What does the Trustee do?

Ask a 7 year old what a Trustee does and a 7 year old would say “do trust”. 

This is the verdict of chapter 7 of the second Joint Expert Panel on the Trustee of the USS pension scheme.

The press statement from the Joint Expert Panel is available here and the full report is available here

Before diving into the intricacies of dual discount rates and risk budgets, it’s worth asking ourselves why many students last term went without lectures or tutorials or any kind of teaching, why they got nothing for the money they borrowed or spent to be taught.

The breakdown in trust has resulted in the kind of feuding which the general public has rejected in favour of getting things done and I think it time that someone listened and acted on the Joint Expert Panel’s recommendations. If the current trustees and the stakeholders (USS executive, employers and unions) cannot come to an agreement, I would like the JEP to be backed by the Pensions Regulator to take control.

The USS should be run as a mutual and the views of all parties – including the JEP, should be taken into account.

It has come to something when the Trustee of the USS is recommended to come to the table to discuss getting things done through mediation. This suggests a failure of trust that would amaze the 7 year old.

The USS Trustee no longer “does trust”.

What has happened?

I have hinted at parallels with the breakdown in the political process which resulted in us having to have a third general election within five years.

What has happened at USS is that instead of mutual endeavour to provide university teaching staff with promised pensions, we have two sides who have adopted quite different views on how those promises be met.

USS wants to adopt an approach which makes the possibility of a shortfall in funding impossible by adopting a conservative investment approach and demanding more in contributions from stakeholders. This approach has been adopted by the Trustees.

Members, represented by  the teacher’s union (UCU) want lower contributions and a less conservative investment proposition, resulting in lower contributions for members and employers.

The JEP appears to be siding with the members in recommending alternative investment strategies that would result in higher discount rates and lower contributions. It claims that these strategies would meet the approval of the Pensions Regulator which acts as a referee in what has become a fiscal boxing match.

This is all that has happened in the last three years. Like Brexit, the resolution of the problem has become bogged down to the point that force majeure is now required to get things done

Let’s get USS done

The answer to the problems created by the USS dispute cannot be resolved by the Trustee, which has lost the trust of its members. If this happened it cannot – as any 7 year old would confirm – be called a Trustee. The Trustee has to go and be replaced by an independently appointed body,  the JEP. Indeed the JEP should be employed to moderate the dispute and (with the blessing of TPR), impose a solution to the issues surrounding the forthcoming valuation.

I cannot see any useful purpose to be served by keeping the current Trustee which has lost all credibility with its members and is – in the second JEP report, being severely criticised for its governance failures.

Implicitly, the report is saying as much and it is also asking stark questions of the USS executive too. It is hard to see how the current USS executive can continue in their posts if the implications of the second JEP report are taken on board.

A proper adoption of risk-sharing – a price UCU will have to pay

Getting USS done is going to mean an acceptance from the UCU too, acceptance that ultimately risk-sharing means more than a grudging acceptance that members will have to pay more. To me “risk-sharing” means accepting in adopting a more aggressive investment strategy, some of the benefits of that strategy become conditional on it working.

The JEP second report looks at this kind of risk sharing (p 66)

It has been suggested that to reach a point where levels of risk and contribution rates are acceptable to all parties, it could be necessary to allow flexibility in benefits. A range of possible alternative means by which active members could share the risk could be explored, recognising that contribution levels may already be deterring some potential members from joining.

(thanks Mike Otsuka for pointing this out).

This kind of risk-sharing is practiced by most people in their pension saving and ultimately it leads to fixed contributions and variable benefits.

The paradigm shift away from a guaranteed to a best endeavour approach need not be adopted overnight, it may happen over a valuation cycle or over multiple valuation cycles. It is the long-term solution to the problem.

Again an analogy with the current political situation is helpful. When Labour finally accepts that it has lost the trust of many of its core supporters, it will accept that the ground on which its principles are built has shifted. I suspect the same has happened in pensions.

The principle that a pension scheme produces a guaranteed benefit has shifted with common practice. Those who argue against ideas such as conditional indexation or even reductions in nominal pay-outs now look as out of kilter with popular thinking as the leaders of the Labour party.

The adoption of mutuality

The old governance model which involves trustees acting for members has broken down at USS. Trustees are now seen as supporting the USS executive and this idea of “them and us” has broken the concept of mutual endeavour to the point that young people are not getting the education they have paid for – because of strikes.

Both sides need to come together and change their positions. This is what the JEP is calling for. If both sides cannot back down, they need to walk away and we need a JEP imposed solution – with the blessing of the referee – TPR.

It is not enough for the UCU to dig in its heels, it must accept that for the USS scheme to be run as the UCU want it to be run, there must be more risk-sharing and that – if the more aggressive strategy doesn’t work, the cost of failure must be born not just in higher contributions but lower benefits,

Risk-sharing is at the heart of mutuality. The breakdown in trust is two way and poor as the performance of the USS executive and Trustee has been, UCU must bear its part in the blame for a generation of students not getting the teaching they’ve paid for.

The UCU’s initial response to JEP2 is here