First the big picture
Universities aren’t going away, nor are the people who teach in them, administrate them and provide the infrastructure that keeps them going.
Many of our universities have survived wars, plagues, great fires as well as many stock-market recessions. People have taught and been taught since the renaissance.
Now the little picture
It is being suggested, because of the financial deficit imputed to the USS pension scheme, that the foundations of our university system are under threat.
The latest financial reports from USS have made it to the front page.
Academics would have to contribute more to their retirement or have future pensions diluted, which would be strongly resisted, (John Ralfe) said. Alternatively, student fees would have to be raised, or more money would have to be diverted from teaching, he added.
John leaves us in no doubt
“The danger that USS poses to the future financial health of UK universities is hugely underestimated”
John is an expert in delivering bad news and the bare numbers give him plenty of ammunition. Using the gilt based valuation technology favoured by accountants , the deficit on the scheme has increased by £7bn in the last year to £16.5bn.
What is surprising is the next line In the year to March 31, USS’s assets rose by 21 per cent to £60bn, but its liabilities increased by 33 per cent to £77.5bn.
What is going on?
The question I (and I hope you) are asking is how a pension scheme’s liabilities can jump 33% in a single year.
Are all those University staff living a third longer?
The answer is “no”, the nature of the liability is the same, same people with longevity increases probably flattening.
What is going on is a fiddling of the numbers about which we have heard very little. Sure interest rates have remained low and with the gilt rates – which drive accounting valuations, but I have seen no explanation why they should have driven a 33% rise in liabilities.
Bill Galvin, the USS CEO blames investment returns
“All we’re in a position to say now is that it is likely that investment returns will be lower than they were assumed to be in 2014 and that will put up the cost of future contributions.”
I find this equally confusing. Apparently , the in-house investment team under-performed its benchmark over the period by 2% but still returned 21% growth on assets.
What kind or investment return was USS looking for? Presumably a return that could exceed the 33% increase in liabilities? In a low-inflation, low-growth environment this looks like a Herculean task?
To the ordinary reader, none of this stacks up. To assume this is leading to teachers being laid off and students paying higher fees is a big jump. People deserve a better explanation.
A better explanation.
Let’s look into the report and accounts and see what’s going on. Here is how the money in the Scheme is invested.
You can see that the majority of the assets are directly managed with only around 20% invested in pooled funds. this should be good news if you have an eye for costs, but these numbers don’t give you the real reason for that 21% return. The reason for that was that the fund was invested 45% in equities, 34% in alternatives and only 15% in bonds (2015 figures).
Ironically, the under-performance was stated to be because the fund was under “invested” in index-linked gilts. I put invested in inverted commas – these gilts aren’t really an asset and their stellar performance last year is down to technical issues such as supply and demand the impact of ongoing quantitative easing.
The point to be made about the scheme, is that it appears appropriately invested for the future, a future where universities will continue to operate, teach and research. Back in 2006, when the fund was much more heavily invested in equities, John Ralfe predicted disaster. Here is what has happened (I exclude the latest returns already discussed)
| 2006 | 15.8% |
| 2007 | 5.5% |
| 2008 | -37.0% |
| 2009 | 26.5% |
| 2010 | 15.1% |
| 2011 | 2.1% |
| 2012 | 16.0% |
| 2013 | 32.4% |
| 2014 | 13.7% |
| 2015 | 1.4% |
| 2016 | 11.9% |
Equities have had one awful year (2008) and a number of good years. The overall impact of being invested in equities over this time will be to keep the fund invested in real assets that profit from real growth in global productivity.
We are currently working on scenarios which John would be happier with. What would have happened if USS had been more heavily invested in bonds in 2006 and what if we valued the fund relative to the actual assets it held, rather than how those assets would behave if they were gilts.
Talking of which…
Here is what has happened to the liabilities
From this, you can see that the contributions made to the scheme more or less cancelled out the accrual of new benefits (disappointing as some of those contributions were supposed to be reducing the imputed deficit.
You can also see that by far the biggest factor in the increase in the deficit was the “effect of market conditions on liabilities. This is getting to the nub of the 33% increase in liabilities. I am a simple man, nearly £8bn increase seems more than technical! What is going on?
FABI explains a lot!
What First Actuarial’s FAB index does is explain that while all this “technical” stuff is going on, the real state of schemes improved from 2006 to 2017 because assets grew faster than liabilities (when you stop being technical about it).
In the real world, the USS did not increase its liabilities by 33% last year but it did increase its asset base by 21%.
The USS, unlike a lot of corporately sponsored schemes is not on a road to buy out, its members will still be teaching in 2117 and the scheme should still be operating indefinitely! We do not stop universities because of technical issues with pension scheme valuations.
The long-term future of the fund is bright so long as it takes a long-term view. The one thing that might stop that long-term view is the kind of panic measures being advocated by John Ralfe and others. We do not need to sack teachers, or increase fees – we need to see the deficit as what it is – “technical”.
This cry of pain from John Ralfe and the pedlars of gloom is crying wolf!
Footnote
Here is something else.
Before I exonerate the management of USS, you might like to read this table. There haven’t been many pay-rises in the universities in the past decade, these figures make for uncomfortable reading.
The USS need to be better about messaging and explain just why the highly paid individuals working for it – are seeing such big wage-hikes.
