When I wrote my blog yesterday, I had not read the USS consultation document which contains the basis of the triennial valuation it has just completed. I was writing “over” the FT article written by Jo Cumbo which (as usual) presented a fair view of the issues.
I wanted to test how far I, as a non-actuary but informed pension person, could go in judging what the USS Trustees were saying. My comments were “un-expert” and I got a few things wrong , I suspect I will continue to do so, I want my understanding to be challenged and informed so I can get better at understanding things.
We cannot all be experts, I know many of the experts who were behind the consultation and would have a drink with any of them, but I don’t agree with a lot of what they are saying and this is why.
I am restricting my comments to the announcement that is made on the USS website.
Why I think USS Trustees are wrong.
At the heart of USS Trustee’s thinking is a wish to be self-sufficient. Like the Pension Protection Fund, USS wants to manage its own affairs without being beholden to the employers who do the bulk of the funding (and even the members who pay 35% of the costs).
I don’t understand this wish to be self-sufficient.
I don’t see the fundamentals of retirement funding changing any time soon – or ever! People want certain incomes – a wage for life in retirement. Teachers are sold a career that gives them just that (whether in the USS or the Teachers pension scheme).
It is assumed that their employers, the universities and other educational institutions have a wish to pay them part of their earnings in pension contributions and this too will continue for ever.
So why are the trustees so obsessed with being self sufficient? Do they think that universities will stop sponsoring USS? Is this really a risk? Why?
In order to meet the growing expense of becoming self-sufficient, the trustees are looking to get employers to pay special contributions (above the regular contributions of an amount equal to 2.1% of the liabilities. This is the same percentage as being paid since 2014 but – since it is 2.1% of a much higher set of liabilities, it means that the Trustees want more money from employers and more money from teachers (assuming the pain is shared 65/35).
But why?
Why set up all your calculations on the basis that there won’t be any funding from sponsors of members from 30 years time? Why not simply abandon self-sufficiency as a target and tell the Pensions Regulator the findings of the PWC covenant assessment? Universities really are uniquely robust, some of them been around over 500 years!
There really is no urgency to close the £5bn deficit in the actuarial valuation, any more than there is to worry about the £17.5bn supposed deficit sitting on employer’s balance sheets.
Why this matters.
I am not an actuary, nor a member of USS, I am – in a round a bout way a sponsor. My son is currently at University and racking up debts from university fees which may increase as a result of this consultation. I am a tax-payer paying for the costs of the universities and ultimately for these pensions. I have a right to comment.
USS is not the PPF, the Pensions Regulator has no reason to enforce the 2.1% special contribution, Frank Field should read this blog and leave the USS trustees alone.
This matters because we are talking about having confidence in the future, confidence in the future of employers to fund pensions and confidence that pensions will continue to be paid ad infinitum.
If we do not believe our Universities have a future, we have no belief in the future at all.
I’ll say it again, these are my views not my employer’s ; I am only reading what I can as a non-expert; I may be wrong. If you think I am- please challenge me publicly on social media, or comment below or write to me privately at henry.h.tapper@gmail.com
Since writing this blog the disclosure of information has moved on
Sheffield University has done a great job putting all the documents surrounding the 2017 valuation in one place.
https://www.sheffield.ac.uk/hr/thedeal/pensionupdates/ussvaluation
Something of a coup for a small group who have been pressing for disclosure – all this is now in the public domain.
This is an excellent and important post, which gets to the heart of what is wrong with USS’s proposed valuation: the groundless obsession with self-sufficiency in gilts + 0.75. As I show in my linked blog post at the bottom of this comment, this obsession is driving a shift of the assets in the scheme from equity to gilts. That gratuitous shift is responsible for 100% of the increase in the technical provisions contribution rate from 26% to 32%-33% that USS is claiming. There are a few points of detail in your post which don’t get things right. I’ll try to point them out in another comment. But your general diagnosis of the problem with the valuation is spot on.
https://medium.com/@mikeotsuka/analysis-of-usss-proposed-valuation-402d9cf675f9
I think Mike’s spot on here. Using USS’s figures, I’ve modeled the asset growth under their plan for ‘de-risking’ from equities to gilts and also under the assumption that this doesn’t happen. The difference is a swing of £9.9bn in present value! That is, the £5.1bn deficit becomes a £4.8bn surplus. Putting all other assumptions aside, it’s USS’s Test 1 which is to blame.
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Thanks Sam – sorry this got stuck in the pending pipeline!
To me this is another example of pensions experts starting at the wrong end of the food chain. The food chain should be to develop successful businesses, that can provide well paid jobs from which money is put aside and invested to deliver retirement income.
To make the pension the most important part of the food chain may mean rationing businesses, with the impact on jobs, earnings and eventually pensions.
As a fellow non-actuary I cannot help but agree with you Henry. If self sufficiency leads to seriously increased contributions now then this could lead to a self fulfilling prophecy of the employers not being around in their current format. I don’t quite understand why LDI is automatically seen as prudent and good when it leads to the closure to further accrual of virtually every private sector DB scheme. Employment is a risk since employers will not always survive. Why place such a massive additional burden now on employers and employees alike? Derisking pensions totally is not possible since assets do not exist in sufficient quantity to directly match assets to liabilities. Surely if interest rates increase in future (they surely must at some point?) Then unless inflation also increases at an equal rate there must be a reduction in deficits? There has to be a reward long term for taking risks otherwise capitalism does not survive. If long term it was more profitable to lend money than to borrow it then no one will borrow. And debt will become worthless. So schemes need to invest in risk based assets to help fund the promised income.
Thanks – I will embed these changes into the post. I am particularly grateful for these comments as i was aware I was a little out of my depth on each!
It seems that all technicalities aside that you’re defending your viewpoint that USS shouldn’t be more independent with the following arguments?
*Some* Universities have been around for hundreds of years.
If you don’t believe in universities you don’t believe in the future.
Neither statement is supported with any evidence to suggest you’re right and USS are wrong in wanting to be more independent.
We have a shrinking working age population, more educated and indebted and underpaid than ever, supporting more retiring old educators than ever.
Is there something USS are seeing quite clearly, while emotional boomers are incapable of taking off their rose tinted spectacles to see?
Universities, just like the economy generally, seem bound to the idea of perpetual growth with no structural capability for stasis or god forbid shrinkage.
How that fits in with a demographic change that requires stasis or shrinkage eludes me. Care to elaborate?
Dave. If the world continues to generate more economic activity this will be done by far more automation of processes and products. There will be a steadily reducing need for the kind of jobs which people currently need as in reductions in the millions. This will mean two things related to education. Firstly, a lot more people will need retraining. Secondly as the population increases or remains constant and as jobs reduce there will be a desire for people to improve themselves as individuals. Both of these trends will vastly increase demand for high quality education.