Fuel for thought

March 2, 2017

With the triennial valuation of the Universities Superannuation Scheme due in March, we are concerned about the self-inflicted harm caused by a flawed measure introduced by the trustee to manage risk.

This measure, “Test 1”, requires closure of the scheme to be within reach at all times. While this may sound innocuous, it forces investments away from the healthy asset mix that has served the scheme well and towards unproductive, low-return assets such as government bonds. This makes paying benefits much more expensive, leading to higher contributions and putting the scheme’s longevity at risk.

The logic behind Test 1 is best illustrated with an analogy. You need to run a motor boat across a bay with a jagged shoreline. You cannot abide the possibility of being stranded in the bay if you run out of fuel. Thus, you decide to hug the coast so that you can bail out in extremis. This decision is made without checking whether the fuel is sufficient for the direct route, or if a manageable top-up would allow ample levels for safe passage. Of course, the fuel required for your new, winding route is much greater. Your decision to hug the coast greatly increases any fuel deficit, increasing the probability that you will be unable to complete the trip.

The chief risk officer for the USS describes Test 1 as ensuring that a safe harbour is always in reach. To us, it looks much more like steering the fund towards an unnecessary beaching.

Sam Marsh, university teacher, School of Mathematics and Statistics
Matthew Malek, lecturer in experimental particle physics
University of Sheffield

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