USS funding position -- how to understand the situation?

kidmugsy

Southend1 wrote: »

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.

I agree; that does seem to be the case. And whether they really are lower risk, Lord only knows. Anyway, I assume the scheme isn't allowed to tell the Pensions Regulator to go and boil his head, so the point may be fair but irrelevant. It may be, of course, that they are lower risk in the context of this pension scheme, in that they naturally hedge its liabilities. "Risk", after all, must surely partly be a matter of context.

Southend1 wrote: »

However what is needed is actually a higher level of risk with better prospects of returns ... in the long term is bound to produce better returns.

No, there is no "bound to" about it, else how could equities truly be higher risk? You had it right first time - there would be be better prospects of returns. Even that I wouldn't want to bet on as a universal truth: Wall St, for instance, is probably substantially over-valued at the moment. (Google the writings of Andrew Smithers for the evidence.)

The opponents of the USS proposal have at least one glaring weakness in their arguments - they are remarkably, thoroughgoingly complacent. Apparently there is no possibility whatever of universities going broke, or shrinking substantially. This is nonsense. In spite of all the wittering about "privatisation", universities are already private institutions, pottering along under their royal charters (or if they are old enough, papal charters). Academics are not government employees. If governments get into enough financial trouble, it is not safe to assume that they will automatically rescue every university that is in financial distress. If you throw out the complacent assumptions, do the opponents still have arguments of any merit? Personally, if I were in charge of a university that was intended to be a perpetual institution, I might be disinclined to risk its existence just to ensure that baby-boomers got a more comfortable retirement than they have been prepared to pay for. To do it at the expense of my younger employees might be particularly unappealing.

UPDATE: just to be clear, if I were a Vice-Chancellor I would stump up for the pensions of the already-retired: those are contractual, so must be paid. It's the pensions of the yet-to-retire that would worry me. Should I be happy to take on ever-increasing liabilities for those in their fifties and sixties, beyond those corresponding to their existing accruals? If so should I do so by taking action that will presumably make it harder to recruit young academics of the standards I hope to attract and retain? Still, for many VCs this is probably much less of a worry than arranging their own next pay rise. How we have fallen, eh?

hyubh

guymo wrote: »

It seems to imply that junior academics should support the pensions of senior ones, a suggestion I find quite unpalatable;

This is inherent in final salary pension schemes, at least for a profession (which lecturing is) in which there is career - and therefore pay - progression for long-term employees.

also known as a Ponzi scheme.

Not really, since prospective pay progression will be one of the factors that enter into the pension fund's valuation, and therefore determination of contribution rates. If the USS' funding situation is problematic it will be for other reasons, i.e. the actuarial assumptions used historically have proved not to be realistic.

hyubh

kidmugsy wrote: »

UPDATE: just to be clear, if I were a Vice-Chancellor I would stump up for the pensions of the already-retired: those are contractual, so must be paid.

Very honorable. Indeed, perhaps more honorable than some:

http://www.timeshighereducation.co.uk/news/call-to-end-postcode-lottery-of-tuition-fee-cash-for-pensions-black-hole/2016800.article

'Postcode lottery', 'prop up', 'bail out', 'forced to participate', 'pick up the tab'... blah blah blah, it's so unfair that our local LGPS fund fails to take liabilities for our retired and current employees as unseriously as the TPS and even USS...

kidmugsy

hyubh wrote: »

http://www.timeshighereducation.co.uk/news/call-to-end-postcode-lottery-of-tuition-fee-cash-for-pensions-black-hole/2016800.article

'Postcode lottery', 'prop up', 'bail out', 'forced to participate', 'pick up the tab'... blah blah blah, it's so unfair that our local LGPS fund fails to take liabilities for our retired and current employees as unseriously as the TPS and even USS...

Whenever a grown man uses "unfair" I rather expect a load of rubbish to follow. I suppose he really means that he wants to renege on contractual liabilities, without, we must suppose, accepting that then anyone else should be allowed to renege on their contractual liabilities to his institution. The bosses of the polys should have thought about that when their vanity led them to want University status.

guymo

hyubh wrote: »

This is inherent in final salary pension schemes, at least for a profession (which lecturing is) in which there is career - and therefore pay - progression for long-term employees.

I think there are two distinct things here:

On one hand, of course in any final salary scheme there is a certain amount of redistribution of wealth. As you say, forecasts about how careers and pay progression will go should feed in to the calculations for contribution rate. The outcome of this should be that the contributions over an average career should be enough to fund the pension of an average retiree. If there is a systematic shortfall then the scheme is doomed. This does imply that some people's career contributions will be more than needed to fund their own pension, and some will be less. I have no problem with this, and I think this is what you are saying in your post --- if not, please correct me!

On the other hand, we have the statement that in USS, current contributions are greater than current pensions in payment, which is quite regularly brought up by people who want to argue that the scheme is in good health. This particular statement does not, for me, imply anything about the health of the scheme. Indeed, it seems to me that if the scheme needs that to be true in order to be healthy, then the scheme is a Ponzi racket: it means that the contributions of the current pool of retirees were never going to be enough to fund their pensions, and that those guys were always reliant on hiring a new round of lecturers to pay for their retirements. If that is the case, it doesn't take a genius to see that the scheme will collapse in a couple of generations' time.

I don't believe that this extreme version of events is the case, which is why I wish people would stop bringing up the "cash in > cash out" thing.

For full disclosure: I am someone whose career progression happened fast and early (made professor in early 30s) so my career USS contributions will be higher than average compared to my pension. I would be absolutely delighted to learn that my contributions meant that there was a bit of extra money in the scheme to keep it alive for others. What I do not want to learn is that my pension can only be paid if there are enough junior staff hired after I retire to keep propping up the scheme.

kidmugsy

guymo wrote: »

On the other hand, we have the statement that in USS, current contributions are greater than current pensions in payment, which is quite regularly brought up by people who want to argue that the scheme is in good health. This particular statement does not, for me, imply anything about the health of the scheme.

I think that must be right. All 'in > out' tells you is that the scheme is not yet "mature" essentially because there are still many more active members than retired members. Presumably there have been youngsters joining in large numbers in recent decades. (Or perhaps many of those who have become inactive are deferred members rather than pensioners: I'd guess that that is less likely as a cause.)

The mutual pooling of risk in a defined benefit scheme is part of its nature, and we all knew that when we joined it. I shall probably die comparatively young, so I shall have subsidised people of my own age who will live on and on. I might have won on this gamble but in fact I shall probably lose. Hard Cheese! But intergenerational subsidy is a different matter.

I don't see why we should aim, actually aim, at asking the members in their 20s, 30s, and 40s to subsidise the active members on their 50s and 60s. (If that is indeed what is being suggested by those opposed to the proposed changes.) This would, I assume, make it more difficult to attract and retain the calibre of people you want to recruit. (Of course, there are many features of the modern university that will anyway repel the clever and spirited, but that's a separate point.)

A pension promise is part of your pay; its purpose is attraction and retention. Would you, as a lively thirty year-old, be attracted by the promise that (i) You will have to subsidise the pension of your fifty year-old Head of Department, while (ii) Your own pension will be vulnerable if ever the university system ceases to expand?

In particular, even at thirty I might have noticed (ii) and raised my eyebrows.


On a separate point, I've just checked the latest annual report. I find that Fixed Interest + Cash make up 27.3% of the investment portfolio. It's not obvious to me that that is necessarily too high, or too low, a proportion. Equities appear low at 43.8%, but if they were to turn out to behave in much the same way as Alternatives (19.3%) and Property (6.6%), then the equity-like proportion would be 69.7%. Whether they will behave alike in a crash, or over the long term, is anyone's guess. The dominant "Alternative" is "Private Capital" (10.9%) which, for all I know, may well prove riskier than traded equities.

hyubh

guymo wrote: »

On one hand, of course in any final salary scheme there is a certain amount of redistribution of wealth.

Hmm, that makes things sound 'political'. All I was saying was: older workers with a lot of service are a lot more expensive in actuarial terms than young workers with not much. Perhaps the USS membership profile is such that members tend to be in the scheme for much of their working life, but when that doesn't hold in a final salary scheme it typically makes the scheme's generosity radically differ between types of member.

In the USS case, the main inequity (if one were to put things like that) is between FS and CARE scheme members - while employee rates are slightly lower for the latter, this doesn't anywhere near reflect the much greater costs of the FS scheme. This 'inequity' will also apply to employers insofar as there are any participating institutions that have proportionally more CARE than FS members, given the USS (unlike, say, most LGPS funds) operates a 'grouping mechanism' when setting employer rates - in other words, each institution does not have its own individual rate reflecting the membership profile of its own past and present employees.

As you say, forecasts about how careers and pay progression will go should feed in to the calculations for contribution rate.

They should and do - actuarial assumptions are provided in the pension fund's (published) valuation reports

The outcome of this should be that the contributions over an average career should be enough to fund the pension of an average retiree.

That's ignoring investment returns, which is where the 'discount rate' used comes in - the higher the discount rate, the more optimistic the fund and its actuary are about future investment returns, and the lower the corresponding liabilities. Moreover, it also ignores the fact that other assumptions (e.g. mortality rates) may (reasonably) come to evolve quite considerably over the course of a member's working life. Given past pension promises are fixed, if people prove to live longer and/or the discount rate used in the past proves to be over-optimistic, it is intrinsic to a DB scheme that current and future members will pay for the (in hindsight) over-generous benefits afforded to their predecessors. Conversely, if investments prove to over-perform and people end up dying quicker than envisaged, existing pensioners won't benefit (unless the scheme rules explicitly allow for it) and current members/employers will instead.

If there is a systematic shortfall then the scheme is doomed.

Any shortfall will surely be 'systematic', so I don't think that in itself says much. The way to improve the situation of a large, open DB scheme like the USS is to 'systematically' degrade future accrual, which is exactly what happended when the CARE section was introduced for new members back in 2011. This doesn't of course mean the existing CARE section isn't worth being a member of, just that it is fundamentally designed to cost a lot less than the old FS section.

On the other hand, we have the statement that in USS, current contributions are greater than current pensions in payment,

As kidmugsy says, that just means the scheme is not 'mature' in the sense of winding down.

Indeed, it seems to me that if the scheme needs that to be true in order to be healthy, then the scheme is a Ponzi racket: it means that the contributions of the current pool of retirees were never going to be enough to fund their pensions, and that those guys were always reliant on hiring a new round of lecturers to pay for their retirements.

People who emphasise cash flow aren't implying that, they're just conflating short with long term.

What I do not want to learn is that my pension can only be paid if there are enough junior staff hired after I retire to keep propping up the scheme.

Relax - junior staff are subsidising your pension already...

kidmugsy

One other thing; one aspect of the proposals seemed to me very low. On closure of the Final Salary Section, your pensionable final salary would no longer be related to your final salary, but to your salary at the moment the section closes. That seems to me to be a dirty deed; I assume they've taken legal advice and the move is legit, but what a cheat! So somebody who has been contributing from, say, age 25 to 40 suddenly finds that the "final salary" part of his pension will relate to his salary at 40 not his salary at 65. By contrast, somebody who is 61 will find the "final salary" part of his pension will relate to his salary at 61 not his salary at 65 - which is overwhelmingly likely to be a smaller sacrifice.

I do wonder whether it might be wiser just to close both FS and CARE sections altogether, eventually honouring the link to actual final pensionable (or career-averged) salaries, and make all future accruals into a DC section alone. I admit that I have no idea whether this could be workable, but the way to stop accruing further liabilities that might ruin the universities is indeed to stop accruing them.

If someone objects that a DC scheme wouldn't work for attraction and retention, my answer is easy. "Pay 'em more." Plus attend to "there are many features of the modern university that will anyway repel the clever and spirited".

guymo

hyubh wrote: »

All I was saying was: older workers with a lot of service are a lot more expensive in actuarial terms than young workers with not much.

You're saying that the longer-serving members represent a larger liability on the books. But of course their lifetime contributions to the scheme are larger too. What are we to conclude?

That's ignoring investment returns... it also ignores the fact that other assumptions (e.g. mortality rates) may (reasonably) come to evolve quite considerably over the course of a member's working life.

Please, give me credit for a reasonable interpretation of what "average" contributions and pension payments might mean, and what it might mean for contributions to "fund" payments. I wasn't ignoring either of those factors.

But you are right to point these factors out because they are the heart of the dispute: what constitutes a reasonable way to evaluate the viability of the scheme under the uncertainties inherent in mortality, investment performance, etc.

While the UCU vs UUK dispute is all about investment performance, the thing that is bothering me about your position is the "etc", which seems to include the future contributions of staff in the scheme.

Relax - junior staff are subsidising your pension already...

If I understand correctly, this means that the UCU is asking me to defend the right of young people to pay for my old age. Why should they? The poor youngsters have to sit through enough of my nonsense as it is (my research papers, my managerial roles, etc) -- to ask them actually to pay me money is completely absurd. Is that what you are saying or am I as stupid as I fear?

kidmugsy

guymo wrote: »

these factors ... are the heart of the dispute: what constitutes a reasonable way to evaluate the viability of the scheme under the uncertainties inherent in mortality, investment performance, etc.

Spot on. There is no particular way that I advocate; I know mainly that I am deeply sceptical of the proposition that nothing awful can go wrong for the universities. I suppose the questions for me are: "if your complacent assumptions prove wrong, who wins, who loses, by how much, and what will the consequences be?" And I am all too aware that the record of USS has been to err on the side of complacency, not of caution.

My favourite internet wag always makes the same opening gambit in discussions of the future of the universities: he intones "Dissolution of the Monasteries". Henry VIII paid pensions to the displaced monks: perhaps we'll end up with the Pension Protection Fund paying pensions to displaced dons. Won't that be funny?