The average FRS17 funding level of university pension schemes has deteriorated over the past year according to the 4th annual survey of University Self Administered Trusts (SATs) conducted by Barnett Waddingham.
Of the universities surveyed, the average FRS17 funding level fell from 81% to 77%, as of 31 July 2012, most likely attributable to the strengthening of financial assumptions following a fall in bond yields. This corresponds to an average deficit of around £42 million per SAT, up from around £34 million in 2011.
Results from the 2012 survey show:
- SAT pension deficits represent an average of 10% of the net assets of the university (excluding the SAT pension deficit) (8% in 2011)
- Contributions to SATs, which cover only non-academic employees, represent an average of 3.4% of total staff costs (3.3% in 2011)
- Average funding level for universities is approximately 77% (81% in 2011)
- Most universities in the survey explicitly disclosed a Consumer Price Index (CPI) inflation assumption, implying that 27 of the 36 universities surveyed now use CPI as a measure of future inflation for at least some of the increases applied to benefits.
- Average real salary growth assumption increased by 0.2% p.a.in 2012 compared to last year.
- The average life expectancy assumption ranged from 18 – 24 years for a 65 year old male
- Average equity weighting is 61%, largely unchanged from 2011 average of 62%
The survey, which focuses on the impact final salary pension schemes are having on the finances of universities, also considers the range of assumptions being adopted by universities in their FRS17 disclosures as at 31 July 2012.
Amidst a decline in bond yields, the average equity weighting of assets invested in the SATs continues to be substantially higher than the average equity allocation within private sector occupational defined benefit schemes in 2012. This suggests that universities are prepared to take a longer term view on investment returns and that SATs trustees believe they are being provided a stronger covenant than that from many private sector scheme sponsors.
The survey also showed that the burden SATs place on universities has increased by a quarter, with pension deficits now accounting for an average of 10% of the net assets of the university.
Findings from the survey imply that many universities are making upward adjustments to their discount rates to allow for the duration of their liabilities. This year, the average discount rate was 0.4% higher than the index yield.
In addition, the survey found that the range of life expectancy assumptions adopted by the universities increased from last year’s surprisingly wide range. Universities were assuming a 65 year old male member has a life expectancy of between 18 and 24 years. This is surprising given that the profile of SATs members would be expected to be similar from university to university, and is perhaps reflective of some universities carrying out a more detailed, scheme specific, mortality investigation.
Nick Griggs, Partner, Barnett Waddingham, who is a leading industry expert on the University sector said: “The news that average funding levels for university pension schemes have fallen is a trend we are seeing across all sectors. The concern is that this will push even more universities to close their schemes to future accrual.
“With SAT pension deficits now accounting for an average of 10% of a university’s net assets, SATs are becoming an increasingly important area. They represent a significant financial risk, particularly given the high equity allocation, compared to other sectors, many SATs hold.”
The survey is based on data in the published accounts of universities with financial years that ended on 31 July 2012. The figures in this survey are based on a sample of 36 universities whose accounts showed they operate their own pension scheme.
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