In normal times, USS reporting itself to the Pensions Regulator for being under-funded would be considered a major news story. But what Jo Cumbo reported as happening  yesterday is not headline news, it is a sideshow to what is being called #uklockdown.

BREAKING: The giant USS pension fund has reported itself to the regulator after plunging stock markets triggered a breach a key funding measure.

Trustees will now consider whether contributions from employers and hundreds of thousands of members need to increase.

More follows

— Josephine Cumbo (@JosephineCumbo) March 18, 2020

This week, undergraduates at Cambridge University were told they would not be able to return to study next term. For final year students, their time at university is over. They can at least console themselves, they will not be victims of the ongoing battle between teachers and their employers over pensions and conditions.

The #USS Trustee Board will meet next week to consider what, if any, action should be taken over the covenant breach

“The 2020 valuation provides an opportunity to take a calm and considered approach to assessing current conditions and any changes to the long-term outlook.”

— Josephine Cumbo (@JosephineCumbo) March 18, 2020

This is a “technical breach” it does not mean that USS cannot pay its pensioners, it means that according to its own assumptions it will not be able to pay pensions in the future  without recourse for more money from employers and members.

Markets have continued to plunge since March 17th and there is no obvious floor where they will land.

The formal valuation at the end of this month will be bad news, USS is heavily invested in equities as it is an open pension scheme with long-term liabilities.

What alternatives are there?

Alternative one – higher funding

The outlook for UK university enrolments in the autumn of 2020 is grim. John Ralfe is right to ask his question

Same for the UK? #USS https://t.co/rUGfgpyz6t

— John Ralfe (@JohnRalfe1) March 18, 2020

Neither employers or staff will be particularly impresses by a cash call in the midst of #COVAD19

Alternative two – “de-risk” to “safe” assets

But would USS be better supported if it were invested in bonds? 

Even traditional safe havens are in crisis

In ‘normal’ crises, money goes out of shares to ‘safer’ investments such as gold or platinum. Today though precious metals prices have collapsed, with gold down and platinum plunging 14.6% to a 17-year low of $650 per ounce. Forget ‘flight to safety’: this is a dash for cash.

— Andrew Verity (@andyverity) March 16, 2020

There does not appear to be a safe haven other than cash. Even if a decision was taken to disinvest, the market would attempt to ambush any sale of assets – with spreads going widening like the gaping jaws of the blue whale.

Alternative three – “stop kicking the can down the road”

There is an argument that the Trustees could trigger an insolvency event and press for the scheme to go into the PPR assessment period. I’m not quite sure how this go down with the general public who see no evidence that universities are insolvent.

But if employers refuse to cough up and the covenant breach persists and actually deepens, then we are in uncharted  waters.  The Government has leaned on landlords not to kick out tenants in default, on banks not to evict those with mortgage arrears and presumably some deus-ex-machina  intervention can happen here. These are not normal times.

There will be those who will want March 31st to be the point when the trustees call time on the scheme and close future accrual but I think it more likely that – to use John Ralfe’s phrase, they’ll continue to kick the can down the road.

Alternative four – Government intervention

It looks possible that the USS covenant breach is the tip of an iceberg that – were it to melt, would swamp all around it – even the PPF. The level of support needed to prop up the ailing funded defined benefit pension system on a mark to market basis – would require a hit to UK Plc’s balance sheet which – in the context of existing interventions – could seriously reduce confidence in the UK’s capacity to pay its way.

If we are to apply the principles of financial economics to the current state of the DB market, we really are in a bad place. But in no worse a place than anyone relying on their DC pension to support them in retirement.

This chart shows why open collective pension schemes invest in real assets. It is why the vast majority of people with individual DC plans are invested heavily in equities. It shows that cans sometimes have to be kicked down the road.

The state of USS is the state of us.

From one perspective, USS is a monster – £100bn of liabilities with considerably less in assets.

From another it is just one example of a problem that we all have right now, our funded pensions are valued “mark to market” as dust.

If we are having to sell today, we are in huge trouble, if not – we can only stick with our strategy and ride out the storm.

There is no “deus ex machina” that can solve this current economic crisis, we can only flatten the curve by not rushing for the door at once.

Here is a post from a steelworker who is looking at his portfolio. He faces the same question as Bill Galvin, the USS trustees and the universities and their teachers.

I’m in Royal London and getting obliterated what’s everyone’s thoughts, stick or twist??

USS is us