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.