USS funding position -- how to understand the situation?

guymo

I wonder if more knowledgeable members of the forum might have a view on how best to understand the apparently irreconcilable points of view on the USS scheme's funding position.

The employers seem to believe that the scheme requires drastic change to combat underfunding, while the union disagrees with the valuation methodology. Neither side seems to want to set out its position in detail. Meanwhile, union members have balloted in favour of industrial action to begin tomorrow.

I don't want to start a political discussion, though some of that is inevitable I suppose. Rather, I would like to understand better what is the right way to assess the funding position and whether there is a need for drastic change to the scheme. Thanks for any direction you can give me!

USS valuations:
http://www.uss.co.uk/UssInvestments/Publications/Pages/ActuarialValuation.aspx

Union's position:
http://www.ucu.org.uk/media/pdf/2/n/ucu_ussvaluation31mar14.pdf

Employers' Pension Forum proposals:
http://www.employerspensionsforum.co.uk/en/pension-schemes/uss/briefings-on--the-uss--9-october.cfm

Southend1

The employers don't actually all agree with the UUK line on this. Mine and others have written to warn that such drastic change is unnecessary.

Basically quantitative easing has lowered bond yields and at the same time the regulators are pushing DB schemes to switch investments into bonds which makes the schemes more costly.

USS is a growing scheme with positive cash flow and reasonable return on investments. It's long term position is sustainable despite the challenge of increased longevity, as long as it retains a suitable risk profile for its investments. There may well be a need for an increase of contributions but nothing as drastic as has been proposed and certainly no need to introduce a DC section. There is an agreed formula for cost sharing of future increases to contributions.

There is a significant political motivation to the current proposals as the government and some senior figures in HE are determined to push on with the marketisation and ultimate privatisation of the sector. Reducing pension costs will make universities more attractive to the likes of Serco when it comes to the big sell off.

kidmugsy

In about 2005 the FT carried a large article saying that USS was woefully underfunded and that this would cost the universities a packet. The issue seems to have been raised with the FT by a pension specialist named John Ralfe. A USS officer wrote a reply that was so feeble that it seemed to me that Ralfe and the journalist were probably right.

Then a few years later the scheme admitted to being in trouble and opened its career-averaged section, ending final salary pensions for newcomers. Implicitly they were admitting that they had been wrong and Ralfe right the previous time, though I noticed no acknowledgement or apology being offered.

If memory serves, Ralfe complained that their new policy was still too risky, and wouldn't be a sustainable solution. "Poo" they presumably replied.

I note that in 2013 he again raised concerns about the scheme.
http://www.ft.com/cms/s/0/14e5b2e6-3ccd-11e3-a8c4-00144feab7de.html#axzz3IER27mJL


Now it proposes (as I understand it) to close the final salary section to all new accruals, and to close career averaged accruals for the excess of any salary over a ceiling of £50k p.a., replacing that tranche with a DC section. In other words, it is admitting that its previous effort was indeed too feeble. Again I notice no acknowledgement or apology being offered.

Based on the record of USS statements compared with Ralfe's, my first instinct would be to look at what Ralfe has to say about the proposal, if he's said anything; there must be a possibility that they are still being reckless rather than prudent. I suggest you google him.

As you might guess I used to be an academic; my experience was that the union (of which I was a branch committee member for a while) was, if I may use old-fashioned slang, a useless perisher when it came to pensions. Ruddy hopeless. And its officers were a shower.

Of course, all this funding business is dealing with the unknowable. The whole problem of increased life expectancies might be solved by a jolly good global viral pandemic, or by the rise of antibiotic-resistant bacteria. Always look on the bright side of life, eh?

guymo

Southend1 wrote: »

USS is a growing scheme with positive cash flow

I don't understand how this is relevant, to be honest. It seems to imply that junior academics should support the pensions of senior ones, a suggestion I find quite unpalatable; also known as a Ponzi scheme.

I very much doubt that the situation is so bad as to have to resort to that, so I wish the union et al would stop bringing it up.

I'd like to know what would constitute a reasonable way to assess the funding position of the scheme. UUK has one view, which leads them to the conclusion that drastic change is necessary. The union seems to have another but I haven't found the explanations clear or convincing yet --- I am hoping to get to the bottom of that if I can. Help!

kidmugsy

guymo wrote: »

I'd like to know what would constitute a reasonable way to assess the funding position of the scheme.

Have a look at the Ralfe link I provided.

guymo

Thanks kidmugsy, I did take a look (after some google shenanigans to get around the paywall). Ralfe's position is that the deficit is actually worse than the USS and UUK would have us believe. That was a bit of a surprise: the rhetoric around these ivory (red brick/plate glass) towers is that the scheme is perfectly solvent.

Southend1

guymo wrote: »

I don't understand how this is relevant, to be honest. It seems to imply that junior academics should support the pensions of senior ones, a suggestion I find quite unpalatable; also known as a Ponzi scheme.

I very much doubt that the situation is so bad as to have to resort to that, so I wish the union et al would stop bringing it up.

I'd like to know what would constitute a reasonable way to assess the funding position of the scheme. UUK has one view, which leads them to the conclusion that drastic change is necessary. The union seems to have another but I haven't found the explanations clear or convincing yet --- I am hoping to get to the bottom of that if I can. Help!

The relevance of the scheme growing and having positive cash flow is, as I see it, as follows. Firstly it is a scheme which is very much alive and therefore shouldn't be valued according to a kind of zombie apocalypse scenario where all participating employers go bust overnight and all current members stop paying into the scheme as of tomorrow. Secondly, there is no need for drastic and immediate action to deal with a deficit - current contributions more than cover current expenditure. Thirdly, the scheme is backed by a financially strong HE sector currently generating large cash surpluses.

It's not about being a Ponzi scheme. However all pensions do require some level of intergenerational solidarity. DB schemes are collective schemes and therefore current members and participating employers can be asked to increase their contributions in times of need. This is not a bad thing. However the current need is not as great as UUK implies. The deficit calculated according to the zombie apocalypse scenario is getting smaller and is in any case largely a product of temporarily extraordinarily low bond yields and politically motivated pensions regulation which makes it difficult to operate DB schemes these days.

My opinion is that a longer term view of the scheme would see bond yields and investment returns returning to a more normal level following the financial crisis and probably completely eliminating the deficit. It would be interesting to see some figures along this line. I believe UCU are considering making some alternative proposals so it may be that they are crunching the numbers and we will see something like this in due course.

guymo

Southend1 wrote: »

My opinion is that a longer term view of the scheme would see bond yields and investment returns returning to a more normal level following the financial crisis and probably completely eliminating the deficit. It would be interesting to see some figures along this line. I believe UCU are considering making some alternative proposals so it may be that they are crunching the numbers and we will see something like this in due course.

If UCU does indeed have an alternative proposal I would dearly love to have seen it prior to the call to industrial action. But that's politics, which I reckon is off-topic.

The question of whether one can or should make assumptions about future gilt yields is clearly a good one, but is a bit of an imponderable, which I suspect is at the heart of the difficulties here. I kind of doubt we would be happy if USS took a huge short position in gilts to back a belief that yields would rise; but maybe that's pushing too hard at the point anyway.

The article kidmugsy linked above suggested that USS was in fact being rather generous in its valuation. This seemed shocking to me, and isn't something either side has pointed out in the discussion to date, as far as I know.

Southend1

guymo wrote: »

If UCU does indeed have an alternative proposal I would dearly love to have seen it prior to the call to industrial action. But that's politics, which I reckon is off-topic.

The question of whether one can or should make assumptions about future gilt yields is clearly a good one, but is a bit of an imponderable, which I suspect is at the heart of the difficulties here. I kind of doubt we would be happy if USS took a huge short position in gilts to back a belief that yields would rise; but maybe that's pushing too hard at the point anyway.

The article kidmugsy linked above suggested that USS was in fact being rather generous in its valuation. This seemed shocking to me, and isn't something either side has pointed out in the discussion to date, as far as I know.

As far as I understand they use the assumptions laid down by the pensions regulator for the valuation.

I think the main problem is that at a time of positive cash flow and membership growth, the scheme should be looking to invest for growth and that means taking slightly more risk rather than the current desire by the regulator and UUK for derisking allows, which actually serves to make the scheme less affordable.

Whether or not the call for industrial action comes before an alternative proposal is at the end of the day a decision by UCU members. I'm inclined to agree with their firm stance on this one. The proposals have been presented as a fait accompli without consultation so there has been no chance for discussion of alternatives. I suspect if they hadn't decided to move to a markig boycott right away then in a year's time we would all be accusing UCU of being caught napping while our pensions were irreparably damaged.

I also have to question why the trustees who are supposed to represent the interests of members of USS are making these kind of proposals without being asked. Surely their duty at this stage is to inform members and employers of the contribution rate required in light of the current valuation and then let the JNC decide how to address this in consultation with all parties?

kidmugsy

guymo wrote: »

The article kidmugsy linked above suggested that USS was in fact being rather generous in its valuation. This seemed shocking to me, and isn't something either side has pointed out in the discussion to date, as far as I know.

But then neither side has an incentive to admit that USS might have been too generous in its valuation, has it?

Southend1 refers to "largely a product of temporarily extraordinarily low bond yields". But how can he, or anyone, know how temporary low interest rates will prove to be? People have been saying for years that they were about to bounce back up. Not so far they haven't. Tomorrow morning they might. Or twenty years hence.

See this, for instance.
http://blog.redington.co.uk/Articles/Dermot-Dorgan/May-2014/WAITING-FOR-RATES-TO-RISE.aspx

Southend1

kidmugsy wrote: »

But then neither side has an incentive to admit that USS might have been too generous in its valuation, has it?

Southend1 refers to "largely a product of temporarily extraordinarily low bond yields". But how can he, or anyone, know how temporary low interest rates will prove to be? People have been saying for years that they were about to bounce back up. Not so far they haven't. Tomorrow morning they might. Or twenty years hence.

See this, for instance.
http://blog.redington.co.uk/Articles/Dermot-Dorgan/May-2014/WAITING-FOR-RATES-TO-RISE.aspx

Interesting article. You're right that it's hard to predict what will happen. However USS is being pushed into buying more gilts at a time when the yields are exceptionally low because the employers and pensions regulator feel they are lower risk. However what is needed is actually a higher level of risk with better prospects of returns. In the short term that may make the fund value more volatile however this doesn't matter because of the positive cash flow, and in the long term is bound to produce better returns. And as I said, USS can and should take a long term view on this despite the political desire to push everyone into inferior DC schemes.