News that University employers have agreed a deal with the University Superannuation Scheme that will leave members with substantial cuts in benefits , has not gone down well.
Another wave of strikes beckons , deepening the plight of students who have seen their recent teaching and communal experience switch online because of the pandemic.
This blog asks questions of all parties, USS, UUK and UCU. It suggests that now is the time to look again at risk-sharing within the USS so that the costs and benefits of membership are more fairly distributed.
What are the new proposals?
UUK claimed its proposals — which include slowing down the rate at which pensions build before retirement, and capping inflation increases at 2.5 per cent, would help employers and employees avoid significant increases in their contributions.
Under the UUK plan, employer and employee contribution rates will remain at 21.1 per cent and 9.6 per cent of employee salary respectively.
The USS trustees this year warned that contribution increases of up to 25 per cent of salary may be required to keep the defined benefit pensions, which pay out a guaranteed sum each year tied to the employee’s salary, in their current shape.
“The employers’ proposal sees a significant element of defined benefit retained while preventing unaffordable contribution levels,” UUK said.
The intergenerational unfairness of this solution
From all the comments on social media, this spoke to me.
Scenarios like this are the consequence of ultra low interest rates. They are no help to working people.
— Joe Hynes (@Caenwee) August 31, 2021
Perhaps Joe had read this excellent article in the South China Morning Post
Perhaps Joe had been reading Robert Armstrong’s “Unhedged” on 31st August
Is an excess of rich people, not of middle-aged people, what depresses interest rates?
Armstrong follows the implications of research carried out. His argument is that low interest rates protect those who have wealth while those who should benefit from the prosperity of a low interest rate high growth economy are saddled with debt.
Atif Mian, Ludwig Straub and Amir Sufi agree with partisans of the demographic view, such as Charles Goodhart and Manoj Pradhan …that a key contributor to falling rates is higher savings. Savings chase returns, so when there are more savings and the same number of places to put them, rates of return must fall.
M,S&S disagree, however, about why there are ever more savings sloshing around. It is not because the huge baby-boom generation is getting older and saving more (a trend that will change direction soon, when they are all retired). Rather, it’s because a larger and larger slice of national income is going to the top decile of earners. Because a person can only consume so much, the wealthy few tend to save much of this income rather than spend it. This pushes rates down directly, when those savings are invested, driving asset prices up and yields down; and indirectly, by sapping aggregate demand.
Why doesn’t all the cash that the rich push into markets get converted, ultimately, into productive investment, either at home or abroad? Tricky question. For present purposes it is enough to note that this is not happening — the savings of the American rich reappear, instead, as debt, owed by the government or by lower-income US households. (In another paper,
MS&S have pointed out that this means the high share of income going to the rich hurts aggregate demand in two ways: the rich have a lower marginal propensity to consume, and governments and the non-rich are forced to shift dollars from consumption to debt service. Economically speaking, high inequality is a real buzzkill.)
Translated to the context of the decision of the USS employers, you can see what Joe may be getting at. The economics are working for the haves and against those aspiring to have.
Because the proposals safeguard what has been accrued, the cuts fall heaviest on future accruals. The economic benefit of the USS scheme to those at the end of their careers is immense, but progressively less impressive the further members are from retirement.
Those that argue that CDC has the potential to be economically unfair, should take note. The worst thing that an open scheme can do is to take fright at a low valuation and lockdown. I have shown this chart many times, including to a group of USS members at Cambridge.
Once the “open sweet spot” closes and schemes start taking risk off the table, discount rates tumble and the supposed cost of benefits soars. The snapshot of the 2020 valuation suggested that the scheme was going bust, but since early 2020 we have seen a remarkable bounce back. USS valuations are based not on the returns from growth assets but on the cost of liabilities, the cost of meeting liabilities is based on low interest rates and interest rates remain low because of quantitative easing.
The message of USS is fundamental to the inequalities inherent in the regulator’s funding requirements for schemes. It is a message that schemes like USS should pull up the drawbridge on the future to secure the past. Any sense that those who have had it good – may have had it too good is not even considered.
So it is that younger members have to keep older members in clover. While these proposals will not close the scheme for future accrual, they will make future accrual more expensive and many younger members will be tempted to forsake the sweet spot – which they aren’t enjoying. Certainly , many outside the scheme will chose not to join it, if the current proposals go ahead. The scheme may not close, but its gates will narrow.
The benefits of older members were based on a world that is different, where interest rates and discount rates were high. They had it good on the way up, enjoying low contributions and high benefits and now they are being cushioned as pensioners by an improved covenant ensuring their futures without financial uncertainty.
If interest rates and discount rates rose, the “deficit” within USS would shrink. If USS continues to enjoy its share in a buoyant market in growth assets, the assumptions in the valuation will be beaten and the deficit will shrink.
Pulling up the drawbridge now, presents the worst of all possible worlds to younger members and provides unimagined security to older members.
Maybe UCU should consider the CDC alternative. Maybe those that have already accrued pension rights , including those who have become pensioners, should consider indexation conditional on the market conditions at the time. I dream – the regulations will not let this happen – but if there were natural justice, all within the scheme should be sharing the pain, not just current workers.