The Universities Superannuation Scheme has a surplus of nearly £17bn, provisional results of the 2026 valuation found, indicating that the future service cost could fall to 16.4% of salaries from currently 20.6%. It is now consulting with universities about the valuation assumptions under its new methodology.

The £79.8bn scheme published indicative figures for its latest triennial valuation earlier this week. The provisional findings for the 31 March valuation suggest a funding level of 127% with a surplus of £16.9bn, up from £7.4bn in 2023, when the funding ratio stood at 111%. 

The trustees are now consulting with the Universities and Colleges Employers' Association on the proposed methodology and assumptions to be used in calculating the technical provisions and draft Statement of Funding Principles.  

The main questions arising for the trustees and stakeholders will be how much prudence to build into the valuation, the employer contribution rate, and whether to derisk the investments or try to grow the surplus. There will also be a question about what to do with any surplus. 

“A sustained and material surplus provides a chance to consider the scheme’s strategic direction. This is a welcome change to the funding challenges USS faced over the previous decade," said USS chair Dame Kate Barker, who recently announced she will stand down in July next year. 

“The current strong funding position presents an opportunity to put USS on a long-term stable footing, which would be consistent with what the sector said it wanted to achieve at the 2023 valuation. This was also a major theme in early discussions on the 2026 valuation. But there are choices to be considered, so it is important the sector is clear about what it wants to achieve — and what it wants to avoid — at this valuation and over the long term," she added.

Barker said the prospect of a growing surplus raises “important questions”, such as how much of it should be kept in the scheme or supporting contributions, benefits or future benefit design developments.  

“Different approaches involve different trade-offs, and the choices made now will influence the Scheme's future funding position, contribution requirements and resilience to adverse outcomes,” she said. 

USS said early engagement with employers showed a continued desire for stability. 

The scheme is using a new 'three-leg' approach for this year's valuation based on best estimate, technical provisions, and contingency measures –  a set of additional metrics used to assess the scheme’s resilience to downside scenarios and stress events. 

The scheme is proposing an initial discount rate based on best estimate expected returns on the valuation investment strategy, less a margin of prudence of 1.1% per annum, as well as a long-term discount rate equivalent to best estimate expected returns on the low dependency investment allocation less a margin of 0.7%. It assumes it will hold the valuation investment strategy for 30 years and then moves to a low dependency allocation over the following 10 years. 

Under this new methodology, the initial best estimate investment returns – including a 0.1% allowance for an illiquidity premium – are at gilts plus 2.2%, with the initial TP discount rate being gilts plus 1.1%. Over the long-term, the scheme assumes best estimate low dependency returns of gilts plus 1.3% and a TP discount rate of gilts plus 0.6%. 

The University and College Union has welcomed the publication of the valuation, seeing its multi-year strike action over pensions between 2018 and 2023 vindicated. In 2023, benefits were restored as the scheme was in surplus after a deficit of £14.1bn in 2020. 

"University bosses wrongly sought to dilute our entitlements but, thanks to UCU, benefits were protected and the scheme is now posting a near £17bn surplus," said general secretary Jo Grady.  

"We also welcome the introduction of a new valuation methodology following proposals by UCU that have been accepted by the trustee and will now consider the valuation's details in full before responding further to the consultation," she said. 

"The priority must be to avoid the chaos caused by previous instability in the scheme. This means the current contribution rate must be maintained, a significant portion of the surplus must be used to hedge against future potential volatility, and the investment strategy needs to be orientated towards growth." 

The new valuation comes as employer body UCEA is lobbying the government to change the pension arrangements of post-92 universities, which have a statutory obligation to offer the Teachers' Pension Scheme to their employees. TPS employer contribution rates are set to fall from April next year but are still higher than those of USS.  

While some modern universities have sought to shift staff into corporate subsidiaries with defined contribution schemes, others have struck agreements with USS. Northumbria University is giving academics the option to move from TPS to the less generous USS, initially proposing to freeze salaries for those who stay in the teachers' scheme. It later said salary levels for TPS members would be agreed locally, committing to review what salary increases may be affordable via a new negotiation process with UCU. The majority of eligible staff chose to stay enrolled in TPS despite incentives of up to £12,000, according to a Times Higher Education report from last month.