Ex-Bank of England chief attacks ‘unfair’ UK pension reforms

Universities Superannuation Scheme is in ‘rude health’, says Mervyn King

September 6, 2018
Mervyn King
Source: Getty

The former Bank of England governor Mervyn King has questioned the rationale behind controversial reforms to UK higher education’s biggest pension fund, claiming that the Universities Superannuation Scheme is in “rude health”.

Writing in Times Higher Education with the economist John Kay, Lord King criticises the way the USS’ £7.5 billion deficit has been calculated, saying that the “strange” and “pessimistic” assumptions used in last year’s technical valuation should be revisited.

Professor Kay and Lord King, who led the UK’s central bank from 2003 to 2013, say that the introduction of “well-intentioned but inept financial regulation” had forced the pension fund’s trustees to take an overly bleak view of the scheme’s healthy finances.

“In the context of a fund with almost £64 billion in assets, which has recently been earning investment returns averaging £5 billion per year, it is plain that the USS is not facing a funding crisis now or in the reasonably foreseeable future,” the pair write, noting that “last year the USS received £2.2 billion and paid out £2 billion”.

Warnings of a multibillion-pound deficit led Universities UK to propose last year the end of the element of the USS that guarantees members a set level of income in retirement, prompting 14 days of strike action at 65 universities this spring.

Although the valuation is now being reviewed by an independent panel, concerns about the scheme’s funding prompted the USS – which has about 200,000 active members, mainly in pre-92 institutions – to announce significant increases in employer and employee contributions in July.

But Lord King, who began his career in academia and was appointed professor of economics at the University of Birmingham at the age of just 29 in the 1970s, adds with Professor Kay that the USS’ long-term forecast for asset growth was “well below the rate assumed for planning by the most cautious endowments”.

These overly gloomy forecasts, coupled with “over-prescriptive” regulation that assumed that “the fund could be closed down at any moment”, had made it “inordinately expensive” to maintain the USS’ defined-benefit scheme, the pair argue.

“As so often, cash flows are a more reliable guide to what is going on than hypothetical valuations,” the pair advise.

“Economic models are indispensable, but as guides to thought, not substitutes for it,” the pair say, adding that “a model should never be treated as an oracle that emits obscure but unchallengeable verities”.

The intervention by the pair – Professor Kay is visiting professor of economics at the London School of Economics and a Financial Times columnist – comes ahead of the expected publication later this month of the independent panel’s review of the USS’ valuation.

Campaigners hope that the panel will present a solution that allows defined benefits to be protected and averts the worst of the contribution increases proposed by the USS.

Lord King and Professor Kay warn that a failure to revise the USS reforms would increase intergenerational unfairness by asking younger academics to shoulder greater costs for lower rewards to benefit older academics closer to retirement.

“Baby boomers ourselves, we see here yet another example of the entrenchment of our own position and that of our contemporaries at the expense of our grandchildren,” they add.


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