The state of USS is the state of us.

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.

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.

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.

Screenshot 2020-03-19 at 05.50.13

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

Screenshot 2020-03-19 at 05.50.48

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

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

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

Screenshot 2020-03-19 at 06.06.02

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

Even traditional safe havens are in crisis

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.

CDC lifecycle

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

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 state of USS is the state of us.

  1. Kiffmeister says:

    Regarding alternative #2, needless to say, although bonds prices are also declining, DB plans would still be in better condition today if they hadn’t over-invested in equities, although I guess it’s too late now to cry over spilt milk.

  2. Dennis Leech says:


    It is disappointing that you report – uncritically – that there are £100 billion of liabilities. The central issue in the valuation dispute is how the liabilities figure is arrived at. It is an artefact with no practical meaning in terms of the payment of benefits. The expected future benefit commitments of a DB scheme are defined by projections of inflation and mortality rates and other factors. They are therefore are not affected by interest rates on government bonds which are nevertheless used to compute the liabilities figure. Record low interest rates mean record high liabilities. The liabilities figure is highly misleading. All it does is say that gilt rates are very low (actually negative in real terms).

    This suggest open 5: do the valuation using common sense and look to see if the investment income from the portfolio would be likely to provide the pensions benefits given that the scheme remains open in the long term. That means looking beyond the daily gyrations in asset values at the economic fundamentals.

    The present conditions are unique and not like the financial crisis of 2008-9 because it is impossible to forecast today what the economy will be like in the long term. But one thing is for sure the market aint doing that.

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