Not the time to butcher teacher’s pension benefits.


My little break in France was rather spoiled when I read Jo Cumbo’s articles on the potential “remedies”  Universities UK are considering to correct their supposed pension funding deficit.

For those who can’t follow this link, these include

  • Lowering the salary cap against which DB benefits are earned for £55k to as low as £20k
  • Replacing the  DB benefit with a DC benefit (for capped earnings)
  • Fiddling with the commutation factors to give people less pension for taking tax free cash
  • Lowering the accrual level (the rate at which defined benefits build up)
  • Upping member’s contribution rates (again).

All this only three years after the same type of cuts were inflicted on the hapless members.

Whoever is Jo’s source, we can assume it is reliable. Whether the source is on the Union side (UCU) and is meant as a warning shot or from Universities UK (a softener upper?) is not material, the “remedies” are all about the teachers taking the medicine.

Is the patient sick?

The false diagnosis is something every doctor has to be wary of. The symptoms of the USS’ malady are not clear. Under one funding measure, the scheme is in deficit, another in surplus. The professed aim of the scheme – to be self sufficient (Test one) suggests that the employer’s covenant cannot be relied on, yet the last covenant assessment suggested the covenant is of the highest quality.

The assumptions that the deficit will worsen are linked to the scheme’s intention to reduce its exposure to the type of investment that could return it to good health. In short, there are a mass of contradictions in the messaging from the most recent valuation that make it anything but clear that the USS needs remedy at all.

Is now the time for surgery?

Some would argue that what is intended is not surgery but butchery, but that is to look at worst case scenarios.

The timing of the current valuation is critical. There are two potential factors that could radically change the funding position. The first is whether the recent changes picked up in UK actuaries Continuing Mortality Investigation are sustained, the second is whether Mark Carney’s promise of a rise in UK interest rates is imminent and substantial.

The CMI numbers suggest that UK longevity may be flattening and that some of the assumptions baked into the liability valuation may be over-cooked, this would argue that the deficit may be less serious than stated. We will have to wait a few years to test this one!

But the second factor, a sharp and immediate rise in UK interest rates, could make any decision based on a 2017 liability valuation, look very silly indeed.

The value of doing nothing.

There is a bias within management culture, to make a difference. Whatever the assets you are managing, the bias towards change reflects the vanity of believing you know better (or at least have better information). But there are plenty of examples to suggest that it is those organisations who start with a plan and stick with it , who outperform those who tack left and right towards their goal.

There is tremendous risk in Universities UK making radical changes to the pension scheme. Most obviously there is the threat of large-scale industrial action, but secondly there is the possibility of a long-term detoriation in the morale, quality and output of our teaching profession. We chose to pay university staff a mixture of wages and deferred wages for a reason. It is to give them the financial security not to worry about their future. If we want our teachers fighting for security, then we can give them a DC benefit, but that was never the idea.

I am a tax-payer and I have a son at University, I am not happy to see my taxes and my son’s contributions to his education dissipated in such a detoriation in teaching standards.

For the record, I do not think these remedies are necessary, I do not think the patient’s sickness is chronic and I do think that left to itself, the USS would return to good health over time. This is not the time – in my opinion- to butcher benefits.



About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Not the time to butcher teacher’s pension benefits.

  1. John Mather says:

    Henry I think it is time to make changes in a constructive manner to take the longer view. Short termism is one of the major problems and the current remedies are at best not fit for purpose and at worst the cause. How could you get the hapless trustees to accept the FAB strategy in say Carillion

    Liked by 1 person

  2. Adrian Boulding says:

    Now that DB schemes are fully mature the most important thing is how they are invested. Our system is fundamentally out of balance with the trustees choosing the investments and the employer then picking up the consequences with higher contributions

    OK, I know the trustees have to consult with the employer before deciding their investment strategy, but if you check the TPR guidance pages they are crystal clear on this – the trustees must choose the investments that they think are in the best interests of the members and they have no duty or responsibility to follow the employer’s wishes.

    The consequence of this out of balance structure is that the only lever the employer can pull is to reduce benefits for future accrual, or occasionally for existing benefits by devices like RPI to CPI switches.

    And pulling on this lever will be much more socially acceptable if the succession of stories around unaffordable deficits and only a 50/50 chance of getting your benefits in full continue to dominate the media.

    Like many others I am gobsmacked by the level of DB transfer values. My roundtable on them this week produced a case with a multiple of 54! Rather than stop this profligate spending on transfer values employers seem happy to see it continue, perhaps because they’ll pay this high price now to get off the hook of a DB benefit where they pay the future cost but the trustees are the ones taking the decisions that are driving those costs

    Hope this helps



  3. Saul Jacka says:

    I think the two commenters above miss the point of the article.
    USS’s assets have performed extremely well for quite some time thanks to sound investment.
    The draft valuation is, I believe, showing a best estimate of a 12% surplus.
    BUT the actuaries appear to be pushing for an enormously conservative valuation based on a return of less than CPI. Simultaneously they seek to push the fund to invest increasingly in gilts to “reduce risk” (Please note that a notional investment in long term gilts would have been more volatile over the past 3, 5 and 7 years than a similar passive investment in the FTSE100)! The trustees are, I suspect, being pressurised extremely hard to agree these ridiculous assumptions.

    How is that the trustees’ fault? And why, apart from bald assertion, has the time come “to make changes in a constructive manner to take the longer view.”?
    It is the actuaries’ use of gilts as a valuation basis (together with their current wild fluctuations) which is failing to take the longer view.

    Liked by 1 person

  4. henry tapper says:

    You are right that the trustees need to take advice and the advice they are getting is “ridiculous”. But the advice is coming from the USS management team and I suspect that everyone is looking over their shoulder to the Pensions Regulator and even the DWP select committee. There is a collective funk and the trustees are at being asked to sign off on it, but that does not mean they should.

    Liked by 1 person

  5. Saul Jacka says:

    I couldn’t agree more!

    Liked by 1 person

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