Dr Deepa Govindarajan Driver (@deepa_driver on Twitter) has written this article in a purely personal capacity.  

Deepa is a former chair of UCU’s USS negotiation team (SWG). Her professional expertise is in governance, financial regulation and accountability. She is currently a member (alternate) of the UCU negotiating team.

Why We Should Not Gamble Away Our Retirement: Arguments against a Conditionally-Indexed USS Pension

For those who wish to have a straightforward yet critical explainer to the fundamentals of Conditional Indexation, here is an article that cuts through the jargon Conditional Indexation: An introduction to a sugar-coated bitter pill

Pension indexation is fundamental to preserving the guaranteed value of retirement savings and pension income into old age. The peace of mind that comes from having a secure & anticipatable-y indexed pension, that allows us to plan our retirement sufficiently in advance, is important to many USS members. This is particularly true, for those who have experienced low pay or endured pensions erosions due to vulnerabilities within employment e.g. casualised work; or life circumstances such as gaps in pensions accruals due to career breaks arising from caring commitments. Pensions gaps are magnified by pay gaps.

Guaranteeing the nominal value of the USS Defined Benefit (DB) pension we receive, while making inflation indexation – the crucial component to a pension that provides an assured quality of life – conditional, is in my opinion pure trickery. With the Bank of England’s deputy governor warning about war-time inflation, the insecurity of even permanent jobs in Higher Education, rampant pay and pension inequalities, and a decade of stagnant or eroded wages, workers in higher education just cannot afford to be taken in by this sleight of hand.

So why on earth – a sceptical reader might wonder – have negotiating teams from both stakeholders (UCU and UCEA) and a team of staff from USS been devoting so much time to exploring Conditional Indexation (CI) in recent years?

Given conditional indexation involves a one-way risk transfer from employers to members, why have UCU used scarce time and resources to explore it seriously? For UCU, the clear reason is that investigating CI, albeit sceptically, was what reps from our branches, regions and nations, at our annual sector conference agreed democratically that UCU negotiators were to do. Ours is a union of those who work in various roles across academia. We pride ourselves, as a profession, in being open to new ideas and being intellectually curious. That, in part, has also, to my mind, driven our union’s willingness to explore CI. Our members’ openness to studying CI was also perhaps driven by a concern that employers may not be as open to making sufficient movement on improvements to valuation methodology (which was seen as absolutely fundamental to securing the future of our USS), if we did not credibly acknowledge their desire to investigate CI.

It is important to remind readers here that employers’ preoccupations with introducing CI, thus far, have been repeatedly couched in the language of improving “Scheme stability”. (They used also to talk about reducing member opt-outs; now they talk about generating value for money from contributions.) My view is that in reality, the employers’ focus has always been on a particular aspect of stability. But more about that later.

Like UCU, employers’ want stable valuation outcomes that don’t wildly jump about the place, based on the movements of gilts. Employers’ desire for predictability in terms of their contributions to pensions costs is also understandable. A second reason has – to my mind – also been driving their interest in conditional indexation. Employers have long been seeking to reduce any reliance on the collective covenant underpinning the DB Scheme (also known as the ‘last man standing’ guarantee in USS. This includes reducing the reliance that arises from employers underpinning the Scheme’s guarantees related to inflation-protection. Such inflation-proofing, is important to members, even if it currently only affords inflation-protection up to the level of the so-called ‘soft cap’. What employers haven’t seemed – to my mind – to prioritise, is the stability and predictability of DB benefits that members get. Nor have they shown a clear interest in the survival of the Scheme’s DB component in the long run. This, of course, should be and is, a preoccupation for members because we care about having dignity and certainty in retirement. We also care about future generations of workers in academia (our students and peers) receiving a strong, stable, well-indexed DB pension.

Some have said that introducing CI will allow USS to generate greater returns for members because the Scheme Trustee would be able to step away from the regulatory constraints that relate to ensuring inflation protection. The Trustee can thereafter take on certain investment risks that it feels it cannot take on within the current arrangements, and also due to regulatory constraints. The expectation is that under CI the Trustee will feel able to invest in a wider selection of returns-generating assets, with higher risk and therefore higher returns. The dampening of such choice is ascribed to the need to invest in some lower-risk investments matching the regulatory emphasis on securing the inflation-protection promise.

So why do I say that any potential for additional risk-taking resulting from the removal of the guarantees to inflation protection in CI are a terrible solution for members?

Theoretically, the Trustee’s desire to have the options for such increases in risk-taking and return-making make sense. But, both in theory and in practice, we know risks have both up-sides and down-sides. And while much is being made of the potential up-side to members and employers, the discussion around down-sides is remarkably one-dimensional, despite the actual downsides being multi-dimensional and complex. USS trustees are of course risking members’ money and not their own. While members like me argue for greater risk-taking by the Trustee, we want them to engage in such risk-taking while being bound by the existing guarantees to inflation-protection (i.e., not CI). We feel that not doing so is driven by the desperate, unfounded, and muddle-headed preoccupation of some with treating USS like just another single-employer, DB scheme with a paucity of new members contributing to the Scheme, or like a Scheme that may have to close at any moment in the short-term. Many scholars and UCU’s actuaries, have long-argued that being obsessed with the certainty bonds provide and so, skewing the USS investment portfolio away from returns-generating assets towards bonds, does not actually help the Scheme in the long-term. The core argument here is that we must recognise the uniqueness and strength of USS as an open, immature DB scheme with a sector-wide membership and a collective underpinning from employers, some of whom have vast swathes of assets and the strongest of whom have been around for over 500 years. Recognising this allows the Scheme Trustee to invest more extensively in productive assets and benefit from risk management over a longer-term time horizon. This allows the Scheme to deliver strong real returns and helps the Trustee not just to secure the pension promise but also to provide positive outcomes, for our communities and society-at-large.

That said, I strongly disagree with the suggestion that we should seek take on more risks by trading off the certainty of inflation-protection. It is often argued that regulatory constraints are driving the move to CI. It is said that the Trustee is unable to invest appropriately and in the best interests of members because current regulations and legislation cater to single-employer, closing or closed DB schemes. If we know that the requirements the regulator or government place on USS as an open, multi-employer, sector-wide DB Scheme are unreasonable this should be addressed by working with the regulator and with government to amend these requirements.

If instead, CI is used as the backdoor route to address issues with, or to skirt regulatory or legislative inadequacies, we open up a new Pandora’s box of risks. We create a further layer of unpredictability and even more dependencies while purporting to make the scheme more “stable”. CI, in this way serves – perhaps inadvertently – to increase instability for members while increasing stability for employers. Stability for the goose in this case is not stability for the gander.

Even with a well-governed USS, we should not underestimate the factors that could affect whether increases, in good years – the carrot currently being dangled to tempt members to countenance incurring the potential losses to indexation in bad years – will ever be awarded in reality. The simple fact is that this is not a realistic way to look at risks to members. Making indexation conditional and depriving members of that promise, introduces a whole new range of risks to members’ pensions. Some may argue that any such increase in risk could potentially be offset by an unconditional increase in the pension promise to members that could be given at the point when we agree to make the switch to CI. But it is difficult ex-ante to predict the nature and substance of the gamut of risks that the Scheme will be subject to, once indexation is conditional. Even with a technocratic mechanism supposedly aimed at clawing back inflation-protection that has been lost in bad times, the practical efficacy of such a mechanism is hugely dependent on factors that are typically beyond union, employer or even USS control. Examples of factors that might affect the recouping of indexation include governmental pressures. We are well aware – in completely unrelated contexts to the discussion of CI – how successive governments have promised and then tried to erode the triple lock on state pensions. We also know how employers’ poor practices that were brought in during states of emergency, never got rolled back even when circumstances changed. These demonstrate a particular pattern, and we must be alert to it. In the case of CI, we must be particularly sensitive to the impact capricious governments have on pensions, and we must also be alert to the deference of regulators (including The Pensions Regulator, TPR) to, and to groupthink in the actuarial profession. We must be particularly sensitive to the extreme deference shown by many pension scheme trustees to prevailing market wisdom, and regulatory and governmental priorities.

Then there are the revolving doors between employers and USS, employers and government, USS and The Pensions Regulator etc. Such revolving doors between those who see themselves as sector leaders in HE or as industry pensions professionals, and those who make or implement public policy, have led to cognitive capture amongst decision-makers. Such capture has in the past, reinforced the misguided consensus that our USS DB pension was in deficit and the only solution was to cut member benefits drastically. In the future, such groupthink may create a consensus that indexation should not be granted due to issues elsewhere, (such as employer requests for government handouts due to falling student numbers, for example). If such groupthink were to surface, we would have little influence to reverse it, especially when any decision not to award indexation, is presented to members as a technocratic outcome i.e., “Computer says no.” Opposition through industrial action for example, would be tricky in these circumstances. Under CI, employers would of course have already passed on the indexation risks to us. So, they would have little innate reason to protest the lack of indexation. And we, on the other hand, would have little opportunity to take the issue up with employers because they would politely tell us that it was quite simply not be employers’ problem any more.

Some colleagues have argued that we need to continue to participate in the joint CI work even now, so we understand the potential upside to CI before turning it down. I have some intellectual sympathy with these arguments but argue that working on CI is now distracting us from our core task of serving as the stakeholder advancing members’ interests. I use the word ‘advancing’ here intentionally. Trade unions must advance working people’s interests, not simply spend all their time reactively defending members against gratuitous employer attacks.

CI involves a one-way risk transfer from employers to members, and is not a form of risk-“sharing” that mirrors the current arrangements in the Scheme. Let me say that again, because this is a fundamental point within this article. Conditional indexation is a risk-transfer from employers to members. It is not a neutral change to the current arrangements for risk-sharing. Those serving members’ interests, must be focussed on securing DB and the associated inflation protection that makes it retain its value, and then enhancing it We must not seek to generate returns by accepting a one-way risk transfer from employers to members.

In the past couple of years, although the Scheme was in surplus, negotiators, were seeking to follow the mandate from members to sceptically explore CI. UCU’s energies would however now – in my opinion – be better used improving the pensions of our lowest paid members, engaging seriously with regulators and parliamentarians to raise awareness of the uniqueness and strength of USS, reforming the governance of the USS Scheme, improving further the valuation methodology and importantly exploring the many paths to stability for both members and employers. UCU’s negotiators have worked hard but were only able to superficially touch on some of the above, given finite time and resource. I argue that allowing negotiators to devote more time to these matters (rather than to CI) can lead to much better outcomes for members.

I will be trying to persuade reps at UCU’s Higher Education Sector Conference (and I hope readers of this article will join me in saying this), that we should not simply be focussing on CI as the sole viable path to stability. CI mainly serves employers’ interests and does so in a very narrow way, even on that count. UCU (and UCEA) have not yet thought through or worked on – with USS – the range of other options for changes to Scheme design that would strengthen DB and the Scheme, while protecting indexation and keeping contributions reasonable. We must and can re-focus on what best enhances the value, stability and longevity of the Scheme without requiring members to give up their claims to assured inflation protection, if members give negotiators, HEC and UCU headquarters that direction. Such enhancements to the Scheme will make our institutions more attractive employers in the long-run and provide security of pension provision for future generations of staff. So, this is not just all about UCU, and it is not just members who win. Employers – if they are not devious or short-termist – win from such a refocus too.

Here, I must say that it is absolutely vital to take with a pinch of salt the claims that employers are exploring this with an open mind or that they have not yet made up their minds about CI. It is vital that we are realistic and understand that employers would not have spent over a year worth of time and resources pushing for and working on CI, if they weren’t preoccupied with introducing CI and ridding themselves of the indexation risks. Their desire to introduce CI – if not clear already – has been made abundantly clear in the most recent UCEA consultation with employers where they say, “Employers wish to now push ahead with the development of CI as a future design of benefits in USS, as it carries the potential to deliver greater longer-term stability, and greater value for money from the contributions being paid-in by employers and members.”

Conditional indexation by transferring risk from employers to Scheme members, works for employers, but does not work for members. It spectacularly undermines members’ interests, and so we must not stand for it. We have spent copious amounts of scarce UCU time and resources on “exploring” CI. Now we must be careful about being taken in by the razzle dazzle of snazzy econometric models or driven by our intellectual curiosity to conduct such a CI experiment on USS members despite having the knowledge that it could foreseeably offer detriment to members in practice, while being an interesting idea in theory. We just cannot afford to rely on false theories of risk-sharing between employers and employees while ignoring the practical realities of power dynamics and risk transfer that we see at every turn in our workplaces. We should certainly not be taken in by complex methods dreamed up in ivory towers. Those of us who are trade unionists and/ or care deeply about fairness, must recognise that many of our colleagues (and indeed future generations) do not have accumulated or inherited wealth that offers us a cushion against the possible losses arising from the removal of inflation protection. Many employers (especially the wealthiest ones) have huge reserves and are absolutely ruthless about keeping pay stagnant, entrenching precarity, or pushing for redundancies. Despite their financial muscle, these same employers now also seem to want to palm off the inflation protection risks to us. We, as members, cannot afford to gamble with inflation protection, particularly in old age and retirement. Conditionality of pensions can rapidly and easily burn through any little cushion that hard-earned wages have given us.

USS colleagues, despite being professionals in the notoriously ruthless financial sector, have expressed to me their sincere desire to do what is right by members. I believe them and I know that many of them work hard and try to do what they think serves all members best. But I cannot help recognise that such conditionality of indexation can further incentivise USS to be more sanguine and unfettered in the risks they take with our retirement money. This includes decision-making by those at the very top of USS, who themselves likely have nest eggs or cushions built from long financial careers with six figure salaries. We must be aware that some may be seeking to advance their own career in the financial / consulting industries by taking USS through the adoption of the novel mechanism that is CI. There are also those at USS who may genuinely want to do the right thing by members, but who are taken in by the groupthink and propaganda accompanying CI’s vague promise of potential higher returns. These industry professionals and consultants may themselves have past employment in an environment where DC pensions are the norm. Many may therefore not be able to easily put themselves in our shoes or meaningfully engage with the consequences of long-term losses that CI can bring, or even be able to recognise the low and stagnant salaries that are the reality for many workers in our sector. These professionals are unlikely to suffer the consequences of CI being a disaster for our members. Only some will feel able to contribute if our union must in future fight to undo CI (because CI fails) or to help us take the Scheme back to properly guaranteed and indexed DB. This is our members’ pension in a deeply unequal sector where the pay gap amplifies the pensions gap manifold. As the stakeholder advocating for all USS members, UCU just cannot afford to take a misstep.

The performance of USS investment management in recent years, and the resistance of USS’ top-tier to being genuinely accountable to members on its investment performance are also things we as members must carefully consider. USS’ senior management have emphasised the term “fiduciary duty” many times when we have raised our concerns about certain investment decisions. They also repeatedly emphasise that the Trustee has a specific duty to secure ‘accrued benefits’. USS has made clear that they are not here to advance members’ interests or even to secure in the longer term, the Scheme’s current structure as a predominantly DB scheme. This, they say, is the prerogative and business of the stakeholder representatives ie UCEA and UCU. USS only seek to be financially prudent with our pension pots, so that they can secure the pension promises that have already been accrued.

Over the years, the USS pension surplus/deficit has fluctuated wildly. This volatility has often been related to the way deficits, in particular, are modelled, rather than due to any changes in the inherent health of the Scheme. So. what do we make of USS taking many years (and us taking much industrial action against our employers) before USS and employers agreed that we were right regarding the flaws in USS’ valuation methodology? USS has never openly acknowledged that its entrenched ideological positions – consistent with industry group-think – led, in part to the disastrous (circa) 40% cuts to future guaranteed benefits. USS have now addressed some key issues with the valuation methodology. This is of course welcome progress, and I acknowledge that these changes are down not just to the joint work of UCU and UCEA but also to the skill and hard work of those at USS who approached our concerns with a more open mind. That said, despite the passage of time USS has not accepted all the changes we proposed. It is importantly worth noting that USS’ senior management has never publicly apologised to members for the stress and harms many members (particularly precariously employed members) experienced when the pensions cuts were made.

Some members (myself included) may surmise that USS’s fiduciary duty would require them to recognise that there are certain risks we, as members, do not wish USS to take, with our money. We may also argue that there are certain types of investments a responsible pension fund (not to mention members) do not wish to profit from. Yet, USS did not take sufficiently seriously our members’ repeated concerns about Thames Water. It is quite revealing that they even showcased the Thames Water CEO at their annual open meeting, while Thames Water were polluting our seas and rivers. Similarly, USS decided to continue with Liability Driven Investments (LDI), despite our repeated expressions of concern around the risks such investments and leverage bring, both to members and to society at large. Despite UCU’s explicit and repeatedly stated position on the issue, there has not been a serious effort to divest from the war machine or Israel during the ongoing genocide in Palestine. This can come across as USS signalling that they know what’s best for us. To be fair, members would (mostly) not profess to be investment experts, and members have delegated the management of their pension pot to USS. However, it is still our pension pots that USS hold, UCU does represent members in the Scheme and USS do say they seek to do all this in our best (financial) interests. So even if USS don’t really prioritise our ethical position against war or the Israeli genocide, it is abundantly clear that they should do more to engage with the reality that the war machine is setting our planet ablaze and that war and genocide, amplify the uncertainties and risks affecting our pensions.

Investment risks (though members pay a third of any increased costs) are mainly discussed with employers. USS’ latest records show us that it has lost members’ money – in fact, it has lost us a billion pounds each year, twice in the last three years’ statements. Despite this, the Scheme is able to be in surplus. Conditional indexation however introduces a highly significant dependence on the investment performance of USS, to member pensions. Industry experts have repeatedly asked why this performance is not any better. USS has also been deeply resistant to any member oversight / accountability of its investment management arm s. With CI, members will have even more dependence on that investment management function with little to no control over its decisions.

Conditional indexation also should not be seen as some sort of antidote to the intergenerational inequalities that plague our sector. Given sharpened global uncertainties, our members need greater security in retirement, not less.

Conditional indexation – in my opinion – is a one-way street going away from DB towards more insecure, and Defined Contribution (DC) pensions. Even if one were to feel strongly about the theoretical possibilities of any upside on investments, does anyone who has worked in academia, feel our employers will voluntarily move us back to a guaranteed and indexed DB pension, if CI turns out in reality to be a disastrous experiment? Whom are we kidding? We should not mistake either an absence of national industrial action by UCU members against employers, or more cordial interactions with employers at USS Joint Negotiation Committee, to be some indication of employers suddenly caring more about our well-being either at present or in future

Those of us who are trade unionists and/or seriously committed to security and dignity in retirement owe it to ourselves (and to all working people) not to accept a second-rate pension or a mildly souped-up DC savings plan. Let us not be complicit in the unjustified erosion of our retirement security. At a time when the Scheme is wildly in surplus they argue now that we need to be moved to conditionally indexed pensions because CI is what delivers “stability” and “greater value for money”. These specious arguments are not surprising. When we defended DB pensions from those who sought to cut them without reason, we did it by thinking critically about the arguments and opinions of those ‘experts’ who told us that we – like many other groups of working people – should quietly accept a move to DC pensions. They argued then, that the death of DB was inevitable, because our pensions were in “deficit” and unaffordable. We won because we didn’t just mindlessly accept this received wisdom. We recognised the impact of misplaced incentives and groupthink. Our critical engagement and the success of our humongous DB USS pension demonstrates to the world that  we can guarantee dignity and security in retirement for workers. Such aspirations are not simply a pipe dream. With a reasonable valuation methodology and good governance, USS continues to be sustainable both in the short-term and in the long-term as a well-funded DB scheme that is affordable, desirable and serves its primary purpose. Now, we must use that same critical thinking to reject Conditional Indexation. Let us now not snatch defeat from the jaws of victory. We should be spending our time improving pension affordability and security for all. UCU represents all members in the USS scheme, not just UCU members. We owe ourselves and all staff (and future generations of students and workers) dignity and security in retirement. UCU must now wholeheartedly oppose CI.

The author would like to thank reviewers, whose comments were gratefully received and helped shape and sharpen this article.