As Frank Field, Chair of the Parliamentary Work & Pensions Committee, writes to the Trustees of USS, the Pension Regulator and ministers about the record deficit position the Scheme now finds itself in, I wanted to consider if the Scheme is a victim of circumstance or are there any lessons to be learned. The USS annual report as at 31 March 2017 showed that the asset values had increased 20.48% from £49.8bn to £60bn but the value of the liabilities increased £18.7bn to £77.5bn resulting in an increased deficit of £17.5bn. The accounts stated that the deficit was driven by “lower expected levels of future investment returns and lower yields on index-linked gilts”. This is consistent with the position in many other schemes. It’s just much more noticeable here as we’re taking about very large numbers and the fact that the new figure represents a record reported deficit for any UK pension scheme. It’s also important to note that these results are accounting results produced using a basis established under UK Gapp (FRS102) and not the funding position of the Scheme on which contributions are based. It’s widely discussed whether or not these figures are being distorted by suppressed gilt yields as a result of quantitative easing. There is undoubtedly a debate to be had about whether the current basis of FRS disclosure is fit for purpose. It is extremely unlikely also that the assumptions used for the accounting disclosure will match those used for the 2017 funding valuation which is currently underway. At the last valuation in 2014 the Scheme had a reported deficit of £5.3bn. The active employers agreed to contribute an extra 2.1% of payroll over 17 years to plug the gap – equivalent to an extra £165m per annum. The Scheme also took action from 1 April 2016 to increase contributions by 2% for future benefits from 16% to 18% and to revise the basis of future benefit provision from final salary to CARE with an imposed salary limit (£55,550 for 2017/18) to try to reduce costs. The question now is did this go far enough and are further contribution increases / benefit reductions likely to stabilise the position? The on-going 2017 valuation therefore is likely to show a worsening position however potentially not as bad as the change in the accounting position. It does however seem likely therefore that further changes will be needed. There has already, not surprisingly, been a great deal of negative comment about any increases in contributions being funded via increases to tuition fees and the unquestionable intergenerational unfairness of current students having to fund for a benefit for todays lecturers which they are unlikely to ever benefit from. However, where else can the money come from when many organisations are struggling financially and indeed many struggled to find the money for the increases after the 2014 valuation? The problem for many of these participants is potentially much more acute and worrying as it highlights a dangerous inflexibility in the approach adopted by the USS trustees. The rules of the USS are very prescriptive in that once an organisation signs up they must admit, and continue to admit, all eligible employees to the Scheme. There is no flexibility to amend this eligibility criteria, no ability to limit those joining or close to new entrants as has been the well worn path in many other schemes where employers are looking to limit their liabilities. Many employers experienced affordability issues from 2014 onwards as they were forced to fund higher contributions as well as paying contributions for a greater number of employees as a result of auto-enrolment. This double whammy was placing great financial stress on organisations but any requests for flexibility from USS were met with a lack of flexibility, or indeed sympathy. I can only see the position deteriorating further post the 2017 valuation. Organisations will be trapped unable to afford to pay the on-going contributions and unable to limit the extent of those contributions. Employers are also in a worse position as they will be unable to cease accrual entirely and exit the Scheme as this will result in the imposition of a cessation debt based on a valuation basis much stronger than that applied to the on-going and accounting position. The cessation debt will be based on gilt yields which are at record low levels resulting in record high levels of deficit on exit. This means that the deficit on this cessation basis will be significantly higher than the £17.5bn identified at the accounting valuation. This problem is partly down to the rules around exits from multi-employer pension schemes, the so called Section 75 debt issue. This has been a well known problem for many years but successive governments have refused to address it. Recent consultation on the issue offers some hope of progress but we could still be a long way from a resolution. USS however cannot apportion all the blame for the issue here as they have been less than proactive in seeking alternatives for their participating employers, something which many other schemes in a similar position have managed. It cannot, in my view, be sensible to encourage employers to provide pension benefits at a level they cannot afford especially in a scheme where any financial failure impacts directly on other participants in the Scheme and it is incumbent on the scheme to look to seek solutions to the issue and to be supportive of proposals to improve the position. So the position at USS is far from unique. Like many other schemes it is undoubtedly a victim of market conditions. USS could also legitimately claim that successive governments cannot absolve themselves of blame given their inaction around the Section 75 legislative issue. However this is far from the whole story and USS needs to be more proactive in seeking to address its participants concerns and needs. The results of the 2017 actuarial valuation will undoubtedly bring this in to even sharper focus and hopefully encourage more flexible thinking. Employers also need to be preparing for a likely deterioration in the position and considering their future options.