February 01, 2016

The mystery of the USS

Will the USS have enough money to pay all the pensions that have been promised to members? The answer is that we don't know.

A lot of people assume that, because the scheme has been officially assessed as being in deficit, by its actuaries during the three-yearly valuation process, therefore it must be spending above its income. Just like any business in deficit, it must be having to sell assets or running down its reserves to meet its bills. There are indeed many pension schemes in this situation - but not the USS. In fact the USS is still an 'immature' scheme and very cash generative, making an annual surplus of nearly £1 billion. The misunderstanding is due to language: the word 'deficit' is being used to mean something technical, quite different from its normal sense.

The reported USS deficit refers to the fact that the value of assets is insufficient to cover the estimated liabilities. A better term for this might be 'shortfall'. But saying that there is a deficit in this sense tells us nothing about future cash flows, so there may or may not be a deficit at some future point. It all depends on what happens in the future, and estimates of assets and liabilities do not provide more than the most vague and imprecise indications of that.

To assess the health of the scheme it is necessary to make assumptions about what is likely to happen in the distant future: how long members will live in retirement, when they will retire, their future salary increases, inflation rates, interest rates and investment returns. What is assumed makes a huge difference to the liabilities figure, so much so that it is hard to take the deficit as in any way precise. And it is not unreasonable to believe it does not exist - that the deficit is a statistical artifact that depends on the method used.

For example, take inflation. The USS trustees estimate that for every increase in the retail price index measure of future inflation the liabilities estimate increases by £0.8 billion (£800 million). Their last valuation (for March 2015) assumed a long term forecast for RPI inflation of 3.4-3.5 percent per year into the distant future. But currently inflation is negligible, zero percent. I will leave you to work out how many billions difference it makes whether we use the uSS's so-called 'market based' estimate or the real figure taken from the real market. Or we could generously use the government's official target of 2% CPI (2.7% RPI) - despite the Bank of England's consistently failing to hit it. Either way it illustrates what a wild margin of uncertainty there is in these calculations.

The UCU union and UUK university employers are beginning to look again at this methodology by which the assets and liabilities are estimated. They are examining all the technical assumptions to see if they are not so overly prudent as to create a false deficit. This will be welcomed by all members.

But their review must also answer the question of whether there is likely to be enough money to pay the pensions each year. For that they have to view the scheme as a going concern, with money flowing in and being paid out each year into the foreseeable future. Until that is done whether there is enough money will remain a mystery whatever is decided about the assets and liabilities.


- 2 comments by 1 or more people Not publicly viewable

  1. Nick Sparks

    I saw that Prof Jane Hutton has been appointed to the trustee board. That seems like good news!

    (https://www.uss.co.uk/en/news/general/2016/02/new-director-appointed-to-the-trustee-board).

    24 Feb 2016, 10:07

  2. Dennis Leech

    Indeed it is good news.

    24 Feb 2016, 18:50


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