‘No one knows for sure’: deficit at heart of USS dispute debated

Four experts discuss the estimated shortfall that led to strike action at UK universities

April 3, 2018
Pensions strike posters
Source: Shutterstock

The dispute over the future of the Universities Superannuation Scheme has been driven by concerns about an estimated £6.1 billion deficit in the fund.

But many campaigners have disputed the existence of such a large shortfall, which led Universities UK to propose an end to the “defined benefits” element of the scheme that guarantees members a set level of income in retirement.

Here, academics and experts offer their views on the hotly contested figures.

‘No one is sure about this £6.1 billion figure’
Jamie Smith-Thompson, managing director of pensions advice specialist Portafina
No one knows for sure about this £6.1 billion figure. It’s not a [situation] where we can say 'all of this service and benefits that you’ve accrued, we have to capitalise now' and there’s a crystallisation event for all members at once. It just doesn’t happen like that.

For me, the biggest factor of all is the freedoms that actuaries have when it comes to these assumptions. This undefined approach will have a huge impact on the employer’s knowledge of the deficit and the plan of action to start clawing away at it.

As advisers, when we get a transfer value, we do a calculation known as a transfer value analysis. This has predetermined assumption rates that are governed by our regulator.

Wouldn’t it be great if the actuary had to follow similar predetermined assumptions and there were consistent assumptions throughout, based on the investments the scheme is holding?

‘A panel will add another voice but not definitive answers’
Jens Perch Nielsen, professor of actuarial science at City, University of London
Non-actuarial staff are quizzing me on detailed actuarial valuations [based] on complicated stochastic models. Setting down a panel [as proposed by Universities UK] is likely to add another voice in this debate. But the confusion will remain.  

In my view, we have to move towards a defined contribution scheme and combine it with the most recent university-based research on how to communicate pension risk and pension benefits. We have to provide optimal transparency and optimal pension benefits for the individuals. Such an approach would lead to a one pension product per university lecturer approach. 

It is time to set down not only a panel looking backwards trying to improve valuations of an outdated system but a forward-looking innovation team exploiting all recent research and technological advances to create a second-to-none pension system created by academics for academics.

‘The methodology behind the deficit calculations is flawed’
Michael Otsuka, professor of philosophy at the London School of Economics
USS’ embracement, for this valuation, of a controversial measure of “short-term risk” is the source of much of the difficulty in reaching a settlement that is acceptable to  employers and the union.

To determine whether this level of risk is too high, USS takes the volatile and high current cost of exchanging the scheme’s portfolio, which is weighted towards growth assets, for a lower-risk, lower-return, “self-sufficiency” portfolio weighted towards bonds.

It then compares this cost with the revenue that would be raised by an increase in employer contributions by 7 per cent of salaries over decades.

In September, USS proposed the following disciplinary measure: if the current cost exceeds the projected revenue, this would automatically trigger extra employer contributions to close this gap as a “rapid pre-agreed short-term response”.

Employers vehemently rejected this proposal. Their rejection was a major factor in USS’ shift to a more conservative valuation in November, which rendered the cost of providing a meaningful, decent level of defined benefit pensions unaffordable.

Of what relevance, however, is a gap between the revenue that could be generated over decades and the current cost of moving to a self-sufficiency portfolio?

Perhaps if it made financial sense to move to such a portfolio now, and there was a large bank willing to lend USS money to purchase such a portfolio now on a decades-long repayment plan of 7 per cent of salaries, this gap would be of significance. But it makes no financial sense and there is no such lender.

‘We need greater transparency and openness’
Sam Marsh, teaching fellow at the School of Mathematics and Statistics, University of Sheffield
One of the striking things about the valuation of pension schemes is how much weight is given to summary numbers. Think, for example, of USS’ “£6.1 billion deficit” – given how drastically these figures can change on a very minor tweaking of key assumptions.

Debates about the correct figures for deficits or investment forecasts miss the point: it’s the uncertainty in those numbers that needs much more attention if one is to sensibly determine whether things are on track.

We know that the USS trustee’s best assessment of the fund is that it is healthy, with a large surplus of assets and current contributions in excess of what’s needed to continue the scheme unchanged. The question then becomes: how much room should be allowed in case the forecasts prove too optimistic? Or, rather: how likely is it that we could end up getting badly stung?

Given the life-changing effects that pension valuations can have, we should be demanding that they are carried out under much higher standards of openness and transparency. The lack of transparency would not be tolerated in academic journals and should not be tolerated here.


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