Uss

kidmugsy

hyubh wrote: »

What 'fact'?

"your money is tucked away safely and managed by the member": that fact. Your money, for example, can't be pinched to fund the pensions of people given bogus late-career promotions, or pillaged to pay redundancy costs that ought properly to fall on the employer. Any investment choices will be yours, not somebody else's; your scheme will be run in your interest. Few much care about these things while a defined benefit fund seems to be enjoying a wave of prosperity; they begin to care when there are signs of trouble.

hyubh wrote: »

How large a pension liability is depends on the assumptions used.

Blah, blah, blah: this is the same sort of smug response that the apparatchik gave in 2005; true but unhelpful. Assume 10% p.a. real growth to infinity and your problems all evaporate. Assume negative 10% and you're doomed. It's axiomatic that the estimate of the liability depends on the assumptions. Who on earth would ever suggest otherwise?

Yet since the exchange of views in the FT in 2005, new members have been demoted to a career-averaged scheme rather being given entry to the final salary scheme, the members' contributions have been raised, and the inflation-linking on all new contributions has become capped. That suggests to me that the alarmist journalist in 2005 was spot on, and the complacent apparatchik was talking rubbish.

hyubh wrote: »

If the final salary section closed tomorrow, accrued benefits would remain.

Well of course; and that's very valuable so long as there are funds enough - which is Ralfe's worry.

hyubh

kidmugsy wrote: »

"your money is tucked away safely and managed by the member": that fact. Your money, for example, can't be pinched to fund the pensions of people given bogus late-career promotions, or pillaged to pay redundancy costs that ought properly to fall on the employer.

Care to explain how lecturer redundancy costs are pushed onto the pension fund? Or an example of this? Even if they were, the main thing they would affect is the employer rate following the next valuation.

Any investment choices will be yours, not somebody else's; your scheme will be run in your interest.

Ridiculous - the USS is clearly run in the interests of the pension fund and its members.

It's axiomatic that the estimate of the liability depends on the assumptions. Who on earth would ever suggest otherwise?

Are you being deliberately obtuse? I'm asking what assumptions in particular are in dispute, and that you are claiming (by vague appeal to John Ralfe) that the USS and its actuary have got wrong.

jamesd

kidmugsy wrote: »

I always enjoy pointing out that the great pension robber, Robert Maxwell.

He's not the only one. Mr. Ralfe, legally, cost Boots shareholders a fortune by selling out of equities near a market low and it's no surprise he was fired for what he did. He's not the sort of person I'd be paying much attention to in this sort of discussion.

It's hardly a bad thing that there have been adjustments to USS and I assume that that will continue, particularly if life expectancies continue to rise.

kidmugsy

hyubh wrote: »

Care to explain how lecturer redundancy costs are pushed onto the pension fund?

I'm surprised that you are keen to comment on USS without knowing about this scandal. What used to happen (I hope it has been stopped) is that the employer would strike a deal with an employee of suitable age that on redundancy he'd receive his USS pension without actuarial reduction. In a rational world, the employer would refund the cost of that to USS. In our wicked world it didn't; USS - i.e.long term, the future pensioners or the other employers - footed the bill. Now why, you might ask, should the University of (say) Cambridge avoid that bill so that the pension of poor old Dr McTavish of (say) the University of Glasgow is thereby put at risk, or the University of Glasgow has to make higher pension contributions?

I say "you might ask" but clearly you wouldn't since you are an uncritical, albeit ignorant, admirer of USS.

hyubh wrote: »

Ridiculous - the USS is clearly run in the interests of the pension fund and its members.

Oh, don't be so obtuse. (i) Read the para above, (ii) Reflect on an issue you didn't engage with i.e. the pillaging of the fund by bogus late-career promotions, and (iii) Open an economics textbook and read up on the Principal-Agent Problem.

hyubh wrote: »

I'm asking what assumptions in particular are in dispute, and that you are claiming (by vague appeal to John Ralfe) that the USS and its actuary have got wrong.

Oh dear, you are clearly not a thinker. Look, all assumptions might be wrong, that's why we call them "assumptions". The liabilities might be grotesquely overestimated because a new 'flu might sweep the world and exterminate everyone over eighty. Antibiotic-resistant bacteria might do much the same job. Hurray - defined benefit schemes are all saved. Ditto, assumptions on assets might be wrong, and assumptions on revenues.

But if USS doesn't want to use the assumptions of FRS17, it really must tell us why. If they fielded some obviously intelligent, frank, well-informed spokesman or writer to explain why USS is substantially different from other defined benefit schemes, I'd listen. There might well be a decent, even persuasive, case to be made. But if all they do is field some dim mumbler to evade the question, then they have failed in their duty. And, of course, the dim mumbler will remind anyone who's on the ball in this case of their lamentable reply to the journalist in 2005, when events went on to prove him right and them wrong.

I don't know any of the individuals involved, so I can't say whether the people responsible for the reply in 2005 were stupid, dishonest, reckless or whatever. But they said that all was well and then in a few years time took the sort of action that showed that all had been far from well. Your view seems to be that their record should be ignored and that they should be trusted uncritically. My view is "once bitten, twice shy": make 'em explain and justify.

kidmugsy

jamesd wrote: »

He's not the sort of person I'd be paying much attention to in this sort of discussion.

Another account of Ralfe's management of the Boots fund was that he'd rather brilliantly seized an opportunity to realise enough by the sale of equities to buy enough gilts to balance off the whole of the scheme's liabilities. Perhaps he took the view that with a commercial business like Boots it would be wiser to have the Pension Fund make the low risk, tax-advantaged investments, and the business make the riskier investments. There's some justification for that view:
http://en.wikipedia.org/wiki/Modigliani–Miller_theorem

The natural way for USS to invest to offset its liabilities is in Index-Linked Gilts. The fund currently would rather not just offset its liabilities, but instead punt on equities. It may be proved right or wrong - personally, I'm rather sympathetic to the equity route - but is is surely under a duty to explain or justify. I don't think that ad hominem sneers at Ralfe are much help: but my pointing out just how misleading USS's statement of eight years ago was seems absolutely relevant. Do you think otherwise? Should they be uncritically trusted in spite of that record? Is there no case for their being required to explain their thinking? Should they be uncritically trusted after their years of folly on redundancy and bogus promotions. Really?

Remember that this is the biggest private defined benefits scheme in the country. There are lots more people than just its own members who have reason to take an interest in its state.

Southend1

Southend1 wrote: »

Is this difference between USS and average allocation because USS is open to new contributions whereas most DB schemes are now closed?

Anyone? Surely an open scheme would need to be reasonably heavy in equities as they are likely to outperform other investments in the long term

hugheskevi

Is this difference between USS and average allocation because USS is open to new contributions whereas most DB schemes are now closed?

There are many reasons behind scheme asset allocation. Part of that reflects the strength of the employer and the scheme funding position - a very large and well funded scheme with a (relatively) small employer may well choose a far more cautious strategy than a pension scheme which is small relative to its sponsoring employer, particularly if the employer is in very good financial position.

Traditionally, a very simple rule of thumb was to look at liabilities associated with pensioner members and invest those in bonds (as the payments are more certain, and also there is a cash flow that is a similar shape to bond coupon payments), and invest assets relating to active members in equities (to benefit from growth, as no payment are due).

It is far more complicated now, especially as many schemes and employers wish to de-risk, and move toward safer assets or even fully derisk the scheme and move to buyout (ie which is roughly similar to the cost of funding the scheme using gilt investments on a cautious basis).

But if USS doesn't want to use the assumptions of FRS17, it really must tell us why

They report on many different basis. Page 95 of the 2013 Annual Report says:

The actuary also valued the scheme on a number of other bases as at the valuation date. On the scheme’s historic gilts basis, using a valuation rate of interest in respect of past service liabilities of 4.4% per annum (the expected return on gilts) the funding level was approximately 68%. Under the Pension Protection Fund regulations introduced by the Pensions Act 2004 the scheme was 93% funded; on a buy-out basis (ie assuming the scheme had discontinued on the valuation date) the assets would have been approximately 57% of the amount necessary to secure all the USS benefits with an insurance company; and using the FRS17 formula as if USS was a single employer scheme, using a AA bond discount rate of 5.5% per annum based on spot yields, the actuary estimated that the funding level at 31 March 2011 was 82%.

Southend1

Tbh I'm not a pensions expert but as a USS member I'm not worried by their investment strategy or the current funding position. The last 5 years have seen massive volatility in markets but USS as it points out is a long term investor. I think they're pretty brave not to cave to everyone who says they're overweight in equities just because that view reflects what is happening in a very small snapshot of time

jamesd

kidmugsy wrote: »

Another account of Ralfe's management of the Boots fund was that he'd rather brilliantly seized an opportunity to realise enough by the sale of equities to buy enough gilts to balance off the whole of the scheme's liabilities.

The other account might note that to do this Boots shareholders had to start making formerly suspended payments into the pension fund, that those responsible for judging him made the decision to fire him and that his market timing was appallingly bad. While by contrast, the BoE fund's market timing was superb.

kidmugsy wrote: »

Perhaps he took the view that with a commercial business like Boots it would be wiser to have the Pension Fund make the low risk, tax-advantaged investments, and the business make the riskier investments. There's some justification for that view:
http://en.wikipedia.org/wiki/Modigliani–Miller_theorem

That particular theory in general is taken to mean that it doesn't matter whether a business is funded by equity or borrowing, which isn't in itself true because it depends on the relative costs of those things at different times. Which is why at times you see companies issuing equity to decrease borrowing and at times the reverse.

But here it is not one business, it is two: the pension fund and the operating company. The pension fund benefited from increased certainty, the operating company shareholders paid for it in contributions to the pension scheme. The operating company also got lower volatility on its balance sheet, but it wasn't free.

There's an alternative method available to reduce volatility of of balance sheets: switching to defined contribution pension schemes. Which is what has generally been done in the private sector now.

kidmugsy wrote: »

The natural way for USS to invest to offset its liabilities is in Index-Linked Gilts.

Only if those are believed to offer the lowest overall cost to the employers with acceptable variations in scheme valuations. Since those are some of the most expensive assets available they aren't generally going to be a natural match for anyone but a forced buyer. They are a natural liability match, but there's also cost reduction as part of the duty of people running schemes.

kidmugsy wrote: »

The fund currently would rather not just offset its liabilities, but instead punt on equities. It may be proved right or wrong - personally, I'm rather sympathetic to the equity route - but is is surely under a duty to explain or justify.

Using mixed assets is hardly something that should be considered unusual enough to merit detailed explaining, surely? By offsetting liabilities I assume you mean putting them on the books at the cost implied by AA rated corporate bonds a today's valuations. Even though it's pretty self-evident that we are not in normal market conditions for that particular asset class and the scheme is not using solely that asset class.

kidmugsy wrote: »

Should they be uncritically trusted in spite of that record? Is there no case for their being required to explain their thinking?

I'm happy for people to be asked to explain but it's nice also to recognise when those complaining about it are proposing exceptionally costly alternatives that are seldom used because of their costs. And that sort of thing is not a good service to the employers, employees or customers, because one way or another, those are the ones who get to pay the bill.

kidmugsy wrote: »

Remember that this is the biggest private defined benefits scheme in the country. There are lots more people than just its own members who have reason to take an interest in its state.

Indeed. I'd be pleased to read that it has decided to adopt the standard private sector solution to this problem: switching to a defined contribution scheme for all future accruals and eliminating future balance sheet issues for the scheme, employers, and customers. That would nicely protect all of those customers and future tax payers, though the existing liabilities would be troublesome for many years to come.

That would be a good, if initially very troublesome, move to greatly stabilise scheme liabilities.

jamesd

hugheskevi wrote: »

They report on many different basis. Page 95 of the 2013 Annual Report says:

... 68%, 93%, 57%, 82%.

There seems to be ample room there for uncertainty even in valuation and relying on the future obligation of employers to fund the scheme.

There is one certainty, though: paying more in now has a certain cost, waiting until the liabilities are clearly known not to be funded leaves that uncertainty until it materialises, if it ever does.