Is the USS de–risking deficit based on sound thinking about the universities' intentions?

The Universities UK (UUK) did a survey of what is known as the sponsor covenant for USS. That is it asked its member institutions how much they could afford in contributions, whether there was any possibility they might leave the scheme, and such like. They wanted to be able to quantify this source of risk. Ths is obviously vital for the future of the USS. If institutions cease to be members, or to contribute for whatever reason that has major cost implications for the scheme.

In their report Response to the Universities Superannuation Scheme Consultation on Technical Provisions and Recovery Plan of 2 Dec UUK referred to this as follows:

1.6 The sheer range of responses to this consultation – and previous consultation exercises as part of the valuation framework – means that the majority view will not satisfy all employers, and indeed some structural aspects of the USS (such as the exclusivity clause, and the lack of control over benefits and investment strategy at an individual institution level) are causing real concern for some. In our response to the March consultation exercise we said we would welcome a further review of mutuality and potential sectionalisation. The diversity of institutions’ views expressed in recent consultations makes it imperative that this review takes place sooner rather than later. We suggest that this review commences as soon as the 31 March 2014 valuation process is completed.

This is a major part of the case for 'de-risking' that is costing over £5 billion of the deficit that members (including those same institutitons) are going to have to pay.

I find this particular part of it amazing:

"some structural aspects of the USS (such as ... the lack of control over benefits and investment strategy at an individual institution level) are causing real concern for some."

This leads me to wonder if these universities thought properly about what they have said before pressing the 'send' button. Have they investigated in practical terms what sort of pensions they will provide and what the cost will be? I am almost tempted to think that their response to the survey has been filled in by someone with limited understanding of how pension schemes work. And also that they have not properly considered how the information would be used in relation to the future of the USS.

They say they want to have control over benefits and investment strategy at an individual institution level. It is hard to believe they would want welcome such control. They would find providing good pensions a lot more expensive because they would be giving up the enormous economies of risk sharing in both investment management and the payment of benefits.

Moreover it seems to go against the experience of some institutions that have found their own SAT schemes too expensive and have had to cut them (eg Warwick). All the evidence is that foregoing the economies of risk sharing in both investment and payment is extremely costly - 50% is the figure based on empirical studies.

[It is also worth considering the fact that most independent schools provide pensions to their teachers through the TPS. They know how expensive pensions are and what good value a large DB scheme like the TPS is. (BTW this represents a huge subsidy to the piviate sector in education that is almost never mentioned.)]

The alternative interpretation of their words is more chilling: that these institutions see themselves as only providing very poor off-the-shelf DC benefits. Getting out of the USS would then be an opportunity to cut costs. Yet they would still be saddled with a huge legacy bill to pay the DB pensions they are already committed to provide.

Either way, how can they see that as in their interests?

Dennis Leech : 18 Jan 2015 01:31 |  Comments (2) |  Report a problem