A previous phoney deficit

Phoney deficits

The Pensions Regulator’s patience with USS and its Trustees is running short.

The FT has got hold of an email from TPR which rebukes USS for overstating its deficit and misrepresenting the views of TPR on discount rates. (you can read the FT article on this link – thanks FT)

An excerpt from the January 8 2019 email from The Pensions Regulator to #USS raising concerns about the misrepresentation of TPR’s views on discount rates in the 2018 #USS valuation document. pic.twitter.com/qF2sgtxSDk

— Josephine Cumbo (@JosephineCumbo) 15 June 2019

The deficit has been presented at various levels- including the £10bn quoted above – part of the 2017 valuation pack. The scheme published a consultation document in January outlining how the plan had a (revised) deficit of £3.6bn , but even that is now showing much too high.

In its January consultation document, the USS set out its approach to valuing the scheme, including the liabilities, and said the regulator

“prefers measuring discount rates relative to gilts”.

But the regulator said in its email to Jeff Rowney, USS head of funding strategy, that this statement by the scheme was “incorrect” as the watchdog had no preferred approach to setting discount rates.

The impact of phoney deficits

The impact of USS’ actions – has been to set the Trustees on a path that requires it demand unsustainable contribution rates to the scheme to meet a notional deficit.

The implications of TPR’s intervention are that the deficit arising from USS’ valuation is too high, that the deficit contributions are unnecessary and that by overstating the deficit, USS and the Trustees are undermining confidence in USS.

We have seen just where this leads. Last year it led to a strike, this year it is leading to Trinity College walking away from the scheme apparently fearing it could be the last man standing.

Just why USS is intent on being the architect of its own demise is unclear. It’s firmest supporter is not the USS, but the University and College Union who have this to say

“This latest revelation will do nothing to calm the frustration felt by many members . . . It is essential that members’ trust in the scheme is restored and maintained.”

Hero Jane Hutton

The fearless Jane Hutton stood up to USS and whistle blew to the Joint Expert Panel (an independent group set up to moderate the dispute). To quote Jo Cumbo in the FT

She highlighted a discrepancy between the regulator’s published position on discount rates and how the watchdog’s views were presented in the USS consultation document.

The regulator’s January email to Mr Rowney (funding officer for USS)  was copied to David Eastwood, chair of the USS trustee board and Bill Galvin, group chief executive of the scheme and a former chief executive of the watchdog.

But the email was only shared with the entire USS trustee board in May after Prof Hutton sought confirmation from the regulator about its position on discount rates. In the email, the regulator did not insist that the USS correct the wording in the consultation document, but asked the scheme to “consider doing so”.

The document was not altered.

The regulator is separately probing claims by Prof Hutton that she was obstructed by the USS trustee board from establishing whether the scheme exaggerated the extent of the plan’s deficit in the 2017 valuation. The USS estimated the deficit at £7.5bn at that time.

Now threat of more strikes

The Trinity College bursa has written an open letter to the College’s dons, which includes this statement.

As a responsible employer and as a charity, the Trustees have a duty to protect the College from risks and mitigate those as far as possible. By removing the LES [last employer standing] risk, the Trustees have helped ensure the College’s continued long-term existence as an academic institution and charity….

You can read the  open letter to the fellows of Trinity College Cambridge on Mike Osuka’s blog  though Mike wants me to point out that the blog is not the open letter!

The perceived threat to Trinity College is based on insecurity created by overblown deficits. Even the Pensions Regulator, a most conservative body, has had enough.

There is talk of Cambridge fellows boycotting teaching Trinity students next term

The UCU is now threatening to take fellows back on strike unless there is a change in position at the USS to fall in line with the proposals made to it by the JEP – the independent moderator.

The students will once again suffer. There is no doubt in my mind – and I speak as a parent of a son who has suffered a year of disruption at Cambridge – that the USS are causing unnecessary problems which are leading to disastrous consequences.

It is quite possible that Trinity’s action could prove contagious and that the USS gets what it has warned against, a scheme unable to be supported by its sponsor. If this happens then the USS will be the architect of its own demise.

Who suffers?

It strikes me that while university teachers suffer, students suffer and the tax-payer suffers, USS is not suffering at all. Salaries at USS continue to be paid at very high levels. USS staff continue to parade around as industry authorities and certain elements of the pensions industry continue to hold them up as upholding the principles of prudence, caution and of financial economics.

There doesn’t seem much suffering going on at USS.

The asymmetry of suffering in all this is only too obvious, as is the asymmetry of information.

There is something deeply wrong with a system that allows USS and its Trustees to behave as they do without sanction, whilst all around them pay a high price for their less than transparant behaviour and their promotion of a deficit which is quite obviously a fib.

Porky