USS enterprise should torpedo pension fears

June 9, 2006

Claims of 'financial black hole' ignore strong financial future of HEIs and academic fund members, argues Ed Randall

Battered and bruised by the pay dispute, those academic managers and staff who read the Financial Times have now been confronted by a potentially far more disturbing problem. Senior editorial writer John Plender, in a commentary published last week, launched a stinging attack on the Universities Superannuation Scheme. He noted that it had "assets to cover only just over three quarters of its £28.3 billion liabilities" and had "racked up a deficit of £6.6 billion". As a respected FT commentator with experience as a chartered accountant, Plender should be taken seriously.

But what Plender describes as a "financial black hole" does not necessarily imply that the future financial health of British university education and the pensions of academics are in danger. I am not convinced by his criticisms of the USS's management of the £21.7 billion university pension pot. I do not accept that the scheme's trustees failed because they did not exercise "their power to raise contributions to plug a deficit" of £6.6billion in March 2005. With universities declaring that a 13 per cent pay increase, phased over three years, is barely affordable, Plender's proposition that employer contributions to the USS pot need to rise from 14 per cent of annual salary to 18 per cent is deeply troubling.

In Plender's view, the USS is taking a "punt" that "could undermine UK universities". This rests on a highly critical analysis of the scheme prepared by John Ralfe, a pension consultant and former head of corporate finance at Boots. Ralfe argues that contributions to pension schemes should not be used to pay current pensioners - they should instead be invested in order to produce future benefits. He says that making secure investments, which are not necessarily the most rewarding, should be the overriding goal of fund managers. And he is greatly concerned that the USS is apparently taking a more risky course.

Expert jousting over actuarial calculations, differential rates of return and risk analyses can easily generate alarm. But, for most USS members and university finance officers, entering the thickets of investment risk, longevity assumptions and pension fund accounting standard FRS17, is unlikely to be either rewarding or reassuring. Even though the scheme has some of the brainiest pension fund members in the country they would be well advised to decline invitations to become amateur actuaries, investment analysts or accountants. It doesn't make sense to spend time acquiring or duplicating other people's skills to keep our pension pots safe. Members of the USS should continue to rely upon the integrity and good sense of the scheme's trustees.

USS trustees are well placed to grapple with the major policy issues associated with very complex pension equations. Peter Moon and Edwin Topper, respectively USS chief investment officer and actuary, have responded forthrightly to the recent criticism.

Topper dismisses the idea that either the USS or HEIs are in a financial fog about how to approach questions such as whether the scheme should trade off lower funding for teaching and research against higher employer pension contribution rates. The USS's reliance upon riskier equity investment, rather than gilts, is part of a strategy that avoids universities having to push up contributions, which would drive a coach and horses through their revenue budgets. Topper insists that a sensible balance is being struck that makes it possible to hold employer contributions to USS at 14 per cent.

Likewise, Moon rejects what he argues is the excessively precautionary approach being promoted by Plender and Ralfe, and he is right to do so. USS pensioners may be living longer and equity markets may go down, but we shouldn't allow ourselves to be stampeded into an overreaction. The scheme is in a strong financial position because contributions will exceed pension payments for many years to come. It is entitled to take a more optimistic view about its finances than many other pension funds. The USS, it shouldn't be forgotten, serves institutions, not just a population, with above-average longevity. With income exceeding outgoings, it is responsible to favour equity investment over safer but less rewarding gilts.

In troubled times there are grounds for accepting USS reassurances. The scheme has made serious efforts to inform members about its investment portfolio and policies. In the face of fierce criticism it has been willing to explain and debate the reasoning behind its key decisions. In the world of pensions there can be no guarantees, no risk-free strategies. USS contributors and pensioners should rest assured that the scheme is as well equipped as any of the big UK pension funds to intelligently weigh the interests of pensioners and contributors.

Ed Randall is a lecturer in politics and social policy at Goldsmiths, University of London.

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