Crisis accounting

August 3, 2017

The “financial hole” that has been reported in the Universities Superannuation Scheme in no way corresponds to the health of the fund in the real world. Rather, it is the result of what a recent report described as the “over-pessimistic assumptions and inappropriate methodology” adopted by the USS board.

The USS valuation is based on the “gilts plus” approach – the assumption that the fund’s current and expected assets can be assessed only in terms of the interest rate on gilts (government bonds) plus a little bit more, because the gilts rate is more fixed and certain than the return on equities. The trouble with this approach is that only about 20 per cent of the USS portfolio is held in gilts (the rest is in equities); and while gilts returns have been very low for many years and have recently declined year-on-year (from 0.6 per cent in 2011 to −1.8 per cent in 2016), the return on the other 80 per cent of USS investments has been consistently about 8 per cent. The “£17.5 billion deficit” bears no relation to the USS’ true current financial situation but is rather a forecast for the future based on the low (or even negative) returns offered by a tiny proportion of its investments (gilts).

The “deficit” would be much reduced or even vanish if the USS were to value the scheme on its true financial merits, which would mean basing its portfolio valuation on its real assets and on what is really happening to its equity yields.

“Prudence” yes, but “reckless prudence” no – otherwise further downhill slides are inevitable for the USS, and entirely artificially.

Howard Moss

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