Background
The latest valuation of the assets and liabilities of USS took place on 31 March 2014. Such valuations are required for schemes like USS to undertake every three years. Although the results of this valuation are not yet known, it is widely expected that the deficit between the anticipated future costs of providing benefits to members (the liabilities), and the funds that will be available to pay for those benefits (the assets), will have increased substantially. The current deficit is estimated at £8bn and is the reason that changes to the scheme are being discussed.
In addition to the anticipated deficit in USS, there are additional considerations regarding the volatility of the deficit. At March 2011 this stood at 2.9 billion, reaching 11.5 billion in March 2013 and then swinging back down to 7.9 billion by June 2013.
The closure of the USS final salary section and its replacement by a career revalued benefits section (CRB) for new entrants from October 2011 was the main change adopted in response to the valuation outcome in 2011. It was intended that this would reduce the deficit over time and contain the cost of future benefits. However, this has not happened and instead the deficit has continued to grow.
Reasons for the current funding position
There are a number of reasons why USS's deficit has continued to increase despite the changes made to USS in 2011 This include falling bond yields, reduced optimism about investment returns and the increasing longevity of USS members, meaning people are drawing their pension for longer in retirement. It has recently be estimated that for every additional 2 years of life expectancy there is an additional 5% cost to USS.
Unfortunately simply increasing the amount everyone pays into the scheme does not appear to be an affordable long-term solution for the scheme's sustainability – for members or employers. Therefore, a change to the USS structure appears to be necessary.