Assets, liabilities and old age tensions

November 14, 2013

In “Pay it forward” (Letters, 7 November), Dennis Leech attacks my analysis of the financial health of the Universities Superannuation Scheme, the UK’s largest pension scheme.

The basis of his attack is not specific to the USS: he rejects the whole approach of comparing the market value of any private sector pension scheme’s assets and liabilities (promises to members) to measure a surplus or deficit. But this argument is at odds not only with my views but also with UK pension legislation designed to increase security for members. This requires all pension schemes to have enough assets to meet their liabilities, measured every three years, and to plug any deficit through extra employer contributions. (Official figures put the total UK pension deficit at £161 billion as of September 2013.)

He also argues that a “pension scheme is a form of social security…the income of one generation is guaranteed by those who follow”. This may apply to old age pensions, with the taxes paid by those in work paying pensions for those who have retired. However, it does not apply to employer pensions, which are recognised in law and by economists as deferred salary deals: employees are prepared to take home lower salaries while working in exchange for guaranteed pensions when they retire.

In assessing the health of any pension scheme, Dennis Leech says we should consider the “cash-in, cash-out” model, with current contributions paying current pensions. But regular annual contributions are intended to meet the cost of future pension promises made today, so using them to finance current pensions is dangerous double counting.

What happens to “cash-in, cash-out” when a company goes bust, so there can be no further company contributions? Hundreds of thousands of people have lost some or all of their pensions in this way, prompting tougher regulation.

The USS, meanwhile, has a whopping £10.5 billion deficit and its current contributions do not even meet the annual cost of new pension promises. So without a huge leap in bond yields or equity prices before the March 2014 actuarial valuation, member and university contributions will have to go up significantly. The USS – in denial for many years – should face up to this. (“Ex-regulator mounts up for long-term destination”, News, 7 November.) In turn, higher contributions surely mean higher student fees: where else could the money come from?

John Ralfe
John Ralfe Consulting

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Reader's comments (1)

What is there to say? John Ralfe warned years ago about USS. I do not agree with his view that bonds are best (see also letter on equities in this issue). Bonds can be manipulated by Government ti give very low (below inflation) yields and if you lived in Greece and invested in Government bonds you got restructured. No investment (even bonds) are without risk, something ofter overlooked in belief bonds are uniquely stable & secure. That said, the bluster of the USS response at the time when John Ralfe first warned about USS problems years ago was a clear signal to me the problem was much worse than I feared. I made changes in my pension plans as a result. Disagree or not, his analysis is worth listening to.