USS – the plot thickens!


Correspondence has emerged between the various macro-stakeholders in the USS “pension deficit”

The cast in order of appearance

Frank Field – Chair Elect of the Work and Pensions Committee.



Here he is kicking off correspondence in August with….



Lesley Titcomb – CEO of the Pensions Regulator.



Here is her response to Frank Field.



Field also writes to Professor Janet Beer at Universities UK (the sponsoring employer)

janet beer



And Janet Beer responds to Field on behalf of the employers.



Frank Field writes to David Eastwood, Chair of the USS

David Eastwood, Chair of the USS , responds to Field.

david eastwood



Taken together, this correspondence ,mainly in August 2017 forms an archive for future scholars trying to unravel the complex dynamics at play.

Frank Field – fresh from a bruising encounter with Philip Green of BHS is determined to be on top of the USS deficit,

Lesley Titcomb is determined to show Frank Field she is on the case and working hard to protect the PPF and the employer’s interests.

Field is critical of the Universities UK for inadequately funding USS and wants tuition fees ring-fenced.

Janet Beer hints that rather than put up tuition fees, Universities UK would prefer “benefit reform” ( a euphemism for pension cuts).

Field is critical of the USS’ management of the investment of the  scheme, it’s recovery plan and wants to know more about actuarial assumptions

David Eastwood defends the USS’ management’s transparent approach and hints that it is piggy in the middle.

Taken together, the correspondence displays how difficult it is to align the interests of the general public, employers and the managers of the scheme. The voice that is not heard in this debate is that of the members, who appear to be the stakeholder most likely to pick up the tab (by way of pension cuts).

The heart of the matter

Perhaps the most interesting letter is that from Lesley Titcomb to Frank Field in which she sets out the guiding principles that tPR’s past intervention prompted USS to adopt.

uss bull

These principles are open to challenge.

Take the first bullet;-  What does “proportionate” mean?  Given that DB pensions are not funded like insurers,   with no legislative standard other than “prudent”, what level of risk protection is reasonable/prudent for a scheme like USS? We now know that the Pensions Regulator is not prepared to accept the covenant assessments carried out by PWC and E&Y on UUK, so presumably tPR reckons itself the judge of prudence. This was never the Regulator’s role.

How exactly is USS pension risk measured?  The USS is an open scheme with liabilities already into the 22nd century.   Who defines the suitability of the risk measure and what is it?

Take the second bullet; what is meant by risk reduction? Pension cuts dressed up as “liability reduction exercises”? Why should tPR be intervening in what is fundamentally a matter of reward? The total compensation of those in the USS is the aggregate of pay and benefits, if benefits are reduced, does this not put upward pressure on pay? If so- where is the long-term gradual risk reduction going to be achieved?

Why is the Pensions Regulator taking such a proactive stance?

As mentioned above, the spectre of BHS runs through this correspondence. No one wants to be seen to be weak, everyone has to be on the front foot and so we have this extraordinary meddling.

Ironically, the losers in any pension dispute are the members who either see their benefits or their covenant reducing. The irony is that the members are hardly mentioned in this correspondence, they seem to rank lower than the interests of the tax-payer (who pays the student fees), the Universities, the USS (who have an a priori charge on the assets for their management) and of course the Regulator. The Regulator’s agenda – it appears – is primarily to protect the PPF, secondly to protect the sponsor and finally to protect members.

Here is the nub.

BHS, Tata Steel, Royal Mail, Halcrow have one thing in common, an employer with uncertain revenues and a weak business model. The USS is different, Universities are well funded, have strong cash-flow, excellent contingent assets and have no history of failure.

Both PWC and Ernst and Young considered the University’s covenant to be grade 1 (as good as it gets). TPR has disputed and is not yet prepared to accept the covenant assessments

It is hard with so much evidence to suggest that Universities UK cannot stand the risk, that the battle being fought is not about Universities going bust, or fees going up, but about USS members continuing to accrue a  defined benefit in retirement.

While I can understand the feelings of deprivation amongst those who are not accruing such a defined benefit, I do not agree with the principle of “beggar my neighbour”. For the same reason , I do not believe those who have fine houses should be forced to live in the annex and rent out the majority on affordable rents.

Fine pensions and fine houses are the privilege of a few but they are things that can be achieved by the many over time. They are things that people can work for. If we want to pull down our pension schemes, why not pull down fine houses too?

The alternative

The principle of “beggar my neighbour” that runs through much of the correspondence between the four parties in these discussions is mean-spirited and self-destructive. No one will win by transferring USS assets from equities to bonds.

In comparison, the £60bn of assets that the USS currently invests, are funding British industry, our infrastructure and doing so in a sustainable way.

No one will gain if the University staff go on strike, least of all those who pay tuition fees.

The tax-payer is the insurer of last resort of the maintenance of the University system and has been, one way or another since the 15th century.

It is an extraordinary thing, that the Pensions Regulator and the Universities themselves seem to have come to a pact which assume there can be no escalation in risk from pensions. For within the Pension Regulator’s letter to Frank Field we discover;-

USS bull 2

Instead of looking at the USS as a threat to the Universities’ future solvency, we should be adopting a “can do” approach – glorying in the taking on of 27,000 new members, exploring the flexibility of the scheme funding regime and looking at those £60bn assets as a tremendous opportunity.

For to look at pension liabilities as a threat, is to forget they represent the futures of millions of UK citizens which are the better for them. The mantra of risk-reduction hides a more fundamental issue, our workforce is relatively unproductive. If the best we can do to make our human resource more productive is to starve them of retirement income, we have no real understanding of personal motivation.

If we want to make Britain great again, we need to be a lot more ambitious in the way we deal with issues like the USS “pension deficit”.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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15 Responses to USS – the plot thickens!

  1. Adrian Boulding says:

    Another 27,000 members have joined…..

    Universities UK would not be the first employer to seek to offset the costs of the additional members brought in by auto- enrolment with a benefit reduction of one form or another

    If a family has only one jar of jam and the kids bring extra friends home to tea then mother spreads the jam more thinly .


    • Greater USS membership via auto-enrolment increases the annual payments universities must make, via 18% employer contributions for a greater proportion of their workforce. This might prompt universities to call for a decrease in the 18% level of employer contributions. But they’re not calling for this. Rather, they’re willing to continue to pay 18% but would like future DB accrual cut (per capita) because they’re unwilling to take on the level of investment risk to which the current accrual rate exposes them. But extra membership via auto enrolment decreases their exposure to disinvestment risk, since it strengthens the cash positive position of the scheme and makes it less likely that they will need to sell assets in the fund.

    • Richard Bryan says:

      Surely it was always the case that employees in USS-eligible positions were automatically made members of the scheme unless they opted-out? So why is it claimed that auto-enrollment has made a difference? 27000 in four years – that presumably means the change in total membership – the ARs give typical ballpark figures of 20+k joiners and 20+k leavers (mostly deferrals) and 3K retirements per year, although it’s a bit difficult to follow as, for example, the 2016 AR contains a ‘restatement’ of 41K in the membership.
      The turnover is presumably mostly due to post-docs on short-term contracts. Basically, the claim boils down to a bit of an increase in the number of post-docs, and not any great attraction of the scheme.

  2. George Kirrin says:

    The part of Professor Sir David Eastwood’s letter of 21 August 2017 to Right Hon Frank Field MP I don’t follow is this:

    “Over the five years to 31 March [2017?], our returns have also outperformed the liability proxy comprising mainly long-dated UK sovereign gilts ….”.

    If that’s the case, why has the deficit stated in the scheme’s Annual Report (which is presumably meant to show “a true and fair view”) gone up? There seems to be a disconnect somewhere between a so-called “liability proxy” and a so-called “gilts-based monitoring of the position using ,,,, a floating discount rate that maintains the same fixed margin above market gilt yields”.

    Perhaps “in revisiting all assumptions from
    first principles” the trustee board will reconsider how “well-governed” and “engineered” its solvency framework and decision making processes really are?

    • It’s because the higher value of USS’s assets, relative to their value if USS had been entirely invested in the gilts liability proxy during the past five years, is outweighed by the increase in the valuation of the liabilities on the gilts +1.7 discount rate that they use to monitor the funding position of the scheme between triennial valuations. Though it appears that USS will correct this problem going forward, there is, at present, an incoherence between the method they use to monitor the funding level of the scheme between valuations and the method they use to establish the funding level of the scheme at its triennial valuation. See here for more details:

      • George Kirrin says:

        Thanks for the clarification, Mike.

        But how do they plan to “correct this problem going forward”?

        Do the trustees have what Henry might call “the courage” to vary the fixed margin over gilts? Do the trustees have sufficient awareness of what TPR like to refer to as “sufficient flexibilities within the scheme funding regime” to abandon “gilts plus” altogether and replace it with “prudent expected returns”?

        Expected returns are meant to be long-term assumptions which shouldn’t spike up and down with bouncing spot yields and curve shifts. I don’t consider “rolling 5 year” benchmarks to be particularly long-term either.

        One approach (which I think Redington call a Direct Projection approach, as opposed to a Present Value approach; others may call this “budgeting” as opposed to “matching”) would be to use a prudent view of the expected cash flows to explain/make more transparent their expected funding requirements, rather than updating balance sheets which don’t balance.

  3. Mike Otsuka says:

    They don’t provide much detail, but this is what USS says will be put in place of its current practice of interim monitoring of the funding level between valuations based on a gilts plus discount rate: “USS intends to supplement Test 2 by ongoing monitoring of the required contribution rate for the current benefit using a model that calibrates to the underlying internal rate of return assumptions used by the trustee rather than a fixed margin over gilts. The 2014 approach which assesses a probability of contributions needing to increase is not a sufficiently helpful indicator of future contribution requirements being simply a prediction involving many unknown elements. Estimating the required contribution using a model calibrated to the latest view of the expected return on assets will be a more reliable indicator of the employers’ short term risk exposure. Employers still wish to see the probability of future contribution or benefit changes being required at future valuations, and the trustee will continue to work with UUK to find a suitable approach.” (quoting from p. 42 of USS’s September consultation document linked below.)!/file/USSTechnicalprovisionsconsultationdocumentSept2017.pdf

  4. henry tapper says:

    To Bryan’s point, it will be interesting to find out if the 27k are extra – or if they are just the usual new intake. I can only assume they are exceptional entrants – AE catches plenty of workers who would not normally be eligible. So let’s have some more detail from USS in due course!

    • Richard Bryan says:

      Quick look through a selection of the ARs — ‘total contributing members’:
      2005 110,000
      2009 133,400
      2013 148,466
      2017 190,546
      so roughly +23K, +15K, +42K for the successive four-year periods. 27k is the difference between 42k and 15k which perhaps is what they mean by ‘rate of new joiners’, except that these figures are the totals rather than joiners/leavers. Maybe. But I’m sure you could get 27k out of the figures in many other ways, looking at them year by year.
      Btw, deferred members
      2005 62,700
      2009 78,700
      2013 98,975
      2017 139,313
      Anyway, the figures are in the ARs so are there for a more comprehensive study if anyone wants to, and find a reason for the fluctuations in membership increase rate between the different periods.

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  6. Phil Castle says:

    Just ahd this forwarded from a client.

    Dear colleagues

    Those of you who are UCU members will have received communication by UCU’s General Secretary, Sally Hunt, but all colleagues should be aware that HEI employers are currently suggesting to move USS from a defined benefits scheme (determined and guaranteed by your ‘career average’ earnings) to a defined contribution scheme (where your money is no longer guaranteed, but dependent on the stock market investments at the point at which you retire).

    This means that the employer is intending to move all risk on to you as an employee.

    UCU is adamant on resisting this proposal, because the USS pension scheme is healthy and increased contributions are not needed. UCU maintains that the way in which our pension scheme is evaluated is problematic, leading to requests for increased contributions from the pension regulator.

    On the one hand, the employers rule out increased contributions. On the other hand, the employers do not support UCU in challenging the way in which the scheme is evaluated. What they come up with instead is a proposal to radically change it, which will not only reduce retirement income for all of us, but even remove security about what retirement income we can expect.

    Whether or not you are a UCU member, do come along to UCU’s next termly meeting to find out more and to find out what can be done to prevent this from happening:

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