Representatives from the College and USS met on 20 April 2021 to discuss outstanding questions [pdf] as part of the ongoing valuation process. Questions from the College were submitted in advance.



Professor Ian Walmsley (Provost); Professor Richard Craster (Dean, Faculty of Natural Sciences); Audrey Fraser (Head of Reward, Engagement & Policy); Professor Axel Gandy (Chair in Statistics, Department of Mathematics); Dr Tony Lawrence (Director of Finance); Professor David Miles (Professor of Financial Economics, Business School); Vickie Sheriff (Director of Communications); Carey Southward (Senior Pensions Specialist); Helen Young (Reward, Engagement & Policy Adviser)


Mirko Cardinale (Head of Investment Strategy & Advice); Guy Coughlan (Valuation Programme Executive); Mel Duffield (Pensions Strategy Executive); Jeffrey Rowney (Head of Funding Strategy); Steve Towers (Head of Strategy Solutions); Mya Seery (Stakeholder Engagement and Committee Co-ordination Adviser)

Joint Expert Panel recommendations

The Joint Expert Panel had previously provided recommendations to USS ahead of the current valuation. The College questioned why USS had deviated from these, most notably by not considering the possibility that future investments may outperform expectations and whether, as a result, this valuation was overly prudent.

USS explained that the Pensions Regulator had already noted that previous valuations were “at the limit” of legal compliance for prudence. It was also suggested that prudence is multi-faceted; whilst the valuation may appear more prudent when assessing its asset growth and contributions, it is arguably less so when assessing the road to self-sufficiency.

USS Covenant

In its initial proposals, USS outlined three scenarios of future contributions, with scenarios two and three being based upon strengthening the covenant of the scheme[i]. The College questioned how these scenarios were devised, particularly the 7.5% difference in contributions between scenarios two and three.

USS noted that, in order to receive a ‘strong’ covenant rating, there needed to be a longer suspension on employers leaving the scheme. As this reduces risk, they would then be able to extend the period allocated to reduce the scheme’s deficit, which would mean lower contribution rates. This is what is being suggested in scenario 3.

The College reiterated its long-term commitment to USS, but further queried how USS evaluates each institution’s debt (the Debt Monitoring Framework), and whether this suggests a higher level of risk than is accurate. The College asked that USS measure net debt rather than gross debt – USS agreed to consider this matter and provide a follow-up.

USS predictions of asset growth

A fundamental part of a valuation is estimating the growth of assets in the scheme. As part of the scheme’s returns are based on market-dependent investments, the valuation must try to predict how financial markets might perform over time. The College queried how USS arrives at its estimation of growth, referring to a video by Dr Sam Marsh who suggests that USS have consistently undervalued its assets.

USS outlined that an estimation of future return, as analysed by Sam Marsh, is different from a prudence assessment. The latter, which USS must use when undertaking a valuation, legally must be more prudent and factor in that the schemes commitments are growing at the same – if not higher – rate than its investments [ii]. USS stated that the growth in liabilities is currently outpacing growth in assets, and they are estimating that this will continue.

What might need to change?

The College noted that the trend in recent years – namely, successive valuations with significant changes at each one – is unsustainable. If there was an appetite from members, what changes to the scheme might be available to ensure a more stable funding position?

USS outlined that further information will be provided by UUK on potential alternatives in the coming weeks. There are structural changes that could be explored, although there has yet been no indication that institutions would be amenable to them. This may include using a more conditional model[iii] or a collective defined contribution (CDC) model. These would not be able to be implemented in the short-term, however; all models are possible, but government engagement or regulatory changes would be required for each.

[i] A covenant is a question of how much USS can rely on employers now and in the future. They need to take many factors into consideration, including how an employer might be affected by an economic downturn, global events, levels of employer debt, and student numbers. The stronger the covenant strength, the more investment risk USS may take, as any shortfall can be assumed to be covered by the employer.

[ii] Commitments/liabilities are the estimated cost of honouring existing pension promises. The challenge is that this must be quantified at a single point in time (the valuation) for a pension contract that can last over 60 years. To calculate this, you first must estimate the future salary on which pensions will be drawn, and then estimate how much money you would need to have invested now at prospective interest rates in order to meet a pension payment in the future.

[iii] Conditional models adjust benefits dependent on how the assets of a pension scheme perform. For example, a conditional model might only increase pensions built up (but not yet paid) if assets were performing well – in this way, benefits can improve when markets are strong, but no increases paid when they are weaker. Importantly, this only applies before pensions are paid.