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USS: controversial debt monitoring framework proposed

Out-Law News | 15 Jul 2020 | 4:21 pm | 4 min. read

Higher education providers in the UK will be under an obligation to report on their debt levels under new plans outlined by the trustees for the Universities Superannuation Scheme (USS), the principal pension scheme for academic and senior administrative staff at UK universities and other higher education and research institutions.

Pensions expert Nick Stones of Pinsent Masons, the law firm behind Out-Law, said aspects of the proposals, currently open to consultation among employers who participate in the USS, are controversial.

The trustees have identified a need to monitor debt levels among the scheme's participating employers after it was found that "employer debt levels were increasing faster than the size of the sector, and there was no formal process in place for the trustee to monitor and assess employer debt levels on an ongoing basis". This has been reflected in the overall employer covenant rating for the USS for the actuarial variation in 2018, which was deemed ‘strong’ but on ‘negative watch’.

The USS said: "The aim of the framework is to put in place a process where the trustee and the employers continue to work together to support and protect the covenant provided to the scheme by the employers in circumstances where the debt levels of employers are increased. Although actions taken by the trustee under the framework might represent additional calls on an employer's resources, such actions should reduce the risk that the scheme poses to the

employer and the likelihood that adverse changes in the scheme could make an already difficult situation worse." It was reported last year that the USS deficit had nearly doubled over the course of a few months.

Stones Nick

Nick Stones


The consequences of a trigger breach seem to go wider than the legislative regime currently envisages and might be argued as a power grab by the trustee at the expense of the employer

Stones said: "USS is understandably keen to maintain the employer covenant, and has said the lack of any formal monitoring process is a weakness which must be addressed. The result is a policy that applies to all employers regardless of size and a policy designed with higher education institutions (HEIs) in mind, albeit USS has acknowledged it will apply to participating employers outside of the HEI mould too."

"USS argues that the policy is not intended to impact on some important features of the USS, namely the mutuality of covenant amongst the employers, or interfere in the day to day operation of the employer business or give the trustee any new powers. Some may take a different view," he said.

A financial information reporting requirement and a mandatory security requirement that would apply when certain thresholds are triggered are at the heart of the USS' debt monitoring proposals.

Under the financial information reporting regime proposed, employers would have to complete an online form every January to submit financial information based on their audited financial statements, and also to confirm whether it expects to breach any of the 'monitoring metrics' the USS plans to establish in the following year. The USS would then review the information against monitoring metrics to determine whether any action needs to be taken.

The USS has, however, proposed a self-certification regime for reporting, which would not require full data to be provided with it, if the employer "does not have any debt or borrowing; or based on its own calculations, does not believe, acting reasonably, that it breaches any of the monitoring metrics; and believes, acting reasonably, that the situation will not change in the next 12 months".

Further financial information will also have to be shared on an ad hoc basis, including in certain cases where the employer plans to take on new or additional secured debt, and/or grant security for existing unsecured debt, after 1 August 2020.

Stones said: "Whilst it may compel employers to provide the information if it is reasonably needed, it is questionable whether USS can compel the provision of an employer opinion under the self-certification route. Therefore, the more prudent course of action may be to simply provide the raw data and let USS do the assessment itself."

"Whilst security existing before 1 August is not directly caught by the reporting requirements, it may impact on a re-financing or expiry. Actuarial commentary suggests that the chosen threshold of 5% for gross secured debt divided by net assets is overly prudent with 15% being more desirable from an employer perspective. USS believes that 5% is fair and proportionate but does not give any reasons for this and instead requires the employers to argue why a higher threshold is appropriate. Given the nature of what is being done, this seems to be the wrong way around," he said.  

Under the framework, employers whose level of secured debt exceeds the 5% threshold will be required to grant the USS security for the debt above that threshold on a 'pari passu' basis, meaning it will have equal rights of access to that security as other secured creditors. Stones said the measure is likely to be controversial in the eyes of both employers participating in the scheme and the wider banking sector, and that it is not guaranteed that employer contributions to the USS will stabilise as a result.

Stones also questioned whether the new measures could be enforced and the legal basis for some of the measures. The USS has suggested that employers could be expelled from the USS if they do not comply with the requirements, or that it will seek accelerated, or additional, employer contributions in response to rising debt levels.

"To be effective then the policy must have teeth," he said. "It does not appear that actual changes are being made to the trust deed and rules. USS argue they have enough powers within the current statutory framework and the trust deed."

"The existing legislative framework supports information gathering subject to there being a reasonable need. However, it is not clear whether a broad brush, one-size-fits-all approach is within that scope. As to the veiled threat of accelerated contributions or expulsion under the trust deed powers, the position is likely to be more nuanced and, if examined more critically, USS may have some difficulty," he said.

"The risk is that ill-defined powers and sweeping discretion in favour of the USS results in, at best, a lack of clarity or, at worst, a more onerous regime on employers," Stones said. "Subject to greater clarity, the information gathering requirements seem sensible overall, but the consequences of a trigger breach seem to go wider than the legislative regime currently envisages and might be argued as a power grab by the trustee at the expense of the employer," Stones said. 

USS' consultation closes on 3 August.