 been
applied, the shortfall would have reduced to £8.3m.
Implications of the Shortfall
10. The pension Trustees and sponsoring employer (the University) are obliged to reach
agreement over the funding of USPAS. This issue of funding has two distinct parts, past
service benefits and future service benefits, and need to be addressed in different ways.
11. Past Service Benefits is concerned with protecting the benefits accrued by members up
to the valuation date. In effect, it is about recovering the £25.5m difference between
assets and liabilities of the scheme which existed on 31st March 2006. The Trustees
need to approve a University plan to make up the shortfall over an agreed period. This
plan must also be agreed by The Pension Regulator.
12. Future Service Benefits is concerned with how pension provision relating to future
service is provided.
Funding Past Service Benefits
13. The past service benefits built up by USPAS members are a legal entitlement which
cannot be changed without the consent of individual members. The Trustees and
University must therefore agree a plan to bring the scheme into balance and have this
scheme approved by The Pension Regulator. This will be necessary irrespective of any
future proposals relating to pension provision.
14. The scheme’s Trustees and University propose recovering the position as follows:
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a recovery period of 20 years (reduced from 25 years at the 2003 valuation);
financing contributions of approximately £1.9m a year starting in 2007-2008;
financing contribution will increase by 1.5% a year over 20 years.
15. Because the scheme is in shortfall, approval of The Pension Regulator must be sought.
The number of cases considered by The Pension Regulator to date is relatively small
and case history has yet to be developed. However The Pension Regulator has
indicated that all schemes with a recovery period exceeding 10 years will be subject to
detailed scrutiny.
The Pension Regulator will expect prudence and financial
sustainability and hence a recovery period is being proposed by the scheme’s Trustees
and the University, which is greater than 10 years, but less than the previous 25 years.
16. The additional financial contribution of approximately £1.9m p.a. may reduce if stock
market performance improves better than expected over the period April 2006-March
2009 leading to the next valuation. However any possible reduction in contributions will
be small in comparison to the overall additional cost.
17. The proposed recovery plan was approved by the USPAS Trustees at their meeting on
7th March 2007.
Future service costs for 2007-08
18. The future service costs for FY2007-2008 will be 24.1%, of which employees pay 6%.
The cost of future benefits for FY2007-2008 will be around £1.8m. This will be in
addition to the £1.9m to fund past service deficit.
Options for Future Service Benefits
19. As an employer which values its staff, the University wishes to engage in active dialogue
with Council, the USPAS Trustees, scheme members and trade unions to protect
accrued past service benefits and develop a model of funding which provides a secure
and affordable pension provision for what is a significant proportion of University staff.
20. The above proposals only deal with the USPAS pension deficit relating to accrued past
service. The proposals do not address the risk and funding related to future service
benefits. Without any further changes, the cost of past and future service benefits
accrued by members would lead the University to need to fund around £1.8m more cash
each year from operating activity to maintain its required cash levels (unless dramatic
changes to investment performance, life expectancy etc).
21. As sponsoring employer of the pension scheme, the University is at liberty, through due
process, to determine changes to future service benefits.
22. Evaluating and agreeing options for acceptable and financially sustainable future service
benefits will take a significant period of time. Key elements of the process will include:
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communication and consultation with stakeholders (pension members, trade unions,
employers etc.);
modelling the cost and benefits of options;
reaching agreement on the preferred option;
implementation of the preferred option.
23. In the light of the above considerations, it is proposed that plans for future service
benefits will be developed and implemented over the next 12 months. Proposals will be
brought before Council in Spring 2008 and, if approved, implemented from 1st August
2008.
24. The services of Barclays Corporate and First Actuarial will be retained to assist in the
development and communication of proposals.
Membership of the USPAS scheme
25. The USPAS Scheme will remain open for eligible staff to join (i.e. new staff or staff within
the first six months of their contract) while proposals for future service benefit are being
developed and brought to Council within the timeframe indicated in this paper.
26. There is no entitlement, under scheme rules, for entry to the scheme after the six month
window has expired. The Trustees and the University have agreed that discretion should
not be exercised to permit such entry, after 7th March 2007 (the date of the Trustees
meeting) unless there were very exceptional individual circumstances that should be
considered.
Accounting for the recovery plan
27. The proposed recovery plan will impact the University accounts in the following manner:
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the existing FRS17 accounting treatment already recognises a pension scheme
shortfall for USPAS in the Balance Sheet;
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annual adjustments are made to the FRS17 pension shortfall and will continue to
appear in the Income and Expenditure account;
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additional cash payments made as part of the proposed recovery plan will have no
further impact on the Income and Expenditure account, however there will be an
annual cash outflow of the order of £1.9m. Financial performance of the University
would have to rise by any excess over current total cost of the USPAS scheme if the
University is to maintain its current planned levels of cash.
March 2007