Views on pensions depend on principles

September 25, 2014

Re the proposed changes to the Universities Superannuation Scheme (“Reforms seen as ‘radical attack’ on pensions”, News, 18 September): in non-academic terms we are getting done over royally.

This is what people tried to warn would happen, that the USS crisis would get so big we would all get this treatment. The USS should have been reformed years ago: in its current form it redistributes wealth from the lower-earning younger staff to retired and close-to-retired higher-paid staff.

The transfer was hidden because some chose to believe that the employers would make good the deficit when all the evidence was that they would not.

The numbers given assume a 3 per cent return above the consumer price index; this is a heroic assumption. USS went bust on 2 per cent. In reality, the numbers will be worse (much worse) for all concerned.

I also note that in the case studies you print to demonstrate the potential impact of the changes, it would have been better to have “she” as well as “he”, instead of all male illustrations.


Your reports on the Universities Superannuation Scheme tend to imply that statistics show a funding deficit as if the USS’ assets and liabilities are objective scientific truths when in fact they are based on theories.

There are two principles on which defined-benefit pension schemes are organised: pay-as-you-go (which is used throughout the public sector, including the Teachers’ Pension Scheme) and funding (which is used for smaller pension schemes offered by private sector employers in the risky marketplace).

How we think about the USS depends on which of these principles we apply. Viewed as a PAYG scheme, the USS appears to be financially strong with an annual surplus of more than £1 billion a year, a strongly performing investment portfolio and growing membership. The deficit figures you quote come from regarding the USS as if it were the other type of scheme, one belonging to a small company that must be prudently managed against the likelihood of the firm failing. But to apply that approach to the whole pre-92 higher education sector covered by the USS is to misuse a theoretical model by applying it in circumstances it was not designed for and in which it will cease to work. We have heard a lot about economic models failing in the financial crash of 2008; we have the same issue today with pensions.

Journalists should follow the advice of Ha-Joon Chang when he says “economics is too important to leave to the experts”. Rather than taking on trust the opinion of someone styled as a pensions expert (as frequently happens), you should get them to justify in detail what assumptions they are making, and recognise that the whole issue of the state of the USS is in fact highly controversial.

Dennis Leech
Professor of economics
University of Warwick

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