07th Jul 2021

University sector trustees may need professional support

Universities continue to grapple with their vast array of pension arrangements ranging from nationally operated pension schemes (USS, LGPS, TPS etc.) to their own local pension schemes (legacy DB/DC pension arrangements or self-administered trusts (SATs) schemes operated by pre-92 universities) – it’s a minefield.

While the statutory deadline for filing the valuation officially ended on 30 June 2021, the USS saga is far from over as it continues to face extraordinary funding challenges with the deficit growing from £3.6bn in the 2018 valuation to between £14.9bn – £17.9bn in the 2020 valuation, depending on the actuarial assumption adopted. But this does not mean that local pension arrangements should be overlooked nor does it mean they do not face their own challenges. 

Deficits have gone up and with that will come a demand of higher funding contributions. Trustees also have a new regulatory regime on the horizon and The Pensions Regulator has growing focus on good governance. The pressure on trustees to ensure their pension schemes are managed effectively is mounting.

Collaboration is crucial

While there will always be conflict between member security and sponsor affordability, trustees and sponsors must work collaboratively. Together they should map out a journey plan that is appropriate for the scheme and also aligned with the university’s business plan, ensuring the sponsor is prepared for the financial demands of the scheme along with its other pension commitments.

An open and constructive dialogue between trustees and sponsors about the material risks to each other’s strategies will provide the scheme with the foundation to strike the right balance between member security and sponsor affordability.

Manage risks – ‘The Three Pillars’

As the ultimate paymaster, sponsors need to be aware of the level of risk a scheme is looking to take and should be willing to underwrite it. There are three fundamental levels of risk that need to be managed:

  • Covenant – professional advisors should work with trustees to dissect the sponsor’s forecast profit, its business plans, understand its level of affordability and its resilience to cope with poor outcomes.
  • Funding – trustees must grasp the scheme’s funding position in order to evaluate the risks associated with the assumptions behind the actuarial valuation and recovery plan.
  • Investment – schemes should ensure they take a supportable and manageable level of investment risk.

20-20 Trustees’ experience in the education sector shows it can often be a difficult balancing act of managing relatively strong covenants and large balance sheets with limited affordability that require longer recovery plans. We believe that taking a holistic approach leads to much more effective decision-making as trustees and sponsors are working collaboratively.

Big scheme projects

Both trustees and sponsors should be mindful of any big scheme projects on the horizon that could affect the scheme’s journey plan, for example, GMP equalisation, liability management exercises, buy-ins/buy-outs and benefit redesign.

The latter is particularly relevant as employers look to reduce their pension costs to a more manageable level driven by affordability and cost certainty.  Whilst universities cannot ‘unpick’ benefits that have already accrued, through appropriate consultation, they can change the pension benefits they provide to their employees going forward. Many have already gone down this route and for those that haven’t, it is increasingly appearing on sponsors’ agendas. However, benefit redesign is not necessarily the only route – through working collaboratively with the trustees and better management of the scheme’s risks, efficiencies can be achieved to provide affordability without having to compromise members’ future pension benefits.

External impacts

Trustees should not just consider their scheme in isolation, they need to be aware of external factors that could affect their schemes, most notably the elephant in the room; the USS. If the USS sees a considerable rise to its pension contributions, how does this affect universities affordability to their other pension commitments?

The USS is proposing a new debt monitoring framework whereby it will collect data on debt from sponsors and agree any mitigation measures where it believes there is a risk of weakening the covenant. Trustees will need to consider how this impacts the security of their scheme and whether they should equally be seeking pari passu security on any new secured debt.

Knowledge is key

Strong and effective governance is particularly important in the university sector and good decisions can only be made if trustees understand the regulatory framework and their roles and responsibilities within it.  This constantly evolving landscape is placing a huge demand on trustees which is why seeking specialist advice from experts in this sector is crucial.

20-20 Trustees’ experience in the higher education sector allows us to pave the way for sponsors and trustees to gain mutual understanding, negotiate effectively and work collaboratively to find the best solution for the scheme.