USS Background Briefing - September 2019

USS has demanded increased contributions from both employers and employees, citing a 'deficit' that is highly disputed.

Last year the Board of USS Ltd triggered a 'cost sharing' rule that compels active employee members of the pension scheme (employees who pay into the scheme, not pensioners or deferred members) to increase their contributions from 8% to 10.4% of salary from this October. Worse still, they then plan to up this to 11.4% next April.

A pension that cost 8% of salary at the start of the year will then cost 11.4% of salary - a 42.5% increase in contributions.

On Friday, the Provost emailed all staff asking staff (again) whether we would support UCL adopting a position on a UUK consultation of its members (the employers) that USS adopt a reduced contribution rate of 9.6% - a 'mere' 20% increase from 8%.

The Provost's public consultation appears timed to muddy the waters as UCU prepares to ballot for industrial action. This is exactly the same proposal (then called 'option 3) on which the Provost sought staff views in May. On 3 June, the Provost wrote back as follows:

You will see that we reluctantly propose to Council, and with heavy qualification, supporting option 3 as the least worst of the three. The majority of the online responses from staff (56%) did not favour any of the options. 32% favoured option 3 (more than any of the other options).

Our advice to this 'consultation' as with previous ones, remains essentially the same. The scheme is in rude health. Provided it is not actively sabotaged by 'de-risking', there is no need for any additional contributions from employers or employees.

UCL should break from the UUK herd. Join with UCU to insist that the scheme is not 'de-risked', and stop playing games with our pensions or our salaries.

Is USS in 'deficit'?

The short answer is No. With a competent investment strategy and no 'de-risking' applied to the assets, the USS scheme is not in deficit and can continue growing for the next thirty years!

The arguments deployed during the 2017-18 campaign, when the employers attempted to change USS's defined benefit pension into a 'defined contribution' one, continue to apply.

Nothing has changed that would alter that analysis. Indeed market performance indicators reinforce that analysis.

• In 2017 the scheme reported >£60bn in assets, representing the accrued contributions of pensioners, invested in the stock market with a rate of return that has fluctuated between 5 and 10% per annum.
   

• The scheme can pay out on the basis of income without touching the assets. 2018 figures show £2.2bn in contributions and £2.0bn in outlay. First Actuarial, working for UCU, have shown that with conservative assumptions, this pattern is expected to continue for the next thirty years.
   

• Scheme benefits increase with CPI. 'Career Average Revalued Earnings' are revalued annually by CPI (with a taper at 5% and cap at 7.5%). Deferred pensions, when an employee leaves the scheme but does not draw their pension, are also uprated by CPI. Therefore, provided that scheme assets increase faster than CPI, the pension scheme will always be in surplus.

Where does the 'deficit' come from?

It can only come from one of two sources: the liabilities increasing or the assets decreasing in value.

Although some, Jane Hutton included, have criticised the exaggeration of liabilities in recent valuations, the main problem is that the valuation is premised on 'de-risking' the portfolio, causing the assets to decline.

What is 'de-risking'?

So-called 'de-risking' is the process of selling off assets in stocks and shares and purchasing government bonds and gilts. Unfortunately the latter have a low long-term return, and in some cases pay negative interest. With Brexit looming this strategy is becoming particularly expensive.

To repeat an analogy we used last time, it is like selling a house, putting the capital in a bank for ten years, and then trying to buy a house with it. If house prices rise faster than bank interest rates, compound interest will destroy your savings.

De-risking is not a temporary plan to tide the scheme over. It is being implemented permanently. This is already having a material effect, currently representing a loss of at least 4.8%pa to the scheme.

Financially, this makes no sense. By projecting forward and assuming that assets are de-risked on the current plan, the assets lose value over time, and the likelihood of an eventual deficit (where liabilities exceed assets) arising increases.

What is UUK's role in all of this?

The risk that 'de-risking' reduces concerns the potential circumstances that University employers might need to lend* capital to the asset managers of USS over a volatile period of the stock market. This obligation, to collectively act as lenders of the last resort to USS, is in essence a consequence both of the employer covenant and the stock market investment strategy of USS.

Fund managers can carry out a more sophisticated approach to investment than simply responding to the market, buying up stocks cheaply during a crash, spread-betting and smoothing. So it allows USS to have an asset portfolio management strategy with a solid track record that has allowed assets to outpace inflation.

In a letter to the employers published on the UCU website, UCU remarks (p5)

Employers may not control the valuation, but their expressions of risk appetite, their record of financial commitment to the Scheme, and their other business activities all have a bearing on the covenant and the methods and assumptions adopted by USS, and thus on the final contribution rate.

The purpose of imposing higher contributions is to allow USS to move into a situation of self-sufficiency from the employers, even if it comes at a much higher cost.

This crisis is made in Westminster. It derives directly from Government policy. University employers are now in steep competition with each other for undergraduate students, and have no idea about each other's financial position. Brexit and Augar create new risks, encouraging the employers to see pension risk - especially mutual pension risk - as something they need to shed.

In May, Trinity College Cambridge announced it would leave USS, paying out to leave, because it did not wish to carry the pension risk of other universities. The overall trajectory is to shift the risk of the pension scheme onto subscribers (us).

It is important to understand that in this act of continuous self-mutilation, costs will increase into the future. UCU notes that it is likely that the new valuation in 2020 will be even worse, and at that point they will come back for more:

We do not believe employers will agree to cover even a 65% share of that rate, and will undoubtedly seek to cut or close the Defined Benefit element instead.

Accepting employee contribution increases means, in effect, supporting USS's efforts to continue to sell off the assets, and UUK's efforts to shift responsibility for the pension onto employees. And the outcome will be Defined Contribution, if only because that model removes all pension risk from employers.

Only by striking in 2018 were we able to shift the political arithmetic. Negotiations between 2017 and 2018 failed to stop the employers or USS Ltd. Within a few days of the strike beginning, the employers wanted to negotiate, and eventually agreed to the Joint Expert Panel being set up.

We will need to strike again to protect our USS pensions - not just for ourselves, but for future generations of academics. Look out for the ballot material. Make sure you vote, and vote YES, and urge your colleagues to do likewise.

UCL UCU Executive Committee

*These contributions, now termed 'contingent contributions', have historically been loans, but UUK have proposed that ordinary staff should also pay into the scheme on the basis of 'cost-sharing'. With de-risking continuing into the future, the financial weakening of the scheme will continue and there is little chance that a loan would be repaid.