TPR- the price of pensions can fall as well as rise.


The Pensions Regulator appears to have forgotten one of the fundamental laws of gravity-  “what goes up, must come down”.

In consumer finance this translates into “the value of investments can fall as well as rise” and in the case of the USS, the solvency of a pension scheme can “rise as well as fall”.

Taking action based on recent results is a mugs game, past performance is no guide to the future, mean-reversion applies eventually and the USS deficit will – given time – revert to surplus.

This is because the USS pension fund is well-managed, because the Western Economy continues to grow and because the current interest rates, depressed artificially by Government policy, will eventually rise.

Why this cod-economics?

The FT have seen a letter, which they partially display, from the Pensions Regulator to the heads of the University Superannuation Scheme. The letter restates tPR’s recent mantra that a scheme is only as good as the sponsor’s covenant but then goes on to argue that the covenant is only as good as the scheme.

 TPR said a “key reason” for its weaker view was the “substantial increase” in the size of the scheme’s liabilities in recent years, which had outstripped the increase in the scheme’s assets between 2014 and 2017. – Jo Cumbo;

My first article on this subject expressed my “cod view” that universities are immutable. Oxford and Cambridge have survived not just the odd economic blip but several world and European wars, plagues and industrial revolutions! A little blip in funding caused by artificially depressed interest rates is not going to threaten our university system.

USS commissioned not one covenant assessment but two, the first from PWC and the second from E&Y. Both rated the covenant as strong. TPR wish to dispute this, according to my sources because they don’t think the Univerity’s £1.5m in free cashflows sufficiently covers the debt.

 “We take the view that there are issues with the sector’s ability to increase payments to the scheme, which might arise under realistic downside scenarios, to remove the deficit over an appropriate period.”

John Ralfe expresses surprise that I disagree with TPR

I find myself in good company.

TPR do not have a crystal ball to determine what the University’s financial position will be in years to come, the covenant assessments look at the situation today. We have to have some optimism for the future, what a dreary existence otherwise!

To suppose that the increase in liabilities that has  caused the deficit is indicative of things to come is as foolish as supposing that the current bull run in UK and overseas equities is going to last. The stock market is at a record high, interest rates are at a record low, the two don’t quite cancel each other out and the USS is showing a deficit. Turn the market scenario around, the USS could have less assets but greater solvency.

The only kind of past performance that can be used to consider pension liabilities is the long-term kind, which matches the duration of people’s lives. If we look at performance in terms of the past 70 years (e.g. post-war) then we get a rather better data-set, than what’s happened over the last couple of triennial valuations (e.g. since 2010).

A welcome leak

Whoever leaked this letter to the FT is to be thanked. The discussion over the USS’ capacity to meet its pension obligations in full, is one that impacts everyone who reads this blog. It matters to universities, students, future students and most of all it matters to those in the Scheme itself.

The Universities wish to play out the discussions in private, the members are keen not just to understand the numbers , but to actively participate. At a time when the pensions industry is bewailing a lack of “engagement” ,  the USS has a superfluity!

Ultimately, this discussion comes down to time. Those – like John Ralfe – who think in short time horizons, want this deficit nailed immediately and would happily move the USS to a DC accrual and its assets to bonds. Those who argue on this blog (Otsuka, Leach, Keating et al.) argue that time will work the deficit out. I side with the latter group because I see no end to Universities and no reason why they should reduce the quality of benefit promise.

The Pensions Regulator appears to me to be intervening unnecessarily and unhelpfully. Its obsession with the covenant is unhelpful, its chicken and egg confusion between covenant and deficit is unhelpful and its accusation that the statement that there are “many significant risks inherent in the funding statement” – self-evident to the point of banality.

A crucial point in the charge transparency debate, was when the Investment Association over-played its hand and likened hidden charges to “Nessie”. It may be that something similar happens here. The Pensions Regulator’s case is hugely diminished by the perverse logic of this letter.

If we want no risk- let’s return to individual annuities.

The FCA want us to consider innovation in our thinking about retirement outcomes, the Pensions Regulator would have no risk in defined benefit. If we want no risk, let us have individual annuities and scrap pension freedoms; if we want innovation let us have collective pensions and the non-advised solutions on which we relied till recently.

The answer does not lie in de-risking but in risk-sharing. De-risking simply shifts risk from one party (usually a sponsor) to another (the member). Risk sharing realigns the risks taken to meet the particular circumstances of the sponsor and the needs of the member.

  • In some cases, members are prepared to take 100% of the risk (the First Actuarial pension scheme is pure DC- at the moment)
  • In some cases , members accept they must take more risk than previously (the CWU’s proposals for the Royal Mail are a good example)
  • And in some cases, there is simply no case for changing the risk-sharing relationship.

I am not an actuary or a member – (I am a little bit a sponsor) of the USS. However, I can see with the cod eyes of a layman that the Universities represent a very strong covenant indeed and that members of the USS work for the universities because of that pension covenant.

The Pension Regulator, in this leaked letter, are intervening in a most unhelpful way, I can only sense that this aberration is because they are spooked by BHS. I hope that that the leaked letter will steel the resolve of those who take the long-term view. The USS management need all the support it can gets and the Universities need to know that they represent as good a covenant that can be offered – outside the public sector.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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10 Responses to TPR- the price of pensions can fall as well as rise.

  1. Mark Meldon says:

    Interesting, Henry. when I started out as a young IFA back in the early 1990s, I worked for a small subsidiary of Lohnro called F E Wright which, in turn was set up in the 1920s to serve the insurance needs of the London leather industry (I even helped look after the Pittards of Yeovil scheme). If I recall correctly, few DB pensions were paid out of the various scheme assets. The process was that a member would accrue 26/60th’s or whatever and have a set pension figure which would be subject to the usual indexation provisions pertaining at the time. The scheme would then purchase an annuity on the open market and my job was to drive around the country setting these up. At the time this worked very well and it was rare that the employer would need to “top-up” the DB fund in order to secure benefits. I very much doubt this is still done but, remembering the 80/20 equity/bond split that most schemes had then, it might still just about work today.

    The general principle was that the scheme assets were heavily invested in higher risk/higher reward assets (property too) but that all of this risk was born by the scheme and then this risk was “taken off the desk” by purchasing the annuity. I was always struck, even back then, as to how sensible this was and still struggle to see much wrong with the idea of investing for long-term growth and income whilst an employee was in service and then using a bond proxy in the form of the annuity when they retired.

    Interesting too, that the schemes had virtually no deferred members as early leavers “automatically” had Section 32 policies set up with the likes of Prudential Holborn (as was). Such policies, as you know, offered the member a high degree of security and, again, got the liability off the desk, albeit at a one-of cost to the scheme which was easily covered by reserves at the time.

    All schemes, too, had insured death-in service schemes with spouse’s pensions built in. Fantastic for the members.

    Sure there were lower-quality schemes (I remember masses of “COMPS” with what was then Scottish Equitable) but the member still got their “pension promise” via an annuity.

    Maybe we will see a return to this neat solution? Despite flexi-access drawdown?

    Very unlikely!

  2. henry tapper says:

    A neat solution when you have the money – unfortunately way beyond the pocket of most DB schemes today. Where there is buy-out, it is typically on a bulk basis (the most efficient way of dealing with problems like pensions is through collective solutions- but say that very quietly).

  3. John Mather says:

    Does anyone ever consider the mortality of the host company now that people last twice as long as listed entities. As far as mean reverting is concerned tell that to the Japanese and see what they say about the last 25 years or am I not allowing sufficient time?

    • Mark Meldon says:

      An excellent point; one has only to look at the composition of the FTSE All-Share over a few decades to understand this. Perhaps those individuals who ended up with Section 32 policies with guaranteed “mirror” benefits in the £30bn Prudential With-Profits fund all those years ago have avoided all of this and are now enjoying secure benefits after all!

      It’s a shame that these “deferred annuities” are, with the exception of the tricky “bulk buyout” market all but gone.

  4. henry tapper says:

    Well – we hope to bring back the idea of a wage for life – embedded in the annuity. It could be revitalised by a more flexible approach to “guarantees” and “reserving” that could allow a little more of the mutuality on which insurance was built. we are insuring against our living too long – collectively this is a lot easier than individually

    • Mark Meldon says:

      Are you not describing a “hybrid” flexi-access drawdown plan coupled with a separate “with-profits” annuity? Surely the latter are now only available from Aviva? I arranged a few of these with Prudential, LV= and L&G in the past all assuming a bonus rate of zero and they have been excellent things.

  5. henry tapper says:

    I hope that the phrase “hybrid flexi-access drawdown plan” is not foistered upon the public! I was thinking of scheme pensions paid from collective funds operating on mutual lines.

    • Mark Meldon says:

      Enough acronyms already!

      I think, for what it is worth, that a good long-term choice would be a Scheme Pension expressly NOT solely holding open-ended mutual funds (gosh, how American!) but looking at those wonderful 19th Century inventions, investment trusts. I have always recommended IT’s to clients and they have been brilliant things from a dividend perspective. Never paid commission to third parties, Henry (where have I heard that before?). Volatility can be “managed” by using something like the £2.2bn Pyrford Global Total Return (Sterling) Fund.

      It’s all out there, just needs rounding up and I guess you might be the man for that, Sir!

      • Richard Bryan says:

        Shhh! I’m longing for the days when I could buy top-name trusts at 10% or more discounts! Or Asia-Ex Japan at -40% in 1998.

  6. henry tapper says:

    a lot of detail here- we need to get to base camp – we need scheme pensions!

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