Suggestions for member responses to the USS consultation, 21/03/15, Dennis Leech's blog

March 21, 2015

Suggestions for member responses to the USS consultation

Here are suggestions for USS members to consider for your response to the consultation, in the light of your own understanding of the USS valuations, and the information and mis-information which has been circulated by UUK and the USS trustees. You can then select questions/comments to contribute to the consultation.

It is in your interests - if you care about your pension rights - to respond to the consultation: many members stand to lose out quite substantially. You should also raise these questions/comments with your university management (if you are not at one of the universities such as Warwick, LSE and Imperial College, which have already challenged the assumptions behind the proposals). There is anecdotal evidence that many universities' managements have not really formed an independent view to inform their vote in the UUK but have tended to follow the conventional line. After all, pensions are complicated and difficult to understand.

The UCU head office have circulated some suggested responses. My suggestions include some in addition to those focussing mainly on specific challenges to the valuation, the way it has been implemented and the assumptions that have been made - all of which threaten the continuation of the scheme. I do not believe the scheme can survive for much longer (as a proper pension scheme - that is, a DB scheme) unless the valuation is challenged by members, both individuals and employers. We have powerful arguments: Warwick University, LSE, Imperial College, Actuarial scientists, First Actuarial.

You should also challenge the so-called de-risking strategy which means changing the scheme's investments so as to forego profitable long-term investment opportunities because they are risky in the short term. This is extremely costly and totally inappropriate given the long-term nature of universities as institutions.

Valuation

The key reasons the employers say they want to make changes to the USS relate to the valuation methodology and funding requirement. UUK suggest the scheme is unaffordable, but the reasoning they have given for this so far is not based on convincing evidence. Indeed some of their reasoning is based on unduly pessimistic assumptions about the future, some of which are contradictory. They were found out exaggerating the increases in life expectancy and had to back down.

Comments members might wish to make:

Demand that UUK and the USS management and trustees respond publicly to the arguments made by the actuarial scientists Professors Jane Hutton, Saul Jacka and others in their letters to them. They should also respond in detail to the arguments put by Warwick University, LSE and Imperial.

Why does UUK ignore the actual historical performance of USS investments? USS investments have done well and can be expected to continue to do so (in line with the growth of the economy). Yet USS trustees assume poor investment performance when calculating the liabilities: they calculate the liabilities using a return on government bonds (gilts) rather than the actual investment portfolio which is a properly diversified holding that includes a wide range of assets. They are not required to do this by the Regulator so why do they insist on it?

Why does UUK ignore the actual historical performance of salaries? The trustees' forecast of salary growth is hence much higher than it currently is. This - arbitrary - assumption makes final salary pensions seem too expensive.

Why have the UUK decided that the sector only has a horizon of 17 years? Why do you not accept the Ernst & Young assessment of robust financial health for at least 20 years?

What is the impact on the estimated actuarial deficit and valuation of varying the length of the recovery period to 20 years (and beyond)?

What is the impact on the estimated actuarial deficit and valuation of using an 'ongoing' valuation instead of a 'solvency' or 'self-sufficiency' valuation? The First Actuarial report indicates that this could make a large - even fundamental - difference.

Why was a self-sufficiency valuation used?

Proposals: New scheme and benefits

Closing the final salary scheme is a betrayal. Members have planned their careers on the belief they would receive a pension and lump sum related to their years of service and final salary when they retire, as promised by the USS and employers. It is unacceptable to replace that retrospectively by a link with their salary in 2016. While the Hutton report argued that CRB pensions were fairer than FS, and recommended that pension schemes make the switch, it did not say that serving members should be moved from FS to CRB. It also recommended that in CRB pensions should be indexed to earnings (so that pensioners would benefit from economic growth) not prices (which is what the USS is proposing, linking pensions to the inferior CPI not even the RPI).

What happens to the death-in-service benefit?

What is the current cost of administering the system?

What is the cost of implementing the USS proposals?

What is the cost of DC: 4% is mentioned in the USS modeller, but it is not clear what the denominator is. If employers contribute 12% and employees 8%, a total of 20%, does 4% of salary go on cost of DC?

How will the £55K cap be applied to part-time workers?

How will the £55K cap be applied to casual workers?

Governance and related issues

What are the risks that the new computer system in USS will not be ready by 1 April 2016?

What approach will be taken if the new computer system in USS is not ready by 1 April 2016?

The proposals involve introducing a DC element for salaries over the £55k threshold and cutting back on DB accordingly. Clearly a DC system moves risk to individuals because there is no guanteed pension or 'pot'. Why have trustees supported moving risk from the collective USS fund to individual members? DC schemes are not really proper pension schemes because they do not lead to a pension in the ordinary sense of the word: they produce an uncertain 'pot' at retirement that can be worth little depending on the vagaries of the stock market. Although such pension schemes are being introduced in the private sector they are nontheless unfair. USS as the largest funded pension scheme in the UK is in a unique position to oppose this trend, not join it.

How much of the trustees' time is taken up by the work? We note the Trustees’ payments are in the annual report, pp96-7. [The highest paid in 2013/4 is Carter (£78k), then Harris (the chairman) £70k, Bull (£70k), Holmes (£55k). The UCU trustees donate their fees to charity and do not benefit financially, under union rule.]

You might ask the trustees if they allowed false information on life expectancy provided by the USS group of the Employers' Pension Forum (EPF) to go unchallenged?

Ask your university management: Did you, as a part of [your university name] senior management, allow false information on life expectancy provided by EPF to go unchallenged?

Can [fill in your university name] University accounting systems manage with the requirements of a DC system?

How many of [fill in your university name] senior staff have opted out of USS as their pensions are too large to get tax benefits?