How will USS value itself today?


News has come in that the University Superannuation Scheme (USS) is going to press ahead with a valuation of its assets and liabilities as at the 31st March 2020. It reasons for it in a public statement.

Screenshot 2020-04-02 at 06.00.28

I had originally thought that this was to comply with the law but Professor Dennis Leech has put me right on that.

So the decision to spend hundreds of thousands of pounds valuing assets that have no market price (because nobody’s buying or selling) is being taken “not to take short term action”.

Not only is it extremely hard to work out what the price of USS’ pension scheme assets are, it’s virtually impossible to work out the impact of COVID19 at 31st March on  future and current pensioners. A valuation at 31st March 2021 could use actual mortality figures , the idea of comparing the 2020 guess with the reality a year on makes no sense to me at all.

The public has no expectation of anything going ahead right now, no Euro 2020, no Wimbledon, no premiership for Liverpool – there may not even be university exams. So why does Britain’s largest funded pension scheme insist on continuity? I just don’t get it. Nor do Kevin and Dennis

The valuation  doesn’t make common sense.

Nor (says Leech) does its methodology

Here’s Dennis commenting on a recent blog of mine  (my italics)

It is disappointing that you report – uncritically – that there are £100 billion of liabilities (in the USS).

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 option 5 (See blog): 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 ain’t doing that.

So what will USS do with the valuation?

USS say they will use this meaningless information and use it to

  1. Re-assess the support available from our sponsors
  2. The outlook for future investment returns (eg the growth assumptions)
  3. The deficit contributions due from universities from 2021
  4. The outlook for Higher Education and Financial Markets

Taken together, the actuarial valuation will be used by USS to put the scheme in lockdown. Quite obviously the sponsor covenant will weaken, the growth assumptions will be revised downwards, deficit contributions revised upwards and all this will be justified on the grim outlook for higher education and financial markets

USS have just commissioned a justification for pensions austerity for the foreseeable future.

This is not the way forward. The way forward is to keep the scheme open and flex the benefits

CDC lifecycle

It may be that the long term future of USS is CDC – that thought could not be spoken pre Covid-19.

If this is the plan then the trustees should be open about it. The public statement says that USS will be “flexible where we can” but this valuation is chaining it to its own railings.

Instead of pretending that USS is bigger than the pandemic and that its BAU trumps the reality of Britain on March 31st 2020, USS should cancel its 2020 valuation and put up a sign on its gates

All bets are off


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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