September 15, 2017

USS valuation: don't believe all you read in the press. USS is in good shape


The reports that have appeared in the press that the USS is in deficit of so many billions of pounds (Times Higher, Financial Times) are very one-sded and misleading - not least because the precise figure seems to change massively each time it is quoted. The latest valuation - actually dated 31 March 2017 - is in progress. The scheme's trustees are currently consulting the university employers about the approach they are following.

The document laying out the assumptions and the questions the universities are being asked has been made available to members if they request it. Members should ask their employer. It has also been published on its website by Sheffield University, and can be downloaded from here.

The calculations that have led to the conclusions reported in the press are based on a very particular view and approach the USS executive want to follow. This is the belief - handed down by generations of actuaries - that pension schemes should invest their funds primarily in government bonds (aka gilts), on the principle that such investments are totally safe, whereas equities are somewhat risky.

The problem with following this maxim in today's economic conditions is that - as a result of our government's policy of very low interest rates - is that it gives a very poor return, one that is currently below inflation.

In other words following their own orthodoxy is irrational: the principle of investing in low risk gilts is a guarantee of losing money in real terms!!! Yet despite their best efforts the UCU has been unable to get them to question their professional norms, and to consider other assumptions, even if it means the pension scheme having to close to defined benefits as a result.

The document's reference to poor investment returns largely reflects this assumption. Yet returns to investing in growth assets are not too low. For example equities continue to give a dividend yield sufficient to meet the anticipated pension obligations.

At the core of the valuation problem is the so called Test 1 which is somewhat technical but requires university employers to make up for the loss by extra payments. But their capacity to make such additional payments is limited. Hence the threat to the affordability of the scheme. But Test 1 is a very specific methodology whose evidential base is open to question. It assumes the only investments are loss making gilts. It would be good to know how the test would work on the assumption the scheme is invested in the actual assets it has. It is puzzling why this is not done.

The draft valuation assumes implicitly that the scheme must be seen as about to close to new members and always remain invested in low-yielding but secure gilts. But the scheme is open to new members, and serves a sector with strong employers - the pre-92 universities (in other words not the former polytechnics but the older, more famous and well established institutons from Oxbridge via the Red Brick Civics to the New Universities founded in the Sixties) - and therefore can invest for the long term. Because it has done this over many years, the USS has an investment portfolio that is mainly concentrated in growth assets such as equities and few gilts - so the assumptions of the executive are not relevant anyway. These investments do well and make a return sufficient to pay the pensions - as long as the scheme remains open.

The UCU's actuary First Actuarial has just published their response to the USS valuation. This assumes the scheme remains open, continuing indefinitely with the profitable investment portfolio it actually has (rather than loss making gilts). The bottom line is that there is no need to cut pensions benefits or raise contributions:

"We conclude from the cash flow analysis later in this report, that the current contribution rate from the 2014 valuation remains a prudent contribution rate, given the current benefit design of the USS. In a scenario of “best estimate” pay rises, the benefits of the USS can very nearly be paid from contributions, without reliance on the assets. There is no need to change either the contribution rate or the benefits to have a prudent funding plan. The strong likelihood is that the USS can be invested to outperform the return required to safely deliver the benefits. Given time, the outperformance will increase the funding level to any desired target. Any formulation of the sign off of the valuation which maintains the current contribution rate and the current benefits is acceptable."

All USS members interested in what is happening - or likely to happen - to their pension rights ought to read this document.

USS in Crisis? What is really going on? A message for all USS members.

This is the message sent to members of the USS from the UCU today.

USS in crisis? What’s really going on?

Academic staff in universities within the USS pension scheme have seen their pay fall in real terms since 2009, the cumulative loss to pay (compared to rises in RPI) is over 16%.

There are 53,237 academic staff at Pre 92 universities on fixed term contracts, many of them attempting to build a career.

In this context, the USS pension scheme is a vital and valued benefit for these staff, to some extent offsetting the pressure on pay and careers for these hard-pressed staff.

Since 2011, after 35 years of being a stable pension scheme, USS has been affected by great instability and turbulence.

Successive valuations in 2011 and 2014 have produced notional deficits that have been used to justify cuts to members’ pension benefits, with the closure of final salary pensions to new members in 2011 and then in 2014 the complete closure of final salary, together with the introduction of inferior Defined Contribution benefits for staff currently paid above £55,500.

In both cases, industrial action taken by UCU members staved off the introduction of significantly worse packages.

On 31st March 2017, the latest valuation of the USS scheme produced a notional deficit of £5 billion and the Trustee Board of the scheme indicated that to cover this, the cost of pensions need to be raised by 6 to 7%.

UCU is deeply concerned that if further cuts to pension benefits are proposed it will inject real long term risk into the USS scheme by making it increasingly less attractive to staff.

This is a real threat. USS faces the risk that it will become a decisively inferior package to the Teachers’ Pension Scheme, which staff in new ‘post-92 universities’ pay into. For example, a researcher joining USS at 38 with a 30 year career will receive more than £200,000 less in the USS scheme than they would in TPS over an average retirement.

The scheme is fundamentally sound

UCU argue that the USS scheme is fundamentally sound. Cash flows are positive. The sector is not likely to implode, the employer covenant is robust and the contributions from active members broadly cover pensions in payment. The scheme has £60 billion in assets to back up this situation. It is a ‘last man standing’ scheme where employers share the risk.

However, the way in which USS values the scheme is creating the appearance of a crisis which, the solution to which, ironically, threatens to generate a real long-term problem.

Since 2011, UCU has consistently argued that the USS ‘deficit’ is based on a flawed actuarial model. This model is creating an appearance of a scheme in crisis that then means it invests in more and more ‘safe assets’ which leads to lower returns then it is more expensive in effect a vicious circle.

Creating the appearance of crisis

The USS Board has opted for a valuation methodology based on a set of assumptions that UCU argue undervalues the robustness and unique nature of the USS scheme, which is one of the largest private sector schemes in the UK.

Most fundamentally, the Board has chosen to interpret the Pensions Regulator’s call for ‘prudence’ with unnecessary strictness by insisting on discounting the scheme’s liabilities using a complex measure termed Test 1 which is expressed in terms of the rate of return on government bonds rather than the rate of return on the scheme’s actual mix of assets.

As many commentators and pension experts have noted, this insistence on tying valuations to historically low gilts yields is creating artificially inflated deficits in many defined benefit pension schemes.

UUK is consulting the employers on the draft technical provisions which if accepted would lead to a watering down of benefits for scheme members. UCU argue that more confidence in the sector from employer and its ability to grow and support a decent pension scheme for staff would not only be important in retention but be valuable in recruiting world class academics.

UCU has commissioned its own actuarial analysis from First Actuarial, based on a different methodology, ‘Best Estimate minus’. ‘Best Estimate’ assumes that schemes will continue to pay out benefits as they fall due and make an actuarial best estimate of the future returns they will make on their actual investments, the minus is the introduction of prudence. We believe this methodology better reflects the reality of the sound fundamentals in the USS scheme and the UK higher education sector. Using this produces a surplus rather than a deficit in the scheme and obviates the need for the flawed ‘Technical Provisions’ being proposed.

At the very least, the fact that this is possible demonstrates the wildly different situations that can be generated by small changes in the assumptions being made by the Board.

Given what is at stake, we believe this makes it incumbent on the Board to reconsider this alternative approach in its valuation assumptions.


The approach being taken by the USS Board may be supported by the Pensions Regulator but the facts remain that:

  • their approach has been criticised by significant pensions experts who recognise that it is creating artificial deficits by linking asset values to historically low gilt yields;
  • their assumptions are based on a harsh, some might say ‘fantasy’ interpretation of prudence that does not reflect the real performance of actual USS assets;
  • the vision of ‘prudence’ is founded on a vision of the UK higher education sector suddenly shutting up shop overnight and winding itself up;

As a result of this, UK higher education employers who have cut staff pay consistently for years have taken fright and indicated they will not raise their contributions any further, leaving hard-pressed academic staff, vast numbers of whom are struggling to build careers on insecure contracts, to pay more or work longer to get a decent pension.

USS shows no sign of deviating from its chosen course and University employers show no sign of willingness to take on extra risk to cover the requirement for increased contributions that will inevitably follow.

Such a situation is highly likely to lead to significant industrial action in the UK higher education sector.

August 11, 2017

More analysis of the USS 'deficit'

There has been some press coverage of the latest annual report of the USS (for the year up to 31 March 2017). It shows a substantial 'monitoring deficit'. This deficit is larger than last year which has led some to make sensational claims about the scheme needing to cut benefits or increase contributions from employers and/or members.

The real issue is whether we take the deficit as gospel truth or not. Some, such as the head of the employers pensions forum, Professor Koen Lambers, VC of York, accept it uncritically as factual. Others, however, are more sceptical, pointing out that it is a result of the falling interest rate on government bonds or gilts, that has been engineered alongside the 'quantitative easing' policy to try and stimulate the economy. This clearly does not have any effect on pensions either now or in the future, which are defined parametrically by the rules of the scheme: pensions depend on number of years of service and average salary (up to £55k). Gilts rates have no effect on either pensions or the ability of the scheme to finance those pensions through their investment income and contributions.

The debate about the USS is directly related to the wider national debate going on, led by the DWP, about how pension schemes should be valued and whether they are sustainable. Comments have been published here. The two issues should be taken together - not least because the USS is the largest scheme in the system - but some commentators are ignoring the national debate. What is needed is an open debate about the USS that includes pensions experts from different sides of the argument, not just the dogmatists who are tending to dominate.

Here is a link to a recent discussion of the USS situation by a pensions expert that you may find elucidating:

Here is another:

Finally, the increase in the USS 'monitoring deficit' is nothing to do with increasing longevity. Demographic changes like that occur over very long periods (eg. at least a decade) not over the short period we are observing. The press reports relate to the Annual Report and Accounts for the year to last March. The last valuation related to 2014, and the monitoring deficit does not reflect demographic changes. The cause of the increased monitoring deficit is the very low interest rates that are being used to update the value placed on liabilities from month to month. Journalists should report that and not simply assume the changes in deficits to be due to rapid changes in longevity.

The USS deficit is really like a house that is in negative equity. It is a valuation that does not involve real money - that is, money that has to be paid in normal circumstances. You can continue living in your house as long as you keep up your mortgage payments. John Ralfe is saying - essentially - that the negative equity has always to be paid off immediately it appears. But any sensible person will take a long term and more balanced view.

Is the USS really in deficit?

Everybody should keep calm about the universities superannuation scheme. Contrary to sensational press reports last week in the THE, Financial Times and BBC, the USS is not actually in deficit - not in the usual meaning of the word ‘deficit’ anyway.

If it were truly in deficit it would not have enough money coming in to pay its outgoings. It would be forced to sell some of its investment portfolio to keep going. But in reality it has investment income each year in excess of £1 billion which is not needed to pay for pensions today and that is available for new investments. It has just bought a large stake in Thames Water, for example. The scheme is cash rich and can remain so for many years. Membership is increasing with over 29,000 new members joining last year.

What, then is the problem? The headline figures quoted are theoretical numbers based on particular hypothetical assumptions about the future, whose realism is in doubt. Many members, the UCU, some universities and some actuaries are questioning whether they really give a true picture of the health of the scheme.

The ‘deficit’ emerges as the difference between the scheme’s assets (its investment portfolio) and liabilities (the value of future pensions benefits). The press reports are sensational because they quote raw figures baldly without any context. The liabilities are estimated to be £72.6 billion, which, with assets of £60 billion, means a shortfall – the ‘deficit’ – of £12.6 billion.

Reporting figures like that as raw numbers, expressed as billions of pounds, without putting them in context is misleading. (It is reminiscent of the way that government debt and deficit are reported in absolute numbers in order to frighten us into accepting cuts in public spending.) Given the size of the USS, with almost 400,000 members, it is actually not surprising that the figures are so large. They need to be put in proper context before any conclusions can be drawn. They represent a funding ratio of 83 percent: the assets are currently worth 83 percent of the liabilities. So is that high or low?

Compared with the funding levels of the almost 6,000 private UK schemes, of which the USS is the largest, it is not out of line. Its funding ratio is fairly typical. The average for schemes in deficit is 83 percent, according to the Pensions Regulator Scheme Funding Statistics 2007. The BT pension scheme funding ratio is 64 percent.

So it is not fair to say, as the FT article claimed, that the USS has the largest gap between assets and liabilities of any scheme in the UK. It is only large because the scheme is very large.

While the USS ‘deficit’ is not out of line with other privately funded schemes, we still need to ask where it comes from in the first place and what it means. The main reason for pension scheme deficits – not just USS – is that the accountants tend to insist on an assumption that schemes be invested only in bonds (even though that may not be true). In this they seem to be following a herd mentality and advocating something which is irrational. Why anyone would believe that investing in gilts at the present record low real interest rates, which entails expecting to make a loss, reduces risk is hard to understand.

But gilt interest rates have really very little to do with the USS pension scheme. After all, the pensions that members will receive are not paid out of the meagre returns from gilts but the much better returns from the long-term investments the scheme actually has, that it has built up over the years, mostly equities and other high-return assets. Such assets – if held for the long term - yield a high return with minimal risk.

[The USS uses this best estimate rate of return to value liabilities but with a substantial – some say excessive – margin of prudence to allow for market volatility of equities and other assets (the technical provisions). However they update this figure regularly using gilt rates, and it is this that appears in the accounts.]

The report also gives an alternative figure for the deficit if liabilities are valued using the actual rate of return from its assets but without the large dollop of prudence. This ‘best estimate‘ for the liabilities figure (as at 31 March 2014) was £38.1 billion, which means the scheme would have been in SURPLUS by £3.5 billion! Of course the necessary degree of prudence needs to be applied here, but it does show that this is not a scheme that is in trouble. We are due another triennial valuation in the next months (with a reference date of 31 March 2017) and it seems likely that the best estimate valuation could well have improved.

Members should stay calm and insist that the scheme remain open to new members and accrual. The biggest threat to the scheme is closing it.

May 26, 2017

The market–based regulation of pensions is a source of risk and deficits

My evidence to the DWP Green Paper consultation on Defined Benefit pensions

May 14, 2017

The ongoing crisis in occupational pensions, that is a result of the closure of many
company superannuation schemes, and their replacement with inferior alternatives, is a
ticking time bomb for society. Millions of workers will, in years to come, face a choice
between retirement with inadequate income and continuing to work into old age.

However it is not clear that there is anything fundamentally wrong with defined benefit pension schemes. A common complaint that one sometimes hears from experienced trustees and finance managers is that a pension scheme that appeared ostensibly to have been in good shape was closed on actuarial advice, after having been shown to be in technical deficit.

I wish to argue in this paper that a major contributor to such deficits are biases inherent in the approach and methods used by actuaries and accountants, based on recent developments in finance theory that are not empirically well founded. The regulatory rules themselves - that are supposed to protect agaist bad outcomes - are actually leading to those very outcomes.

To read more, download the paper here

May 12, 2017

What’s gone wrong with economics?

Lecture to Bath Royal Literary and Scientific Institution

10 May 2017

There is a lot of discussion going on about the state of economics today. A lot of criticism is coming from outside the academic establishment – from students, journalists, public intellectuals and policy makers. This has occurred since the financial crash of 2008 and subsequent recession, although it can also be seen as really an intensification of much older debates about economic thought that have been going on for many years before that. There has been intense debate, within the economics ‘profession’, about the way the subject was done, going back at least to the sixties if not earlier. However it had ceased to take place within the mainstream and nowadays most critical writing is confined to a few fringe academic journals, while the main journals have become almost exclusively the domain of a narrow range of orthodox thinking. This lack of open debate was very unhealthy.

(By the way, economics must be one of a very few academic disciplines whose members refer to themselves as a “profession”. I wonder if this terminology endows the orthodoxy that occupies the pages of the mainstream journals and textbooks with additional authority.)

One of the most remarkable instances of criticism emanating from government circles occurred in 2008 when the queen was visiting LSE just after the crash and she asked the assembled dignitaries why nobody had seen it coming.

One answer is to say that economics is concerned with understanding how the economy works rather than forecasting. After all, nobody would expect a political scientist to forecast the result of every election. But that begs another question: “if economists understand how the economy works, how come they have not been able to design institutions and policies to prevent such crises from happening?”

But anyway many economists are engaged in forecasting and their inability to spot the crash was a major failure of their methodology. The fact that the crash happened was also a consequence of seriously flawed thinking underpinning the policy regime in force.

Following the crash students intensified their complaints about the syllabuses of courses they were being taught. They complained that their courses were too preoccupied with the properties of abstract models not rooted in the real world and they demanded more relevance. For example a group that started at Manchester University called the Post-Crash Economics society
( was set up to campaign for more relevance and methodological pluralism in courses, but it met with limited success. This is actually a renewal of earlier campaigns such as the post- autistic economics movement that began in France in 2000, arguing against the dominance of a single method – which is known as neoclassical economics - and for a pluralism of approaches. They likened the mainstream discipline of economics to someone suffering from autism: someone who continues with the same asocial behaviour regardless of any outside influences. This gave rise to the Post Autistic Economic Review, now renamed the Real World Economic Review. Review. ( )

So what is the problem? Are the students and critics right? Or is it just that they lack the skills necessary to do mainstream economics?

Is economics too mathematical?

A very common criticism of economics teaching and scholarship generally is that it has become far too mathematical. Students today have to take and pass prerequisite courses in quantitative methods before they can study economic principles. Both mathematical and statistical techniques are required. Also scholarship is heavily mathematical with economics writing in academic journals and textbooks couched in algebraic symbolism which makes it extremely difficult to read for all but a few initiates who already have expertise in the area. The usual response is to say that complainers should just get on with it: that is the way economics is.

It is true that academic writing about economics should be written in clear language and not pretend to be something – mathematics - that it is not. This is a major and valid criticism of the way economics is done.

It is interesting and perhaps somewhat ironic that today’s economists who write in this way are failing to follow the advice of one of the founding fathers of neoclassical economics, Alfred Marshall,
( )
who was responsible for the supply and demand framework and partial equilibrium analysis of markets. He wrote:

“[I had] a growing feeling in the later years of my work at the subject thata good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules - (1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics.”

His work was mathematically very rigorous but written so as to be comprehensible to the reader. That does not suggest that mathematics has to be a prerequisite to studying economics at undergraduate lev el though it might be needed before conducting research.

There is an issue about what sort of quantitative techniques students should be expected to know. Statistics is essential because economics is all about measurement. But in their first year students only need to be taught basic economic statistics – that is the measurement of the economy. Students should know about how an index number is constructed so they can understand things like the consumer price index, or the rate of growth of GDP, and graphical representation of trends. Only high school maths is required for this. This is quantitative methods for describing the economy at a very basic level, the foundations for a proper understanding.

More advanced topics such as optimization theory, statistical inference and parameter estimation have to do with economic modelling and not required for an economics degree. Some of the techniques students are taught are really of questionable use. It really does not aid understanding or develop useful skills to have to derive demand functions from first principles expressed exclusively in algebraic terms, with a given utility function – very few are likely to ever need to do that in their later career, only those who go on to very advanced theoretical research. Studying the idea of a demand function and the nature and meaning of a utility function are far more important.

So I do not agree with the simple proposition that the subject is just too mathematical. Quantification is intrinsic to economics. But I think that often what is taught is the wrong sort of quantitative methods – more to do with abstract economic modelling than with the measurement of the real world economy. And too much economics scholarship is expressed using needless mathematical notation, a form of jargon. Economists should heed the advice of Marshall and write in clear English.

The reduction of macro to micro: the neglect of Keynesian economics and the ascendency of neoclassical economics

What has gone wrong with economics is not only that there is too much writing couched in needlessly mathematical terms but something more fundamental than that. It is that there has occurred a major shift of focus away from macro to micro. There has also been a shift away from real-world empirical relevance to mainly theoretical argument. Macroeconomics – by which I mean primarily the economics of Keynes – is no longer taught in many universities. By that I mean it is not taught properly. The economics of Keynes has been sidelined.

To continue reading, download the full paper here.

September 05, 2016

Financial Times article arguing that pension scheme response to deficits makes the problem worse

An article in today's Financial Times argues that the conventional approach to pension scheme deficits by "de-risking" and "liability-driven investing" makes the problem worse.


It makes the same arguments I made in my last blog. See:

What the article is saying is directly relevant to the universities scheme, the USS, because it is committing the same mistakes it describes, in common with very many of the 6000 other private sector (because - surprisingly - the universities' scheme is a private sector scheme) schemes.

August 18, 2016

Pension deficits: mark–to–market valuation is the elephant in the room

The chief economist of the Bank of England, Andy Haldane, has said he hasn’t a clue about pensions. It is not surprising when so many occupational schemes have a deficit that stubbornly just keeps on growing. They have agreed a recovery plan with the pensions regulator to ensure there will be enough money to pay the pensions promised when they fall due - but still the deficit grows seemingly uncontrollably.

The latest estimate for the total deficit for defined benefit schemes eligible for entry to the pension protection fund was £383.6bn at the end of June 2016, up from £294.6bn at the end of May an increase of £89bn in one month. The combined funding level has fallen to 78 per cent, close to its lowest ever level. There were 4,995 schemes in deficit and only 950 schemes in surplus.[1]

The blame for this is most often put on the fact that pensioners are living longer than expected. But that is not convincing and can be only part of the answer: deficits are changing too fast to be due to something as slow moving as longevity trends - that are anyway allowed for in the recovery plans that have been devised. The other explanation often trotted out is the catch-all ‘market conditions’ which covers a multitude of factors. This usually means low interest rates, casually and wrongly equated with poor investment returns.

No. It is the regulations governing pension scheme valuations that are mostly to blame for this unsustainable situation. They are the elephant in the room of the pension deficits story that is being ignored by most of the industry. They are not fit for purpose and urgently need to be revised. They force pension schemes to have to deal with extraneous – even spurious - risk factors which exaggerate deficits. The effect – as we have seen in recent years - is to force many schemes to close.

Deficits have grown substantially since the 1990s when minimum funding requirements were introduced. The 2004 Pensions Act set up the pension protection fund to reduce the risk of pensions failing due to the sponsoring company failing. But it also tightened up on funding rules and imposed an inappropriate market-based valuation methodology[2]. Accounting regulations based on this methodology are at variance with real-world economics. They are based on a purist belief in markets as a source of information - ignoring all evidence from academic economics, both empirical and theoretical, showing the limitations of markets as providers of information. They were intended to prevent pension schemes needing to enter the pension protection fund but in fact have had the reverse effect by making sponsor failure more likely.

It is only policy makers who can deal with this problem. They need to take an overview of the consequences of mark-to-market accounting and revise the valuation regulations in the light of experience.

... To continue reading access the full paper here or here.


The paper has been submitted as evidence to the enquiry being conducted by the House of Commons DWP Select Committee (chair Frank Field MP) and to the DB Task Force by the Pensions and Lifetime Savings Association (chair Ashok Gupta).

June 04, 2016

Will the UK become more powerful if we leave the EU? Voting power analysis suggests not.

A burning question begged by the referendum debate is whether the UK can be more politically powerful if it leaves the EU and regains the full status of an independent sovereign state in all matters than if it remains as a large member of a large and powerful political bloc.

It is a truism that a political actor may have more influence by being a member of a powerful group than it has outside it. It gives up power over decisions taken within the group in order to gain the indirect power from belonging to a powerful group: in other words it benefits from the power of combined forces.

This is essentially an empirical question about weighted voting. In order to answer it in the context of the referendum debate we need to be able to compare a measure of the voting power of the UK both inside and outside the EU. We cannot do that exactly because although the EU has defined voting procedures with precise rules for internal decisions there is not a world equivalent voting body for which we can do a formal analysis for external decisions. Continued

May 08, 2016

Misleading Times article about pension deficits

An article in last Saturday's Times, 'Universities' pension scheme could face their most rigorous examination' is an object lesson in the poor standard of reporting on pensions. Its author, Philip Aldrick, is the paper's Economics Editor, yet he displays a poor understanding of the underlying issues he is reporting which leads him to mislead the reader.

He is telling us about the large deficit that is being forecast to emerge from the next valuation of the USS, the private pension scheme that covers staff of the older universities, what are known as the pre-92 universities. The newer institutions, mainly the former polytechnics, are covered by the teachers' pension scheme, guaranteed by the taxpayer. But the USS is private so it comes under the same regulations as company pension schemes, such as the BHS.

But there the comparison ends. Questions are being asked in parliament about where the BHS pensioners' money has gone: there are some fairly simple and obvious question marks surrounding the role of the former owner of BHS, Sir Philip Green.

The USS deficit is not like that in that it is not clear where the deficiency is or how it has arisen. We cannot blame anyone for taking too much money out. We are told that at the last valuation in 2014 there was a deficit of £5.3 billion and that a recovery plan was agreed involving cuts to benefits and increases in contributions which were designed to fill the gap. Yet only a year later the deficit had become £8.2 billion. And it is estimated that by the next valuation in 2017 it will have ballooned to £11 billion.

These changes have taken place with nothing substantial changing in the actual scheme itself: there has been no Robert Maxwell raiding the pensions pots of his employees, no university finance officers indulging in creative accounting, no sudden mass retirement of thousands of senior professors on high final-salary-linked pensions, no sharp drop in recruitment. On the contrary changes in pension scheme deficits on the scale reported would only normally be expected to occur over perhaps a decade or longer, not a period of months. And they would be explained in terms of tangible factors such as increased longevity. But forecast longevity does not increase in big sudden jumps on the scale needed to explain these deficits.

No. These big swings in the deficit are almost entirely artificial. They are due to the regulation rules which have an inbuilt bias towards finding a deficit. This is is a problem that affects all defined benefit schemes: USS is merely the largest and therefore the effects are greater.

Many of the pension deficits stem from a major mistake by the government in basing regulation on what is called ‘modern finance theory’ or ‘financial economics’. Pension schemes have to be valued in terms of assets and liabilities, which are categories of capital, when what actually matters is whether the flow of income is enough to pay the benefits into the future. Capital values and income flows are two completely different things. It does not matter what the prices of the scheme’s investments in shares are on a particular valuation date; what we want to know is how much income those shares are likely to bring while they are held in the portfolio.

Theory teaches us that the capital value of an asset is the discounted present value of the expected net income received by its owner. That theory is the basis of valuation required by the pensions regulator. But we should not listen to that theory because it does not hold in practice. In reality share prices are highly volatile, far more so than the economics supposed to underly them. The asset valuations are far more volatile than the dividend and other income as a result of natural speculation in the stock market and other reasons like sentiment, 'irrational exuberance', and so on. There is massive evidence on this. There is a wealth of literature showing that excess volatility exists and that it is large; some studies have found it to be an order of magnitude greater than the volatility attributable to underlying economic events.

Yet the legislation on valuation of pension scheme assets requires it to be done in line with finance theory: by pricing to market and taking the ensuing volatility as risk and therefore something important to be managed. If anyone points out that there is excess volatility in the real world, it is dismissed as a merely a 'puzzle'.

The liabilities, too, have to be estimated in a way that makes it possible to compare a figure for them with the assets. (This is where the 'complicated mathematics' of the article comes in: Mr Aldrick reveals he is not well-up on pensions economics when he sneers at this.) The liabilities figure is an even stranger concept than the assets. And this is where most misunderstanding comes from. Most journalists do not understand how artificial and divorced from reality the liabilities figure is.

Under the rules the trustees of a scheme have to work out a hypothetical capital sum that - if it were invested in a certain way - would produce the assumed future benefits. The regulations actually allow for quite a lot of discretion in how this is done but most actuaries have got the idea from finance theory that investing in gilts is risk free. The problem with this is that gilt rates are very low at present so this means liabilities are very high. And as gilt rates change by a small amount the liabilities change massively by billions. (It is not a risk-free rate if it is constantly changing.) Yet the real liabilities are the benefits that have to be paid in the future and have not changed, they are just the same. Once again it is theory in the face of evidence: real pension schemes do not invest in gilts but in assets that will give a high return, in a prudently diversified portfolio.

The third major factor is the employer covenant. When USS was set up it was backed by the government. Any deficits could be made up by changes to the grant. The UGC (later HEFC) had a seat on the Board. So institutions did not have to worry about risk of the scheme failing. But the government (Willetts I assume) withdrew in 2011 and the scheme, as the article says, is a last-man-standing scheme. This seems to be exercising the minds of some of the employers worried about taking on the liabilities for institutions that fail in the new competitive environment where we are being under-cut by cheap new entrants. So the valuation - I believe - currently assumes only a twenty year covenant: to be on the safe side universities are assumed not to contribute beyond that. How likely is it that institutional members of the USS - the pre-92 universities mainly - will go bust.

Members are having to contribute more and more to the scheme, and benefits are being cut, in order to manage a lot of synthetic risk in the form of market volatility which is not the same as actual risk. On top of that they are having to pay to manage the risk of institutional bankruptcy.

Mr Aldrick finishes with an extraordinary comment: "The big hope is that interest rates rise which, through complicated mathematics, will reduce the liabilities. If that is the plan, however, it would make Sir Philip look as clean as a whistle. Universities, we'd like to think, measure themselves by a higher standard."

This statement suggests he does not appear to get it. He does not seem to understand that the reason that the liabilities figure is so large is mainly due to low interest rates but instead seems to believe the deficit is real and that the effect of a rise in interest rates 'through complicated mathematics' is somehow an extraneous technicality that might be as morally dubious as the shenanigans at BHS. The fact that interest rates are low is the reason the deficit appears so large.

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