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.