October 25, 2013

Misleading Newsnight story on Universities Pension Scheme

Newsnight last night had an item that presents the USS pension scheme as having a 'black hole' that will need to be filled by increased student fees.

We are told the deficit has increased in the past year because, although the value of assets (mainly investments in shares and bonds) has grown by £4.7 billion, the estimate of the value of the pension liabilities - the value placed on pensions currently being paid and future pensions for university academic and related staff - has ballooned by £6.4 billion. We all understand investments go up and down with the stock market and profitability of companies. But why have the liabilities gone up so astronomically? We are entitled to ask.

The Newsnight item was all about how the problem is all to do with the investment strategy - but in fact the investments have actually done pretty well.

No the problem is with the figure for the liabilities. Newsnight did not discuss that - nor did my colleague Bernard Casey who frankly ought to have known better. They just accepted this gross figure as if it were a fact.

We are told that the liabiities figure has gone up by 14.6% in one year. But how is that possible? Has our life expectancy suddenly increased massively - in one year? Remember that our pensions are fixed by the rules of USS and depend on our final salaries, our years of service, future price inflation, our longevity. So what has caused this figure for the pensions liabilities to increase so much?

The truth is that it is an artifact of the accounting method. The calculation of the liabilities figure is driven primarily by the current low interest rates due to government monetary policiy (including quantitative easing). There may or may not be a deficit in the ordinarily understood meaning of the term but this is not it.

The key facts are that all the pensions currently in payment, £1.4 billion last year were covered by the payments of members and institutions of £1.6 billion. In addition to that, the fund's investment income was almost £4.6 billion. This does not look at all bad to me. Whether it is adequate to cover the pensions promises only the actuaries will be able to tell. But the calculations we are expected to swallow using the accounting rules known as FRS17 which produce these mad deficits are highly misleading.

See my letter in the Times Higher about this: accounting_tricks.pdf

The problem is that the accounting methods are based on extreme neoliberal economics which views everything as if the world is just a gigantic perfectly efficient all-knowing market. But we know that markets are very volatile and affected by many factors including human irrationality, speculation, bubbles, and all the rest.

- 3 comments by 0 or more people Not publicly viewable

  1. marian mayer

    Another problem Dennis is that media researchers and commentators do not understand the artifice of economics or accounting – I don’t either, but then I’m not paid to. It’s the laziest form of journalism – to report on an issue with so little understanding of the facts – which Newsnight should be embarrassed by. Could it be deliberate? What’s to be done other than press the truth across as wide a spectrum of media that we can? Perhaps UCU could issue a rebuttal with the true facts by way of a press release?

    25 Oct 2013, 11:27

  2. Richard Bryan

    Quite agree. In addition, the continuing assumption that equities are “risky” and gilts “safe”, and the sensationalist reference to the USS “loosing its money in a casino”, is quite misleading in the context of pensions investment for the long term. ILGs currently have a real yield around 0% – so the implication of the reporting standard would be that the liabilities need to be completely funded in real terms now, which is simply not on. And there’s the rather curious implication that a pension fund invested completely in gilts would pass the buck to the government to repay in the future from taxation – so no longer a “private” nor a ‘funded” pension, only the appearance of being so.
    John Ralfe seems to have made a career out of his ‘success’ in shifting the Boots pension fund entirely to gilts. However, that needed a top-up when Boots was taken private (google for a reference), so perhaps not such an overwhelming success. It appears he has no formal accountancy or actuarial qualifications, but inter alia his website states “I was also a consultant to the Accounting Standards Board on FRS17…” so perhaps he has an interest in seeing it rigorously applied. Thus he has manged to become a media ‘go-to’ expert on pension, with the ability to sniff out pensions black holes with all the skill of a medieval witchhunter.
    While I’ve got a head of steam up, why virtually no comment from the UCU or elsewhere on the end of NI contracting out? It will hit members by 1.4% and employers by 3.4% – unless they take the extra-statutory provision in the pensions bill to vary contributions or benefits to compensate. That’s going to be a big hit.

    25 Oct 2013, 14:00

  3. Alan Gibbons

    Dennis, Thank you for this. As a recipient of a USS pension the Newsnight piece certainly grabbed my attention but I couldn’t square it with what I had garnered about the scheme over recent years. Best wishes from an old Warwick hand, Alan Gibbons (Professor Emeritus, Kings College London, Honorary Professor, Warwick).

    30 Oct 2013, 18:58

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