Uss

kidmugsy

hugheskevi wrote: »

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

Fair point: but the booklet that they sent out entitled "Members' Annual Report 2013" is entirely silent on the subject of FRS 17: it reports the figures only on (i) their own preferred basis, referred to as "technical provisions basis", and (ii) buy-out basis.

If they had at that point told the members that they had adopted (i) after rejecting the Procrustean bed of FRS 17, and had then pointed them to a link on the USS website that explained their decision, I'd say that would have been pretty decent, open reporting; but they didn't.

kidmugsy

Southend1 wrote: »

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

That could well be, but one of my questions is why they do not explain such decisions in their booklet "Members Annual Report 2013"; for these purposes I'd class a sentence or two, and a direction to a dedicated link on their website as adequate, as long as that link took you to a focused discussion of the matter, rather than some huge multi-purpose document in which the point might be buried.

Please remember my starting point: their complacent attitude in 2005 was evidently badly wrong. Consequently it's up to them to earn anew any trust that members might have in them.

kidmugsy

jamesd wrote: »

He's not the only one. Mr. Ralfe ...

Oh, shame on you, jamesd. Calling Ralfe a "robber" is poor stuff. Maybe he was incompetent, maybe his judgement was poor ... but "robber"? Come now.

Deep though my contempt is for the Powers That Were in USS in 2005, I haven't suggested for a moment that they were "robbers". Dolts, perhaps; reckless chumps, maybe; dissemblers, even: but "robbers", no.

jamesd

I was explicit in saying that he acted legally. I've no reason to believe he broke any laws. Robbery - which Maxwell didn't do either, so far as I know - would be illegal.

There was also a substantial difference in who paid for it: pensioners, us and some banks in Maxwell's case, with pensioners only getting half of their expected pension, vs shareholders at Boots. And of course Maxwell also added extra costs of all defined benefit pensions via the demonstrated need for the PPF and its levies.

kidmugsy

jamesd wrote: »

That particular theory in general is taken to mean that it doesn't matter whether a business is funded by equity or borrowing
....
But here it is not one business, it is two: the pension fund and the operating company.

I made the reference to the MM theorem because I know that there is a school of thought on pension schemes that says a firm should arrange things so that its pension is invested in bonds (Gilts and so on), and thereby gains from receiving the coupons tax-free, while the company can finance its business by issuing bonds (which, according to MM are no more expensive than equity) which have the tax advantage that the coupons that the company must pay will be deductible from profits and thus reduce the corporate tax bill. The attractions of such a scheme are palpable.

Now, you could well argue that such a plan would be no use to the university employers because they are charities and therefore exempt from Corporation Tax anyway. But if you did so argue you would be taking part in a rational discussion of what USS's policies should be, which in 2005 USS clearly did not want to take part in. Instead of discussion it thought that stuff along the lines of I Can Assure You That ... would do instead. It was proved wrong by events.

Personally, as I've already said, I am sympathetic to USS holding equities; but they were clearly wildly wrong in their smugness in 2005 and so I'd like to know what reasons there are to assume that they're not wildly wrong again. Are there any at all?

kidmugsy

jamesd wrote: »

Robbery - which Maxwell didn't do either, so far as I know ...

My memory is that Maxwell actually managed to behave like a cartoon villain; some of his pension fund robbery was as simple as removing share certificates from a safe.

kidmugsy

jamesd wrote: »

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 ... 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.

I wouldn't say I'd be pleased to see that outcome; I do admit that I wouldn't be surprised. Running a DB scheme is clearly a very demanding task - perhaps too demanding to be practical in many situations without taxpayer guarantees. USS is a private sector scheme with no such guarantees. The plight, if plight it becomes, of USS needn't strictly cost the taxpayer a penny - the taxpayer doesn't own the universities, thank God. But then the taxpayer didn't own RBS.

jamesd

Maxwell indeed appear to have acted in that manner, but did he use violence or the threat of it, the key distinguishing feature of a robbery? Each of us was using the term rather loosely, to convey the causing of a loss rather than more literal robbery.

So far as DC goes, my interest is somewhat different from that of employers or employees, for I'm likely to have mainly the taxpayer's interest and in the case of a massive scheme that means that I could to some extent be on the hook. So I'd be pleased to see well managed risks. Even if that means a completely actuarially neutral DC setup, which would still transfer risk away from the employer - and me - to the employees and perhaps ultimately insurance companies via annuities.

Another way to reduce the risk of the USS is to split it, so that some pieces can fail in more manageable sizes, while others can avoid entering the PPF.

At present it appears to me that there may be some significant transference of risk from relatively new and rapidly growing institutions to the very well established ones. Whether the well established ones are receiving enough benefit - or indeed any - in return is perhaps an interesting question to consider.

kidmugsy

jamesd wrote: »

At present it appears to me that there may be some significant transference of risk from relatively new and rapidly growing institutions to the very well established ones. Whether the well established ones are receiving enough benefit - or indeed any - in return is perhaps an interesting question to consider.

First you hint at USS being Too Big To Fail; then you ask who gains. I have elsewhere pointed out that the 'last man standing' rule means that potentially Trinity College Cambridge will end up supporting the whole edifice.

Your points and my joke illustrate the same problem: talk of the fund being managed in the interests of the members is a hopelessly uncritical way to look at this. In what strange coalitions of interest it has been managed is a mystery to me.

Still, when first they cry that there is no need for change, and then they introduce quite sweeping change, you'd think that people might wonder a bit more. (I don't count a bit of belly-aching about increased employee contributions as "wonder".)

Imastu

Interesting thread - I have a keen interest in this scheme, as a member and from a governance perspective. On balance, I'm in agreement with the USS management view, and while it is difficult and probably wrong to boil the argument down to simple points, that's what we do in life.

For me, the main issue is how to value the liabilities. Changing the discount rate applied to the projected liabilities is the main factor in 'creating' the deficit - therefore that is where one should focus attention. But when we do so, it becomes impossible to define 'the' answer'. There isn't one, just a range of possibilities. The exact valuation cannot be known and will never be known, because there is never a point (until everyone is dead) when the assets and the liabilities can be exactly matched.

The volatility in this area also demonstrates the difficulty of forming a 'fixed' view of the position - a £3bn movement in the position from £10bn back down to £7bn in only three months demonstrates the fluidity.

The latest USS response to the recent (a bit silly, imho) media coverage was issued yesterday:

http://www.uss.co.uk/news/Pages/RecentcoverageofUSSinthemedia-anupdateformembers.aspx

They address the non-use of the FRS17 assumptions as:

"We feel that this approach is too simple and the right way to make these decisions is to look at scheme funding holistically. Our scheme-specific assessment considers the financial strength of the employers, the membership of the scheme, and the investment strategy"

It is a salient point that the financial strength of the institutions that are in it, with the 'Last Man Standing' factor, is a 'good' reason why the valuation assumptions differ from standard corporate rates. Yes, the major Oxbridge colleges are on the hook for any cash deficit that may (but probably will not) arise in future. Fair or not, it's how the scheme works - in any event how they attained their wealth was not exactly fair going back centuries etc, but that's a whole different argument...

In terms of the asset management, I am far from convinced that the divergence away from standard equities into alternative avenues is little more than a way for the fund managers to claim very large remuneration. Could be wrong, and in any event it is not the main issue - the valuation of liabilities is.

Worried? Nah...:)