Letter to Times Higher Education on the latest re USS
In last week's THE Anton Muscatelli, the chair of the employers side in the universities pension scheme, the USS, announced radical changes to the scheme that would amount - in effect - to a substantial pay cut for academic and related staff consisting of loss of retirement benefits (a cut in deferred pay) and increased contributions (a pay cut). In my view the changes are not warranted and result more from a change in economic ideology towards neoliberal ideas than any objective necessity.
I have sent this letter to the editor in reply.
Letter to the Editor of Times Higher Education
The question USS members are asking is exactly why, given that their pension fund is highly solvent by normal standards, they are being told by Anton Muscatelli, on behalf the the employers, that, on the contrary, it is deep in deficit. The figures show the USS is immensely profitable: the latest Annual Report and Accounts show an income of £2,585.4million and expenditure on pensions in payment of £1,462.0million, leaving a massive net surplus to invest for meeting future needs of £1,123.4million. Of course these figures only tell part of the story and one needs to allow for future demands due to demographic changes, growth in membership and so on - the job of actuaries. Nevertheless they surely indicate that there is currently plenty of headroom, which begs the question for Professor Muscatelli to which members deserve an answer: How does an annual surplus of over a billion pounds become a deficit? Can we please be told?
Instead of giving a clear picture of how the accounts are likely to change in the future, he just announces that there will be deficits, measured in astronomical figures of tens of billions of pounds, without explaining the basis of their derivation. He, rather disingenuously, hints at arguments but does not turn them into reasons when he says: "People’s longer life expectancies and the current global economic upheavals make these challenging times for pension funds..." In fact the evidence is that longer life expectancies are a significant - but still relatively small - factor that does not threaten the survival of the scheme: it simply requires minor changes in the rules. "Global economic upheavals" is a term so vague it could mean anything, perhaps intended to make members believe that the investment returns have been unusually poor. But investment returns to the USS compare well with the rest of the industry and the fund's assets have grown - so that cannot be the source of his growing deficit.
Professor Muscatelli's figures are smoke and mirrors - a flawed methodology for a number of reasons. And one of the most important - a point that Professsor Muscatelli does not mention - is the fact that the new methodology does not count income from contributions (£1,539.6million - enough for all the pensions in payment). Up until now the USS (like other pension schemes) has worked perfectly sustainably as a collective fund on a money-in-money-out basis. But this principle is now to be banned for reasons that can only be described as ideological: it is collectivist. The result of that will mean that this hole of £1.5billion per year has now to be filled which will mean members having to pay twice during the transition period for the retired members on the old pay-as-you-go basis and for themselves on the new fully funded basis.
Professor of Economics
University of Warwick
Coventry CV4 8UW