Student fees in the UK highest in the world according to OECD

An OECD survey of education in its member countries shows that the UK charges the highest fees in the world for courses in public universities, higher than the USA. A high proportion of students qualify for state aid in loans or grants. The figures are for 2013/14 before the Coalition's increase to £9k was being paid by all students.

A report is in the Guardian at:

http://www.theguardian.com/education/2015/nov/24/uk-has-highest-undergraduate-tuition-fees-in-industrialised-world-survey-finds

Dennis Leech : 07 Dec 2015 00:36 |  Comments (0) |  Close comments |  Report a problem

Corbyn's proposed 'quantitative easing' is already being done by Osborne

Jeremy Corbyn’s proposal for ending austerity - using Bank of England money to fund government investment to promote growth - has been greeted with a hostile reaction. Critics have dismissed such ‘people’s quantitative easing’ out of hand saying it will lead to inflation. Some have gone so far as to say it is 'ridiculous' to finance government spending by 'printing money', t will 'crash the economy' or take the UK down a slippery slope making the UK another Zimbabwe or Greece, and so on. But it is not in fact a new idea and is not very dissimilar from what the current chancellor, George Osborne, has been doing for years.

A combined monetary and fiscal stimulus, which is what this is, is just textbook Keynesian economics that any student learns in their first year studying macro economics. When there is spare capacity in the economy due to insufficient demand, government spending financed by either QE or borrowing or both stimulates growth and reduces unemployment. Later when the spare capacity has been used up and resources are fully employed is when inflation takes hold. In the UK at present there is evidence of a lot of spare capacity in the high numbers of unemployed, on zero-hours contracts or who are self-employed but making a very poor living. And no inflation.

Yet 'peoples QE' is not really very different from what is already happening. Chancellor George Osborne has been using quantitative easing since the took office (continuing a policy begun by his predecessor in the Labour government). Since 2009 the Bank of England has been buying government and commercial bonds with newly created money. The chancellor at the time, Alistair Darling, had authoritsed the Bank of England to spend up to £200 billion on this, and it undoubtedly contributed to the growth that was happening up to 2010. This was nothing to do with the banking bailout which had occurred the previous year when the financial crisis hit in 2008. The stated aim was to create inflation by stimulating spending and output in some way, notably through bank lending for private investment.

But the distinction between buying assets and buying goods (what Paul Krugman calls 'buying stuff') - becomes blurred when the government has a large budget deficit and is borrowing by selling gilts at the same time as it has a QE programme. The government finances spending by borrowing from financial institutions by selling gilts and these gilts are then bought up by the Bank of England with new QE money. So in effect QE means using newly created money - indirectly - to pay for government spending and hence stimulate the private sector indirectly through the multiplier. This will not cause inflation if there is enough spare capacity. And this is precisely what we observe.

George Osborne expanded the QE scheme in 2012. When the new government come in in 2010 the amount of QE money that the Bank of England had spent buying gilts was just under £200bn. Since then George Osborne has instructed the Bank of England to increase QE money by another £175bn and used it to buy newly issued gilts to finance the deficit. This fiscal stimulus will have helped the economy back into growth - thereby contributing to Osborne's claimed success - although inflation is still well below target because there is still a lot of spare capacity in the economy.

These comments refer to the short-term Keynesian stimulus of QE. What Corbyn is proposing is that - rather than just buying 'stuff' the QE stimulus take the form of public investment in order to benefit the economy in the long run by increasing productive capacity.

One futher point is worth mentioning:
I should just mention that there has been little discussion of the semantic problem created by QE regarding the definition of government debt. The Bank of England owns £375bn of government debt, resenting about 25percent of the total. But since the Bank is owned by the British state the government is actually borrowing this money from itself and therefore pays no interest on it. Counting the debt to include the QE figure as George Osborn does helps him make the political case for cutting spending in order to 'pay down the debt'. But would it not be a fairer reflection of the real situation to quote the net figure?

Dennis Leech : 27 Sep 2015 12:44 |  Comments (0) |  Close comments |  Report a problem

USS attacks 'mark to market' accounting rules

The USS has criticised the government-imposed accounting rules for pension schemes. Kathryn Graham, USS’s head of strategy coordination, has said the current, so-called 'mark-to-market', rules prevent funds like the USS from investing in long-term infrastructure projects. This both limits pension schemes' investment opportunities and also harms the wider economy by discouraging much needed long-term investment.

She argues that pension funds in other countries such as Canada and Australia, that use different accounting rules that allow for smoothing, give them an advantage so that they are invested in much more long-term infrastructure.

This is of course an effect of the 'contested methodology' that the UCU has complained about. 'Mark-to-market' accounting is the major reason behind the so-called deficit and the justification for the closure of the final salary scheme and introduction of the hybrid scheme.

Graham made her remarks at an investment conference and was supported by other pension schemes. The coal industry scheme's representative said that "mark-to-market was forcing pension funds to buy UK Gilts, instead of other assets, unnecessarily" which, as members who have been following the recent debate about its future will know, is precisely what is happening to USS.

There is a clear implication that what is needed is for the rules and the 2005 legislation to be looked at again as not fit for purpose. The appointment Ros Altmann as the new minister could be an opportunity to do that. Her approach to pensions is measured and pragmatic, whereas her predecessor, Steve Webb, also a pensions expert, was an Orange Book Liberal, who seemed to have an unquestioning faith in the omniptence of markets. Ros Altmann has written about the USS saying that the deficit is overblown. On the other hand, Steve Webb has defended the mark-to-market methdology maintaining that pension scheme deficits it throws up are 'real'.

It is time the rules and methodology were looked at again before all DB pension schemes have been closed down as a result of ill-though-out legislation and regulation, and not least for the sake of combatting the short-termism of British investment.

Dennis Leech : 05 Jun 2015 17:34 |  Tags: Pensions Uss; |  Comments (0) |  Close comments |  Report a problem

USS assumptions out of line with other pension schemes

We know that the viability and sustainability of the universities pension scheme, the USS, depends crucially on what is believed about the unknowable future in terms of what are known as the 'technical provisions'. Members have been told by the trustee and the employers that - while the scheme may be very profitable at the moment (and increasing its portfolio of investments rapidly) - at some point in the future that is going to change and it will start to run out of money. Just when that happens - and indeed whether it is factually true that it happens at all - depends on precisely what is assumed about the key parameters like future life expectancy, inflation, salary growth, and so on.

We have been assured that the assumptions the trustee is making are conventional within the pensions industry - the USS is merely following good practice that applies to all defined benefit schemes. Members have been told not to worry too much about them because they are 'economic orthodoxy' and some have been convinced by this argument. Well, I believe we should never take anything on trust and should question everything - especially if it is something whose meaning and context are not immediately obvious to us.

It is therefore interesting to compare the USS trustee's assumptions, laid out in its consultation document and annual report, with the findings of a recent survey of pension schemes by KPMG, which reported on 270 companies with defined benefit pension schemes. This shows that some of the key USS-trustee assumptions in fact appear to be out of line with the industry norms. This seems to be the case particularly for life expectancy and mortality, salary growth and inflation.

On life expectancy, the USS trustee assumes that members who retire today at age 65 will live a further 23.7 years for males (25.6 for females). This seems very high in comparison: the survey median for males is 22.5 years (no figure for females). For those currently aged 45 the assumption is that they will live for a futher 25.5 years after retiring at 65 (males; 27.6 years for females) which compares with a survey median of 24.2.

The USS trustee not only assumes USS members to have high life expectancy but in addition that it will continue to improve at a much higher rate than for other workers, which seems surprising. The USS-trustee assumption is that life expectancy will improve at a rate of 1.5% per annum whereas the KPMG survey median is 1.25%. The survey found that 72%* of companies assumed a rate of improvement less than 1.5%. Perhaps we would expect other groups of workers to catch up with relatively long-lived university staff long term. This assumption of a very high rate of improvement in an already very large life expectancy has a significant effect on the viability of the scheme.

On salary growth, the USS trustee's assumption is again out of line with the industry norm. The KPMG survey median assumption is for salaries to grow at RPI (Retail Price Index) plus 0.5% per year. Only 12% of companies assume a rate above RPI+1%, which is what the USS trustee assumes. There is no explanation as to why this very high rate of salary growth is being assumed. Its effect is very large and it appears a very arbitrary assumption which makes the pension scheme seem very expensive.

On inflation, the USS figure is again out of line with the rest of the pensions industry. The USS trustee assumes RPI inflation will continue at 3.6% per annum while the KPMG median is 3.4% (and only 24% of schemes are assuming more than 3.5%). This seems surprising that there should be so much disagreement about inflation.

On all three it seems the USS trustee is making assumptions about the future trends in these figures that have the effect of making it more likely that the scheme will be seen as unsustainable because they have a very large effect on the calculation of the deficit.

Members might be justified in asking why it is necessary to be so much more conservative than the rest of the pensions industry, when it is known that many schemes are already very prudent.

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*Thanks to Susan Cooper for pointing out the error in this figure in the earlier version posted.

Dennis Leech : 31 May 2015 17:38 |  Tags: Pensions Uss; |  Comments (0) |  Close comments |  Report a problem

Socially Responsible Investment: Church of England fund does well

The USS trustee has recently said, in a letter to a member, that the scheme's paramount concern is to "manage the fund in a manner that delivers the best possible returns for its beneficiaries consistent with appropriate diversification and prudence". This is good logic but it does not always follow that an investment fund will perform less well if it bases its selection of investments on ethical principles.

The latest report about the Church of England Investment Fund shows it is possible to be ethical and make a good return

Dennis Leech : 21 May 2015 12:01 |  Tags: Pensions Uss; |  Comments (2) |  Close comments |  Report a problem

Why no legal challenge to the USS trustee?

The pensions regulations place a paramount responsibility on trustees to try and secure the best returns for the members. This has been used as an argument against those who argue that pension funds should not invest in unethical activities such as armaments manufacture, fossil fuels, racism and apartheid, tobacco, and so on. Campaigners have always been told that the only thing that really matters for the trustees is their fiduciary duty and to bring in ethical considerations will go against that.

The same logic ought to govern the overall approach to managing the scheme and not just to the choice of which companies to invest in (assuming the argument is true which I do not - the Church of England investment fund does very well despite having a strong ethical basis). Yet the USS trustee is following a strategy that is not demonstrably in the interests of members just as if it were choosing certain investments for non-financial reasons. If, for example, it decided to divest from cigarette manufacturers, that could well result in lower returns to the fund if the cigarette shares did well. On the other hand, it could make no difference or even benefit the fund if the shares did badly. There is no certainty but the pension fund trustee makes a decision based on what he or she believes.

There is an analogous situation in relation to the whole management strategy at the USS where the trustee is following financial models which have been shown to be wrong rather than their fiduciary responsibility. Whether following the financial models that currently dominate the thinking of the current USS leadership will deliver better returns than pragmatically taking a view about the future or not is a matter of uncertainty. But there surely must be a basis for a legal challenge to a trustee who bases his or her strategy dogmatically on models that have been shown by academic economists and mathematicians to be flawed.

One example is the idea that risk can not only be measured but also managed. That is a very dangerous idea whose consequences we saw during the banking collapse of 2008 when such measured failed. Measures of risk proved to be chimera: of use only when there was little risk but to be unreliable when they were really needed.

Another example is the belief that it is possible to borrow and lend indefinite amounts at the so-called risk-free rate of interest. That might be a reasonable assumption for a small pension scheme worth a few million pounds but is very misleading for a massive scheme as big as the USS, not only the largest pensions scheme in the country but also big enough that its behaviour affects market prices and to have macro-economic effects.

The idea that the returns on an investment can be expressed in terms of its mean and variance, and that the variance measures risk, is not true as a general statement. This is true in the special case where the returns have a so-called Normal (Gaussian) distribution but the statement is not true in general. And it has been demonstrated (by the mathematician Benoit Mandelbrot and others - see Mandelbrot and Hudson, further references to follow) that returns are not normally distributed so it is imprudent, not to say dangerous, to use the model when making real decisions affecting peoples lives. (An excellent critique of financial economics more widely and its role in the 2008 crisis, see Yves Smith, Econned.)

This prompts the question: why, then, do some pensions professionals continue to use models that are flawed and could be dangerous; is that not imprudent? It is a good question to which there is no satisfactory answer. The most likely reason is that the normal distribution is mathematically rigorous and analytically tractable and therefore convenient to use. Results based on it can be described as scientific, objective and so on, and also modern, so there can be an idea of progress. The use of the model has been described as rather like a drunk who has lost his keys in the street and looks for them under the lamp post because that is where the light is.

But that is precisely what the USS trustee is doing. They like to follow the model because it enables them to assume a direct link between risk and mean return. This is the thinking behind their so-called `de-risking proposal' that members are being asked to agree to. Their proposal is that the USS investment strategy is changed (slowly over years) to a lower risk/ lower return portfolio with members agreeing to compensate for the lower return with reduced benefits and higher contributions. But there is no evidence that this will make it more likely that the trustee will be able to pay the pensions promises when they come due. There are compelling arguments that the best strategy could well be to invest to maximise the long-run return. Some actuaries argue against the de-risking idea on precisely these grounds.

There are other examples of the introduction of flawed financial models by the USS trustee which can be challenged. There is an idea among some that assets are only to be considered as random variables following a random walk process. (Again usually based on the application of the normal distribution to ensure analytical tractability.) But investments in real productive assets such as company shares are governed by the real economy. Yet we are told that investing in real productive assets is too risky. Yet long-term we know that there is a substantial so-called equity premium by which shares outperform bonds. A long term investor like a pension fund should be allowed to invest long term since its liabilities are long term. And investment in equities can be seen as contributing to future economic growth if it leads to capital formation.

There is a belief in the idea that markets provide information better than any individual person can. This economic idea, related to the so-called 'efficient markets hypothesis', has been shown to be a fallacy by leading economists (eg Grossman and Stiglitz, American Economic Review, 1980 and others) yet this - what should be authoritative evidence - is ignored by pensions professionals such as the current USS management. Thus, for example, the only way to forecast inflation in the distant future (vital for calculating the pension liabilities) is to look to the market and study the differences between index-linked gilts and others. We are told that such estimates are 'objective'.

And so on. The use of financial models which are flawed in either statistical theory or economics seems to be widespread (though thankfully not universal) in the administration of pension schemes, of which the USS is becoming a leading culprit.

Yet the USS is the pension scheme for the universities. Its members include experts who understand the reasoning and the evidence behind the pensions theory and financial models. We can therefore challenge flawed thinking. We should not accept the suggestion, made, I believe, by someone close the negotiations that such thinking is 'economic orthodoxy'.

I am not a lawyer but I believe there are grounds for at least considering a legal challenge to the trustee on grounds relating to fiduciary responsibility. There is a motion to the forthcoming UCU Congress from the Lancaster University branch calling for such a legal challenge. It is to be hoped that it gets passed and the union takes the necessary action.

Dennis Leech : 20 May 2015 14:26 |  Tags: Pensions; Uss |  Comments (0) |  Close comments |  Report a problem

Ros Altmann the new pensions minister and USS deficits

Just before the election David Cameron announced that the well known independent pensions expert, who was previously the government's Older Worker's Champion, was to be made a Conservative peer. Now she has been appointed pensions minister in succession to the LibDem Steve Webb who had done the job for the whole of the last parliament. Both are experts in their field but they have very different perspectives.

As far as the main question facing the USS, the measurement and management of DB pension fund deficits, is concerned there is a big difference between them. Steve Webb - as was to be expected from one of the Orange Book Liberals for whom free markets are fundamental - was a consistent believer that the deficits computed using market-based ideas are real, and frequently said so. Ros Altmann on the other hand, has been more pragmatic and much less of an economic ideologue. She has, for example, explicitly criticised the USS deficit in an article in the Financial Times, "Scare stories about USS liabilities are overblown".

The article make a number of important points that economic neoliberals like Webb assume away in their belief that the world consists of perfect markets everywhere. For example she says "A fund the size of USS cannot fully de-risk", "Pension funding has become more challenging in a post-quantitative-easing world, where investment risk and mark-to-market pension liabilities have been distorted by Bank of England gilt purchases. This requires a measured, long-term response to pension funding, which can look through shorter-term distortions and readjust over time where necessary. Indeed, switching to bonds at current rates may itself be a `massive bet'.", "Further changes may be required to ensure intergenerational fairness to cohorts of sponsors and members with such a large, open scheme, but this should be negotiated on the basis of long-term forecasts rather than knee-jerk reactions to short-term market factors."

Her appointment probably has little direct relevance to the USS crisis. But it is possible it might lead to a change in thinking about the pensions regulatory system more widely.

Dennis Leech : 19 May 2015 14:12 |  Tags: Pensions; Uss |  Comments (3) |  Close comments |  Report a problem

Interesting discussion on economics organised by the NYRB

A recent conference organised by the New York Review of Books entitled "What's wrong with the economy - and economics?" had some interesting contributions about the state of economics after the crash.

Especially I thought the following contributions to be very stimulating and insightful for anyone with an interest in current debates.

• Philip Mirowski in the session "Who and where are the economists?" (from 48:00) gives a very entertaining talk in which he argues that the real problem is not with macro - which has been the subject of a lot of discussion since the 2008 crisis - but with micro. Micro today has changed fundamentally from what it used to be: it used to be primarily concerned with the efficient allocation of resources. Today it is all about markets as information processors - which have greater capacity and power than any human being or group of humans - and are consequently a threat to democracy and truth.
• Andrew Graham gives another very entertaining and stimulating talk called "Rethinking the teaching of economics" in the session "The education of economists" (from 45:25). He points to the danger of simplistic application of mathematical functions in economics, illustrated with the Phillips curve.
• Paul Krugman argues persuasively that there is nothing wrong with macro theory as such. Keynes' General Theory plus Hicks' IS/LM apparatus from the 1930s fits the present circumstances very well. The problem is not with economics but with policymakers not understanding basic economics and not listening to economists. This is in the session "Economics after the Crash: A Discipline in Need of Renewal?" (from 24:15).
  
• Robert Skidelsky argues the opposite (same session from 38:45). Much of what he says he has said before (and need saying again) but he makes what seems to me to be a particularly insightful point I have not heard before against methodological individualism, an assumption that is widely used and has caused a fundamental change in the way macro is done. In the past macro and micro could be studied separately - macro could be, and often was, taught first in principles courses. But now the focus is on micro-foundations and, with methodological individualism, macro is seen simply as a matter of aggregating individual decisions. He quotes Keynes who argued strongly against this saying that the economy should be viewed as an 'organic unity' rather than simply a collection of Robinson Crusoes.
  

Dennis Leech : 03 May 2015 16:53 |  Tags: Economics |  Comments (0) |  Close comments |  Report a problem

Required reading about pensions: why are there no error margins in valuations?

This article, "Why are error margins ignored in LDI?", in the latest edition of IPE Investment and Pensions Europe, should be required reading for anybody involved in - or with an interest in - occupational pension schemes. It argues that, in order to be of practical use in guiding decisions, valuations of assets and liabilities should be estimated with a margin of error. This point - that is good science but actually little more than common sense - is directly relevant to the current debate about the universities pensions scheme, the USS, whose trustees seem to be ignoring it completely.

The article says that pension schemes rely too much on financial mathematics for valuations, with its precision leading to a false sense of certainty, and fail to learn the lesson from experimental physics: that margins of error in measurements are just as important as the measurements themselves. We could also say that it is a problem in economic thinking due to too much reliance being placed on the idea that competitive markets are in equilibrium - leading to a belief in precise valuations taken as having the status of fact. Such thinking forgets that in the real world there is everywhere statistical error, which is often a very wide margin. An approximate figure with a wide margin of error is often a more accurate description of reality than one presented with spurious precision.

The article begs the question: why is this issue not being actively discussed by everybody involved in running pension schemes, actuaries, accountants, trustees - and the regulator and the government?

Dennis Leech : 03 May 2015 12:36 |  Tags: Pensions; Uss |  Comments (0) |  Close comments |  Report a problem

Misleading picture of USS pension changes in UUK 'heat map'

Universities UK (representing employers) have just (on 20 April) published comparisons of the pensions members can expect under the USS employers' proposals and under existing rules. This so-called 'heat map' is meant to show the impact of the proposed changes to benefits for members of both the final salary and CRB sections of the USS scheme, modelled according to income and to the number of years before normal retirement age. It has been circulated to members (via employers) as new information in the middle of the consultation period.

Surprisingly, it suggests that almost all members, of both the final salary and the career revalued benefits sections, will get better pensions if they agree to the changes! Only those on very high salaries and close to retirement will lose out. This is a totally unexpected story in view of the dire warnings we have been given up to now about the need to address a large and growing deficit.

The figures are actually very misleading and disingenuous because they use over-optimistic assumptions and selective evidence.

Final Salary Section

The comparisons for members of the final salary section are extremely disingenuous. They are for future accrual only. But the main thing that members are worried about is the treatment of past accrual - that is, what their years of service up until the change over will be worth. But that has been completely ignored. Under the proposals past service will give a pension based only on salary in 2016 - rather than at retirement as expected. If salaries are expected to rise by RPI to retirement while inflation adjustment of the 2016 pension is by CPI - which is what the document assumes - this is going to be quite a big difference for most people in the middle of their career.

What members need is a comparison of the whole pension they can expect to receive that takes account of the number of years they have already contributed.

Also the calculation of the defined contribution pension (for salaries above £55,000) is wildly optimistic - see below.

And of course contributions rise from 7.5% to 8%, an increase in costs not mentioned in the comparisons.

CRB Section

The comparison for the CRB section is not surprising given the increase in the accrual rate from 1/80 per year to 1/75 below the salary cap at £55000. That guarantees higher pensions for all but the highest paid. But this ignores the big increase in contributions for this group from 6.5 to 8 percent of salary. It would give a more honest picture to model both changes together.

Also the calculation of the defined contribution pension (for salaries above £55,000) is wildly optimistic - see below.

The new defined contribution section for salaries over £55k

Tha assumptions underpinning the calculations in respect of the new defined contribution pensions (DC) element seem to be very dodgy. The growth rates assumed seem to be wildly optimistic. Apparenltly (according to the 'heat map' document) they have been agreed by both sides - UUK representing employers and the UCU representing members.

There are two issues: assumed growth rates of the DC fund and annuity rates for converting the DC 'pot' into pension - both are higher than seems reasonable or sensible.

For their predictions UUK assume a range of three growth rates: 4.5%, 5.5%, 6.5%. These are very healthy rates of growth and much better than the rates usually used currently in the pension industry for such comparisons: -0.5%, 2.5% and 5%.

Why have these rates been used? It looks like pension misselling on a grand scale. And why have the UCU negotiators apparently (according to UUK) agreed to them? This is surely not in members' interests.

Then there are annuity rates used to convert the pension 'pots' - on the DC element for salaries over £55k - into pensions.

The 'heat map' document assumes the following rates of conversion of DC pot to annuity:

"Joint life annuity rate (long term market conditions) 23.0 (CPI increases, 5 year guarantee)"
"Single life annuity rate (long term market conditions) 21.5 (CPI increases, 5 year guarantee)"

These rates of conversion of DC pot to annuity are more generous than what the USS modeller assumes. They also seem to be better than what one can purchase on the open market.

DC pensions are risky

What this document fails to mention is that the main objection to DC pensions is they transfer all the risk from employers to members. A DC pensions does not deliver a predictable pension on retirement but an uncertain 'pot' of money depending on investment returns in the stock market and so on, which a member is then meant to live on for the rest of their life. A DC pension is not really a pension in the dictionary sense of the word - which is an income for life - but is really a kind of subsidised saving plan to which both the employer and employee contribute.If there is some kind of financial crisis theen members can lose a substantial part of their pension. (For example, what would happen to a DC pension pot if Greece leaves the Euro?)

For most members the DC component is quite small at the moment because it accrues only on salary above £55k. But the expectation is that it will grow in the future especially if - as many expect - we are told there are further funding problems with the defined benefits CRB at the next revaluation in three years' time.

The spectre of future funding shortfalls

The main threat to the DB pension scheme is from funding. If that is deemed to be inadequate at the next valuation then the rules are likely to change yet again and the DC section will expand or replace DB altogether. Many of us (including some of the UCU negotiators) believe the methodolgy used to value pension schemes and work out funding adequacy levels is deeply flawed and does not provide a good guide when gilt interest rates are as low as they are now. This is bad economic thinking by some pension trustees and actuaries and is leading to socially harmful results.

Dennis Leech : 25 Apr 2015 02:33 |  Tags: Pensions Uss; |  Comments (2) |  Close comments |  Report a problem