Con Keating’s letter to Frank Field

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Today is Con’s 70th birthday. Here he is in irrepressible form, standing up for USS and giving another elder statesman some sensible advice.

An Open Letter to the Right Honourable Frank Field, MP

By email.

Re: Universities Superannuation Scheme (USS)

Dear Frank,

I feel that I may use that familiar form of address for many reasons. Firstly, it was the form adopted in your volley of letters concerning the state of USS’s finances, secondly, the sheer volume of your press pronouncements makes you seem extremely familiar, and finally, on the one occasion when we did meet, admittedly long ago, you did invite me to call you Frank.

I think it is extremely ‘brave’ of you to take on such a cause. When opinion polls (among pensions professionals) show a course of action to be as deeply unpopular as this, only the foolhardy and brave sally forth. In a recent poll, the idea of opening of an inquiry was rejected by three to two (a majority that most elected politicians can only dream of) and much of that limited support was highly conditional.

The publication of USS’s annual report and accounts, predictably, did provoke an up-swelling of recrudescent Ralfe syndrome. This recurrent media phenomenon is based upon a distortion of reality, as many of the survey respondents have pointed out; the stuff of nightmares and delirium, rather than waking reasoned thought.

Let me explain. DB pension liabilities may be (present) valued on the basis of bond yields or the expected returns on portfolio assets; a formulation that is set in parliamentary vellum. The accounting standard differs, but that is also a bond basis. There is a fundamental problem with all of these, they are counterfactuals to the true position. These are valuations of the liabilities as if this discount rate applied (to each and all), not representations of reality. They are properly referred to as Gedankenerfahrung.

Such a valuation might be appropriate if we were pricing the potential transfer of all scheme liabilities, under those terms, but it is not consistent with the true and fair principle of accounting, including valuation, for an ongoing concern. This is a new business pricing, not the valuation of scheme liabilities, which are a book of existing business, contracts previously written and in force, on terms already set.

The calculation of a scheme deficit involves the comparison of this counterfactual (hypothetical) valuation of liabilities with a real, if intangible situation, the current market value of fund assets. The inconsistency here is obvious.

I cannot help but wonder what the value of these assets might be if current gilt rates were to be considered in the markets as applying over the entire lifespan of the scheme, as would be the correct comparison, with both assets and liabilities in the same hypothetical scenario. Please do not take this as advocating such an approach; it would merely be consistent but remain divorced from reality.

The same survey posed a question (of mine) as to the likelihood of schemes achieving long-term returns of 3.5% or higher. This is the present income yield of the FTSE all-share index. I have subsequently been told that it is similar to the rate of return required for current USS scheme assets to be sufficient to pay all projected benefits on time and in full. Respondents thought that this rate was likely or highly likely to be achieved by a majority, over the unlikely equivalents, of nearly 4 to 1. It appears that the vision of USS’s report and accounts as a portent of apocalypse is far from widely shared.

The departure from reality in DB pension valuation and accounting is profoundly problematic, not least when humility is considered as a selfless respect for reality. It leads to an environment in which the interpretation and enforcement of regulation is one of overweening arrogance. And that is hardly likely to promote or sustain the provision of high quality occupational DB pensions.


Con Keating



happy birthday




This article has previously appeared in Professional Pensions.,

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Con Keating’s letter to Frank Field

  1. Adrian Boulding says:

    Happy Birthday Con! I hope you have a good day and don’t spend it reading my comments!

    I recall a time much earlier in my actuarial career when my firm did value the assets on some schemes by discounting their projected cash flows using the same discount rate as for the liabilities. We felt it was consistent. But our trustees and the sponsoring employers found it, just as you say, divorced from reality.


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