Missing step in pension fund accounting: more information on the USS deficit needed

Not infrequently we hear that a pension scheme has a funding deficit, its assets failing to match its reported liabilities, while at the same time it is solvent in the sense that its income exceeds its outgoings. This seeming paradox demands an explanation yet the accountants and actuaries do not seem to think one necessary.

A salient example is that of the USS, whose liabilities were estimated last September to exceed its assets by some £13.1 billion. Yet last year its net surplus was £1.2 billion - income from contributions plus investments of £2.6 billion less payment of benefits of £1.4 billion, a sizeable figure which, while of course telling us nothing about the future pressures on the scheme, nevertheless suggests that there could well be considerable headroom before any solvency problems, if any, emerge. Or even that the deficit is a statistical artefact and not a useful guide to action.

The reported assets and liabilities figures for a large scheme like the USS, which covers a large a sector of the economy, are largely notional in that there are no sensibly conceivable circumstances in which they will ever need to be paid. They come out of the black box of finance theory. What matter are the real flows of income and expenditure every year and how these evolve over time.

There is a missing step in the accounting procedure for pension funds: what is needed is exactly how it is that the notional balance sheet deficit becomes manifest as an income/expenditure deficit and at what point in time that happens. Or if in fact it never happens. It should not be too difficult to provide that information.

(Letter submitted to the Financial Times)

Dennis Leech : 06 Oct 2014 11:59 |  Comments (0) |  Report a problem