Survey shows improvement in university FRS17 funding level

Published by Nick Griggs on

The average FRS17 funding level of university pension schemes has improved, according to our 5th annual survey of University Self Administered Trusts (SATs).

The average FRS17 funding level for the universities in the survey rose from 77% to 82%, as of 31 July 2013, mainly due to strong asset performance supported by deficit contributions paid by the universities.

Results from the 2013 survey show:

  • Average funding level for universities is approximately 82% (77% in 2012)
  • SAT pension deficits represents an average of 8% of the net assets of the university (excluding the SAT pension deficit) (10% in 2012)
  • Contributions to SATs, which cover only non-academic employees, represent an average of 3.2% of total staff costs (3.3% in 2012)
  • Most universities in the survey explicitly disclosed a Consumer Price Index (CPI) inflation assumption, implying that 27 of the 36 universities surveyed use CPI as a measure of future inflation for at least some of the increases applied to benefits
  • Average real salary growth assumption fell by 0.1% p.a.in 2013 compared to last year
  • The average life expectancy assumption ranged from 20 – 24 years for a 65 year old male
  • Average equity weighting is 62%, largely unchanged from 2012 average of 61%

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 2013.

In the past, universities have generally adopted a long-term view to investment with the average equity weighting of assets invested in the SATs being substantially higher than the average equity allocation within private sector occupational defined benefit schemes. This investment position has helped improve funding levels of SATs following a year of high equity returns.

The survey also showed that the burden SATs place on universities has fallen, with pension deficits now accounting for an average of 8% of the net assets of the university.

Findings from the survey imply that many universities are continuing to make upward adjustments to their discount rates to allow for the duration of their liabilities. This year, the average discount rate was 0.3% higher than the long-term index yield.

The survey is based on data in the published accounts of universities with financial years that ended on 31 July 2013. The figures in this survey are based on a sample of 36 universities whose accounts showed they operate their own pension scheme.

Commenting on the survey Nick Griggs, head of Corporate Consulting, says: "Improving equity performance and rising bond yields will have come as good news to SATs trustees and universities, with most seeing improvements in funding positions. However, the economic outlook still remains uncertain and funding positions and investment strategies of defined benefit pension schemes should continue to be monitored. Market volatility also remains a particularly significant risk to SATs given their higher than average exposure to equities.

Our research indicated that almost 90% of SATs are still open to future accrual in some form. With the abolition of defined benefit contracting-out in 2016, the implications on the costs associated with running these schemes will need to be fully understood and mitigating action carried out sooner rather than later."