The USS valuation and a way forward

The controversy over the University Superannuation Scheme’s current valuation sums up all that’s gone wrong with defined benefit pension schemes.

Let’s start with the view of John Kay, one of Britain’s most respected and outspoken economists.


Kay’s comments meet predictable incredulity

And so the conversation continues. It must have been like this watching prize fighters slug it out over hundreds of rounds in the 19th century.

British (English) School; Tom Sayers (1826-1865), Prize Fighter; Compton Verney;

There really is no end in sight to this fight. Someone is going to have to intervene  and it doesn’t look as if the USS trustees , TPR or even the DWP have got any way of separating the pugilists.

There has got to be a better way (than burning down the house)

This long standing dispute is not going to be resolved by either side backing down.

It is clear that tPR and the trustees do not share John Kay’s view that the valuation is the starting point and USS will not be treated as a special case. The supposed deficit will have to be met with real money which will come out of overall reward for university teachers.

The cost of pensions to the UUK will eventually get too great, pressure will be put on academic wages and numbers and standards will fall. In the meantime we are likely to see more strikes and a generation of students who have lost out through previous strikes and through the impact of the pandemic, will leave with degrees but a downgraded education.

Today , Professional Pensions published a word cloud of how pension professionals saw their profession.

And yet there is £80bn in the USS pension, more than £2tr in funded pensions and as much again in unfunded public pension liabilities.

Why there has to be a radical solution to the USS problem

Closing USS to future accrual would not help solve the challenge pensions pose to the Universities. Mike Otsuka has pointed this out

Kevin Wesbroom hopes that the scheme can be kept open by moving the valuation basis from focusing on technical provisions to a more optimistic best estimate basis

One way or another it feels to me that a sensible outcome to the percentage of salary contributions for this valuation should start with a 3, rather than a 5 or 6. And to forestall any future amazement or depression, I am talking in tens not hundreds!

This looks to me like putting the cork back in the bottle only for the wine to further ferment and blow the bottle next valuation.

If the bottle does explode and there is no future accrual , we are into the nightmare death spiral – laid out by First Actuarial

The investment strategy has to reflect a shortening time-horizon, meaning it switches the scheme assets to low growth defensive positioning. This puts up the costs of the scheme as it struggles for self-sufficiency and we end up with reduced pensions at very little cost saving.

Simply playing with the dials is not enough, it is leaving pension professionals with profound depression and the country with good reason to dislike pensions,

A way forward

The slough of despond in which pension professionals find themselves in , may have something to do with pensions having turned from a solution to the problems Britain faced with old age to a barrier put up to the proper running of businesses and institutions like our universities.

Instead of viewing pensions as integrated into a just society, as Beveridge and others conceived them, pensions are deemed anti-social by those having to fund them and divisive , by those due to receive them.

To turn this situation around will need some vision from those at the top. I mean right at the top- those who lead our universities, who represent staff and those in Government responsible for setting the rules by which pensions are paid.

At the heart of the problems is the G-word, the pensions guarantee – that is now so expensive that it creates valuations which – while right in terms of guarantees – are wrong in terms of common sense. Both those approving the valuation and those questioning it are right. But the question should not be about the valuation process , it should be about what is being valued.

Last week I got a couple of direct messages (too contentious for email) from a friend.

The first read

You need to blog that not only should USS go CDC for future accrual bud it should do work on how a DB scheme can apply CDC to accrued rights.

The second read

It is the logical conclusion of the numbers Derek (Benstead) and Red Actuary (Hilary Salt) put out today. Or at least a start. They could argue that though the assumptions are best estimates for the current USS investment strategy, the strategy could/would change if it were CDC. It would be a good start for kicking off the sensible debate in the trade-off between guarantees and risk and cost (which is a debate which has not been discussed on the new DB code but will be).

So while RM (Royal Mail) sort of opens the issue for new accruals, USS could sensibly extend the debate to accrued rights and New Brunswick in Canada points the way.

Perhaps now is the time for us to look at a way forwards, that is sustainable over time.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to The USS valuation and a way forward

  1. Eugen N says:

    Not sure if members of the USS would be willing now to give up the guarantees. Their guarantees are backed by the assets of the Universities due to sponsor covenants.

    I think there should be a way in which this covenant could be used now to fill some gaps, like transfer some Universities’ buildings to the pension scheme to cover existing deficits. Most of these deficits are due to underfunding in the past, so it would be normal that some Universities’ assets they bought in the past to change hands and be given to the pension scheme.

  2. K M Jeary says:

    Henry, our employers (at least Cambridge) do NOT regard the USS pension scheme as unaffordable. It’s the Trustees and the PR who do. I would point out that the one Trustee who questioned their figures (after it was made clear that the details would not be divulged to us) was dismissed. The conclusions of the review body (half UCU, half UUK and a neutral chair, probably containing more intellectual expertise in this area than the entire Trustee board) has recently been comprehensively dismissed without any reasonable explanation.

    With the best will in the world here can be no reasonable compromise if one party does not want it.

    And that’s after a 17%+ drop in relative academic pay after 2008! People also forget that no person is an island. I am currently paying a substantial sum to my youngest nephew to help him get through university and, yes, he paid a term’s rent when he was unable to occupy his accommodation. So my heart sank when he informed me he wished to do a post-graduate course. Another year or more likely two at the academic mill to get him through. And I used to enjoy my job, and I am lucky to have one! No wonder our morale is at rock bottom.

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