A USS CDC scheme “makes sense” – says the FT’s Martin Wolf

This is the first time I have seen a mainstream financial commentator (I don’t count myself as that!) call for the USS Trustees and their numerous stakeholders to sit down and consider risk-sharing through CDC.

Wolf argues that the risks that USS are trying to ensure are not insurable by a pension fund. The threats to the financial system that would bankrupt the pension scheme would also bankrupt higher education. Schemes such as USS should…

not  protect themselves against extreme disasters, but against the downsides of actual performance in the real world.

Instead of building such prudence into USS’ investment and funding strategy that the scheme becomes unviable, the trustees should re-risk and look for upside that could restore lost benefits rather than restrict benefits further. This will bring considerable anger on his head but he is right.

The calamity of USS further de-risking is that it loses the buoyancy to enjoy the returns from markets offering growth on investments. The final calamity would be for the scheme to close for new entrants and ultimately to future accrual. This is illustrated here

As the chart shows, losing the sweet spot that occurs when a scheme is open for the future means selling stocks rather than relying on income, it means moving out of productive capital and into short term instruments that have little social utility, and it means that future members are having to carry all the risk themselves , rather than sharing that risk with employers and other members.

Martin Woolf’s challenge to the USS

Wolf is explicit, the Trustees of USS are getting it wrong and this is leading to dire financial consequences from the scheme, it is also about to lead to further strikes with dire consequences for students.

Wolf quotes Imperial College’s economist , David Miles – approvingly

“The question is whether the USS with its strange structure (large numbers of different institutions, many with limited ability to put more in) is able to make promises guaranteeing fixed pension payments. Risk needs to be spread better.”

So Wolf argues for this

What does make sense is to have a sensibly invested fund (that is, one predominantly in equities) that is structured in ways that limit the downside risk to both members and sponsors in the event of things going wrong, on a relatively manageable scale. What would then be needed is some adjustment of benefits and contributions. This flexibility is what all pension funds need, not to protect themselves against extreme disasters, but against the downsides of actual performance in the real world.

That flexibility is the safety valve of releasing the scheme from a rigid benefit formula so that it can ride out bad years.

In a sensibly managed collective defined contribution scheme, that would happen. Since the sponsors of the USS do not have infinitely deep pockets, it makes sense for the liabilities they bear to be capped

This is analogous to the Chancellor’s decision to suspend the strict application of the triple lock following the spike in inflation that might have meant state pensions increase by over 8% this year. By the letter of the triple lock formulation, Sunak should stick to 8%, but even the most vehement of campaigners – Ros Altmann- accepts a 5% increase – rather than the 3% proposed, makes more sense than over-paying to meet an increase that imperils financial stability.

I hope that Wolf’ (and Miles’s) voice carries to the USS in the City and the university employers around the land. I hope it is heard in the offices of the UCU and by the membership. It makes absolute sense to consider a CDC solution for USS at this point. The timing is propitious. Royal Mail’s CDC scheme is currently being enabled by secondary regulations, the opportunity to switch to a conditional benefit and defined contribution structure will exist by the end of 2022. In the timeframes of USS valuations , that is but a blink away.


About henry tapper

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