Con Keating calls the “obscurantism” of USS

In recent weeks we have seen blogs from Professors Emeritus Michael Bromwich and Dennis Leech both addressing the travails of USS. The blogs can be read here and here respectively. Professor Bromwich’s note is a particularly good attempt at piercing the veil of USS disclosures, which once again can best be described as murky.

The irony of the pension scheme, for those leading transparent scientific endeavour and innovation, hiding behind unsubstantiated half-truths and avoiding peer review would be rather funny if the consequences were not so dire. Bromwich’s blog is worth reading on these grounds alone.

Both these blogs come down in favour of a cash-flow driven analysis of the situation, though they differ in detail. It is also clear that neither believes that the position with USS is as dire as the management of USS would have employers, employees, the Regulator, and the world believe. And when two eminent academic economists find something disturbing, it is probably wise to pause and consider.

Rather than attempting to parse the actuarial models and assumptions, a process which would surely get bogged down in the detail, I simply want to answer one question: how credible are the deficits that we are being asked to consider? I will approach this by asking: what is the required rate of return on assets held at the March 31st 2020 valuation necessary to fully discharge the projected liabilities?

USS published the technical provisions projections of the scheme at this date. In total, they amount to £137.5 billion over the coming 82 years. As these are technical provisions inputs, they will be prudently estimated, though we do not know the extent of this prudence. Scheme assets were reported at £66.5 billion. With these benefit projections and the asset portfolio valued at £66.5 billion, the required rate of return on these assets is just 3.22% pa. This is a nominal rate.

In line with avoiding peer review, we are not treated to a full description of the input parameters of these technical provisions. However, we are treated to two tables listing the gilt yield and CPI inputs. Given what we know about inflation and government bond yields, I find these bizarre. I have reproduced them below, together with their difference, as chart 1.The asset valuation above occurred close to the bottom of the pandemic panic. Asset prices have since then recovered. There have been recent comments that the asset portfolio recently had a value of £74 billion – in which case the required rate of return would now be 2.68%

These are nominal rates of return applying for the long term; the final horizon for this return is 90 years from now and the duration of liabilities is 19.8 years. The resultant question to be asked is: how do these required rates compare with USS Investment Management’s published expected returns? To present these in comparable nominal terms, I have used a CPI value of 2.0%  as applied on average in the projections estimates.

These are shown as table 1.

Table 1.


Expected Return
Equities 6.39%
Property 3.80%
Listed Credit 3.68%
Index Linked Gilts 0.43%
Gilts 0.86%

From this it is immediately obvious that a return of 3.22% is easily feasible within USS’s own expectations. This is particularly true if gilts and index linked gilts are only sparsely held (if at all). It is also far below the historic returns of the investment portfolio, which are substantially higher than the expected returns of Table 1. The claim that a deficit exists is therefore on extremely weak ground and  this becomes even weaker in the light of recent asset price performance.

If we look to the technical provision liabilities figures published in the UUK consultation in Table 2 below, and require funding to these levels, we see the following required rates of return.

Technical Provisions (bn.) 76.3 78.8 81.4 84.4
Required Return on Portfolio 2.53% 2.37% 2.22% 2.05%

These are, quite simply,  obscenely low.  It is just not plausible that these low rates will persist for the next 80 years.

At these rates, it would make sense to take the money out and invest it in the universities given the economic value added of the sector!


It is immediately obvious from the projections of one year’s accruals that the scheme is growing, and growing strongly – with new accruals and £6.86 billion and pensions paid of just £2.24 billion, it is growing at 3.36% p.a. Moreover, the duration of these new liabilities is 31.8 years which compares with the scheme’s prior assessment of 19.8 years.

This scheme is not maturing – in fact, it is growing larger and longer. In this situation, it is difficult to see why there should be any meaningful focus on the various de-risking strategies of which USS management appears so enamoured.

More attention should be paid to the economic consequences of the management of USS, both to the sector and  the economy.  We shouldn’t allow obscurantism to let USS pursue a strategy that is decoupled from these basic realities of investment and pensions.

The impact of obscurantism

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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11 Responses to Con Keating calls the “obscurantism” of USS

  1. ConKeating says:

    I have had a number of questions with respect to this blog

    1. You might state what you are assuming: no more contributions?, the cash flows are pensions in payment? what about short run volatility? what about future accrual?

    The benefits cash flows are the projected future values of all pensions awarded (accrued) – there are no future awards in these figures. They are not pensions in payment but pensions which will be paid over time. Volatility is not relevant – these are the prudent estimates of those future values – “They are Technical Provisions cash flows not self-sufficiency cash flows (which are higher due to the different inflation assumption).” And “The cash flows are calculated using the proposed assumptions for the 2020 valuation which are presented in the Technical Provisions consultation documentation issued by the Trustee in September 2020.”
    Future accrual is dealt with separately and we are provided with an estimate of the 2020/2021 new awards accruals, which takes us to the next question.

    2. What is the figure of £6.86 billion in the conclusion?

    This is the total of new awards in the 2020/2021 year. They assume a retirement age of 66 in line with state pension. This is 5% of the awards outstanding as at March 2020. The total of all awards outstanding at March 2020 was £137.5 billion of which £2.24 is payable in the year 2020/2021.

    3. Explain a bit more the relation between duration of liabilities and maturity.

    The (Macaulay) duration is the weighted average term to maturity of any set of cash flows. The weight of each cash flow is determined by dividing the present value of the cash flow by the price. It is a measure of the effective period of investment.

  2. ConKeating says:

    I have been asked to expound what is bizarre about those CPI and Gilt yield curves. Let me turn that question back on itself – can you develop any plausible narrative that leads to those levels and changes of these two series – I can’t.

  3. ConKeating says:

    I am indebted to Mike Otsuka for this comment which arises from the duration of new awards
    “When applied just to liabilities accrued up to valuation date, the dual discount rate implies a de-risking of the portfolio, as those liabilities will become more mature over time, as more of them convert into contributions associated with pensions in payment rather than active members.

    But the future service contribution rate ought to be associated with returns on a portfolio far more weighted towards growth assets, given their long duration.”
    In other words, the discount rate for new awards should be higher than that applicable to the scheme as a whole in a dual discount rate world.

  4. ConKeating says:

    I have just read an article by Woon Wong in the Royal Economic Society’s journal which covers the same ground as my blog above. It is dated January 19 2021. I was unaware of this at the time of writing this blog. Had I been aware, I would certainly have cited it – and not have had to do many of the calculations I undertook for this one. Unfortunately, I seem to be unable to post links in these comment boxes but a google search returns his article.

  5. Many thanks for writing this, Con, and publishing it, Henry. Inspired by this blog, I recorded an updated version of a presentation I did in 2017 comparing discount rates used in USS valuations from 2008 onwards with returns achieved. Superficial analysis, maybe, but I think it’s an important part of a sanity-check.

  6. Pingback: Another expert – Woon Wong- finds USS accumulating surplus assets. | AgeWage: Making your money work as hard as you do

  7. I do agree with you Con – the current USS return assumptions and the drive to ‘de-risking’ are misguided and dangerous. Clearly, there are risks that need to be addressed but these operate partly at public policy level. For example, the last man standing rules are going to risk the strongest univserities seeking to leave, before they end up carrying the Section 75 liabilities for institutions which close. Secondly, SEction 75 itself and indeed Section 179 are in urgent need of reform, because the costs of annuitisation in the teeth of ongoing QE has become unreasonably expensive for sponsors – and will result in a damaging misallocation of resources. USS should be investing in assets that can build long-term growth directly, rather than competing with central banks for supposedly ‘safe’ bonds. Yes, there are real risks to this scheme, but in my view the biggest of these risks is reckless caution which removes the upside potential that is needed to parvent DB schemes in the UK being unaffordable. The current situation with USS seems to be rather a ‘doom loop’ that benefits none of the parties in the long run. I realise the scheme is not targetting buyout, but the idea that a reasonable return assumption is based on gilts + 0.0 or gilts + 0.5%, or anything even close to this, is a recipe for failure.
    That said, I don’t believe that contributions can be cut and the assessment of required contributions is still needed, to ensure protection against a crash in all financial assets that is clearly possible if the QE bubble bursts. A dose of high inflation could well ensue, but again gilts will hardly be a protection and index linked gilts already yield around negative 1.5% or worse.
    So let’s hope there will be some new thinking coming along. We should use USS assets to help green growth, infrastructure, social housing and other investments that can generate a recovering economy, rather than guaranteeing reduced returns with over-cautious investment.
    This does need to run alongside a re-evaluation of Section 75 as well and the protection of some of the largest universities so they don’t feel they must look to leave the scheme.

  8. henry tapper says:

    Thanks Ros, a blog in itself from which I took one particularly acute observation

    “USS should be investing in assets that can build long-term growth directly, rather than competing with central banks for supposedly ‘safe’ bonds”

  9. ConKeating says:

    Ros Thank you for those comments.

    We certainly agree that S75 needs to be altered – I have called for that on a number of occasions. But that is not at issue in the primary point of the USS blog.
    I am not suggesting that contributions should be cut and by similar token I am not suggesting benefits should be reduced. I am simply saying that the USS that I look at is perfectly viable with the existing benefit structure and contributions of 26% (18 + 8)
    On inflation – I am firmly in the Goodhart camp and see inflationary pressures ahead – in large part because of the demographic pressures. However, that view did not enter the analysis here. I have looked at USS’s inflation expectations in 2017 and obviously the 2020 – and they imply a lowering of future inflation expectations between the two valuations. However that passes without comment from USS.

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