All entries for Thursday 12 February 2015

USS Doublethink

What is alarming about the deal that has just been agreed between the UUK and the UCU negotiators is the doublethink it requires of anyone who believes it offers a solution. It is intended to reduce risk – by making so called technical assumptions on the most prudent basis possible so as to avoid the risk of the money running out for whatever reason. Yet the resulting figure for the so-called deficit that this gives is extremely volatile.

Thus for example we have been told that the deficit was around £12 billion in March but had increased to an estimated £20 billion by December. Normally pensions accounting is very boring with changes taking place gradually over many decades. Yet here we are expected to believe that the deficit has varied by two thirds in only nine months! And no reason is given except vague market conditions. (And we have not had a stock market crash.)

Why did nobody say to the chief executive and the trustees: “Steady on – this can’t be right. There must be something wrong with your model. You have supposedly eliminated risk by using your new methodology, very prudential assumptions and all, yet there appears to be an awful lot more risk/volatility than there was ever before.”

The problem is of course caused by the fact that the methodology is based on purely theoretical financial models with no empirical evidence behind them. In other words blind faith.

The deal does nothing to solve a funding problem but instead makes it worse. The same theories that contributed to the banking crisis in 2007/8 are at work here. We have learned nothing from that experience. And we are told this is ‘economic orthodoxy’ so cannot question it.

Dennis Leech : 12 Feb 2015 16:13 |  Tags: Pensions; Uss |  Comments (0) |  Close comments |  Report a problem