August 11, 2017

More analysis of the USS 'deficit'

There has been some press coverage of the latest annual report of the USS (for the year up to 31 March 2017). It shows a substantial 'monitoring deficit'. This deficit is larger than last year which has led some to make sensational claims about the scheme needing to cut benefits or increase contributions from employers and/or members.

The real issue is whether we take the deficit as gospel truth or not. Some, such as the head of the employers pensions forum, Professor Koen Lambers, VC of York, accept it uncritically as factual. Others, however, are more sceptical, pointing out that it is a result of the falling interest rate on government bonds or gilts, that has been engineered alongside the 'quantitative easing' policy to try and stimulate the economy. This clearly does not have any effect on pensions either now or in the future, which are defined parametrically by the rules of the scheme: pensions depend on number of years of service and average salary (up to £55k). Gilts rates have no effect on either pensions or the ability of the scheme to finance those pensions through their investment income and contributions.

The debate about the USS is directly related to the wider national debate going on, led by the DWP, about how pension schemes should be valued and whether they are sustainable. Comments have been published here. The two issues should be taken together - not least because the USS is the largest scheme in the system - but some commentators are ignoring the national debate. What is needed is an open debate about the USS that includes pensions experts from different sides of the argument, not just the dogmatists who are tending to dominate.

Here is a link to a recent discussion of the USS situation by a pensions expert that you may find elucidating:

https://henrytapper.com/2017/07/31/is-the-university-superranuation-scheme-suffering-fantasy-deficits/

Here is another:

https://henrytapper.com/2017/08/09/ex-abundanti-cautela-con-keatings-words-of-comfort-to-uss-members/

Finally, the increase in the USS 'monitoring deficit' is nothing to do with increasing longevity. Demographic changes like that occur over very long periods (eg. at least a decade) not over the short period we are observing. The press reports relate to the Annual Report and Accounts for the year to last March. The last valuation related to 2014, and the monitoring deficit does not reflect demographic changes. The cause of the increased monitoring deficit is the very low interest rates that are being used to update the value placed on liabilities from month to month. Journalists should report that and not simply assume the changes in deficits to be due to rapid changes in longevity.

The USS deficit is really like a house that is in negative equity. It is a valuation that does not involve real money - that is, money that has to be paid in normal circumstances. You can continue living in your house as long as you keep up your mortgage payments. John Ralfe is saying - essentially - that the negative equity has always to be paid off immediately it appears. But any sensible person will take a long term and more balanced view.


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