The UK’s largest private-sector retirement plan and hundreds of universities have warned the pensions watchdog that its shake-up of rules risks damaging economic growth and the education sector.
In a letter to the Pensions Regulator, which was seen by the Financial Times, the £90bn Universities Superannuation Scheme said its stakeholders had “deep misgivings” about proposed changes to the funding code for defined benefit pensions.
The reforms, published in December last year, could require most of the UK’s 5,200 DB plans, which promise guaranteed pensions, to invest more in low-risk assets, including bonds, and less in high-risk growth assets such as stocks.
The watchdog wants to reduce the likelihood of funding shocks for these retirement plans, most of which are closed and running down their liabilities over the next few decades.
But the USS — along with Universities UK, which represents higher education providers, and the University and College Union, which speaks for staff — warned TPR that a requirement to back lower-risk pension strategies could damage employees’ “future prospects” and divert resources away from teaching and research.
The groups added: “A DB funding regime which does not appropriately reflect USS’s open status and long-term horizons, and which does not recognise the strength and nature of the higher education sector that supports it, may reduce its ability to support such objectives, place unnecessary demands on our sponsoring employers and be to the detriment of our members.”
The letter marks the pension industry’s latest expression of concern over the shake-up’s impacts on members if DB schemes have to reshape their investment strategies.
It also comes as the government examines ways to release billions of pounds of capital from defined contribution pension plans, where members have no guarantee of their retirement pot, by encouraging investment in assets such as infrastructure and tech start-ups.
The USS, which has more than 500,000 members and about 60 per cent of its £90bn fund invested in “growth assets”, said it “firmly believed” that pension fund capital could “play a critical role in accelerating growth, increasing long-term investment in infrastructure and supporting the transition to net zero”.
Jon Forsyth, partner at LCP, an actuarial consulting group, said “rigid” funding regulations could force all schemes to reduce the risk of investment strategies at a certain point in time, leading to “wider unintended consequences”.
“This includes employers, who could face increased costs because they can no longer rely on investment returns from riskier assets to fund pension promises,” he said.
“Lots of schemes de-risking at the same time could also have an impact on gilt markets,” he added, in a nod to last September’s bond market turmoil.
The Pensions Regulator said its draft funding code consultation had “specific messaging and approaches” for open schemes such as the USS.
“We engaged extensively with stakeholders during our consultation, including USS, as their letter notes, and will now be carefully considering all responses, as well as the final regulations, as we finalise the code. We will continue to engage closely with industry during the process.”
