University pension fund faces black hole

LONDON Tue Jun 29, 2010 2:08pm BST

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LONDON (Reuters) - Britain's second-largest private retirement scheme, which pays pensions to university staff, is facing tough decisions on its future, which could cut benefits and trigger a shift from equities as it tackles a huge deficit.

Next week, a University Superannuation Scheme (USS) committee will try to decide between two proposals to address a deficit which stood at 17 billion pounds as of March.

The July 7 vote highlights the dilemma faced by pension schemes worldwide wrestling with rising longevity in the midst of volatile markets and a fragile recovery, which has dented scheme sponsors' ability to meet the growing costs involved.

The 30-billion-pound USS scheme, second in size only to the BT Pension Scheme (BT.L), faces a choice between two plans.

One, from the universities, would hike the age when payments start by five years and increase contributions from members by 18 percent, while those from employers remained the same. The basis for payments to new entrants would change to an average career salary from the final salary arrangement used at present.

The second proposal, from the UCU union, would keep the final salary arrangement intact and only hike the pension age to 65 for new entrants, while placing the bulk of the burden for extra contributions on the universities themselves.

In a UCU ballot earlier this month, 96 percent of members voted to reject the employers' proposals. UCU general secretary Sally Hunt has said the employers "seem determined to create a two-tier system which would damage recruitment and retention of university staff".

Independent trustee Peter Thompson, an adviser to the universities, said if USS changed its benefits to reflect career average pay, the scheme would be likely to take a more conservative long-term investment strategy, eroding USS's relatively high exposure to stocks.

"Traditionally the USS has been very heavily invested in equity", Thompson, a former chairman of the National Association of Pension Funds (NAPF), told Reuters on the sidelines of a briefing on Monday.

"A change would probably not affect allocation in the short term but employers, which are now squeezed by cuts, may get quite keen that the USS lower its investment risk. Diversification is the right word to use," said Thompson.

At the end of March 2009, the scheme was invested 70 percent in equity, with the balance split between fixed income, alternative investments, property and cash. British pension schemes allocated 60 percent to equity, on average, in 2009, consultant Towers Watson said.

Next week's vote will end a two-year negotiation period, but there are still fears that the Joint Review Committee charged with deciding the issue might fail to reach a conclusion.

Damian Docherty, from the Universities and Colleges Employers Association (UCEA), said a prolonged failure could trigger government intervention either by limiting the use of state grants to top up pension schemes or, less probably, through ad-hoc legislation.

Thompson said that without a definitive decision next week, universities could face an additional 220 million pound annual bill from 2012, based partly on longevity assumptions and higher salaries than had been expected. Currently, universities pay 880 million pounds in pension contributions a year.

The proposals for USS mean it would remain a defined benefit scheme, while in the corporate world, many such funds have already closed to new recruits or been ended all together.

Companies have sought to replace them with more modest defined contribution schemes to deal with market volatility, uncertainty over the economy and the increase in longevity.

(Editing by Joel Dimmock and Simon Jessop)

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