The public debate on USS is elevated by King and Kay.

One of the joys of Ralfebot is his sense of mischief. He takes the mick out of everyone -including of course himself. The thought of John Kay or Mervyn King joining any intellectual movement that I’m in – is “looney cubed”.

It’s the other way round. I  read the work of John Kay to understand how economics work and if something I say on this blog ties in with what John Kay says on his blog, I am pleased that I’ve interpreted this great man right. As for Mervyn King, I assume he’s a good bloke as he co-wrote the article.

But it’s good that Kay and King have written about the current challenges facing collective pensions schemes as they have and this shortened version – that doesn’t need access to the Times Higher Education website is still a brilliant read.


For the second time this week, I have come across the phrase ” The best has been the enemy of the good”, the other being in a debate on CDC earlier this week. Kay uses it to explain how the reaction to Maxwell made pensions so secure that no-one could afford to keep them open.

We have never had a public debate about what is an affordable level of risk, only a private conversation between trustees , regulators and employers about what is an affordable level of contribution. The risk bar has been set so high that the Royal Mail has been forced to abandon all guarantees.

Should the USS follow suit and become a CDC?

As well as sitting at the feet of John Kay, I also sit at the feet of the philosopher Mike Otsuka and actuaries Derek Benstead and Hilary Salt.

I will allow to discuss that question but I do not think that the guarantees within the USS scheme are unaffordable, it seems to me they form part of the reward for being a UK academic and they should not be given up without the consent of those who benefit them – and not without adequate compensation.

I think there is a strong case for USS considering up-grading its DC scheme into CDC.

The alternative proposal, which the JEP may consider is moving to a lighter form of DB – which is more focussed on rewarding USS members with bigger pensions and less focussed on the guarantee of such pensions. Moving to a WinRS style of pension might allow the USS to re-embrace risk and invest for growth – rather than to protect the past.

Whether the USS will move towards the low guarantee model, the no guarantee model or continue as it is , needs to be agreed by all parties. What is clear is that it can no longer be agreed by a tryst between the three parties – regulator, employer and trustee. Members are too involved in the debate to be side- lined.

Should the members decide?

As Terry Pullinger of CWU reminds us, the validity of Royal Mail’s approach to Government to have its CDC arrangement is underpinned by the 90% of the CWU’s Royal Mail membership that insisted on it (the alternative being industrial action).

Choices as delicate as WinRS v CDC v current USS DB are unlikely to see such a clear cut vote from membership. But I am surprised that in the consultation that has been going on, there has not been a plebiscite!

And if there was a plebiscite, would it be binding? This brings in a question of benefits across generations and brings us back to John Kay’s article which concludes

Any plan to provide pensions 50 years from now involves uncertainties and therefore should involve an explicit discussion of how risks are shared among employers and employees and between generations.

Recent tinkering with USS benefits have all referenced the immediate solvency of the scheme to the sound of tins being kicked down the road. Those sounds have been heard in the trustee boardrooms of all our DB schemes. There is no explicit discussion of how risks are being shared among employers and employees between generations- anywhere!

Well there might be on the pages of John Kay’s blog, and in emulation mine. But – to use the ending of Kay’s blog

Economic models are indispensable, but as guides to thought, not substitutes for it. A model should never be treated as an oracle that emits obscure but unchallengeable verities

It is not for economists or the pension elite to decide, it is for the people to decide, and by the people, I mean both the members of USS and those who pay for the university system on which this all sits.

That is King and Kay’s point – and it’s one I am happy to endorse!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to The public debate on USS is elevated by King and Kay.

  1. George Kirrin says:

    I note that Professor Kay and Baron King of Lothbury have “no skin” in the USS, having presumably transferred out any pension pots they accumulated as superannuated academics.

    I also disagree that the Pensions Act 2004 is to blame, at least if it is read in conjunction with the 2005 funding regulations under that Act which have “flexibility” (which also used to be claimed by the Pensions Regulator, although maybe not more recently) to use “either or both” expected returns or gilt yields to fund liabilities with prudent investments.

    Professor Wikipedia (based on Professor Stiglitz, I think) suggests the main issues surrounding “skin” or excess “skin” is the principal–agent problem whereby transparency and fiduciary obligations are disregarded by principals who have capital or excess capital (skin) tied into an entity.

    I wish Messrs Kay & King had shared more of theur proposed solutions, if they have any, where trustees are faced with “radical uncertainty”, but I guess that’s how to trail a forthcoming book these days.

    I do agree with their comment that “Actuaries and accountants took on board – rather too enthusiastically, in our view – ideas from financial economics and insisted that pension obligations be quantified and exposed on balance sheets.” This is surely another example of agency problems in pensions.

    And that “regulators are requiring the USS to behave as if the fund could be closed down at any moment while still meeting its obligations with as much certainty as possible.” Those regulators seem to me to be aided and abetted by many of the actuaries (your colleagues, Salt and Benfield, being excused from this broad criticism) and accountants who are failing in their professional duty to recommend a wider range of prudent solutions within the flexibilities of the 2005 funding regulations, focusing a lot more on cash flows and how to achieve them and a lot less on marked-to-market bakabce sheets.

    • George Kirrin says:

      A few typos there, apologies.

      “…. their proposed solutions ….”

      “…. marked-to-market balance sheets.”

  2. henry tapper says:

    Thanks George for those incisive thoughts! Your wit and wisdom is appreciated and I hope your comment is read as often as the blog!

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