USS issue is fundamentally an intellectual dispute

The USS dispute is primarily an intellectual issue. During the consultation period - when members can have their say about its future - it needs to be addressed as such by the university community.

We know that the scheme is very profitable. It currently makes an annual surplus of over £1 billion after paying the pensions of retired members. There are good grounds for believing that it will probably remain in surplus for at least 20 years. See the First Actuarial report that was commissioned by the UCU. Unfortunately the USS trustees have not carried out this analysis (or if they have they are keeping it secret) and have yet to answer the questions that First Actuarial put to them which would enable us to see the true situation.

Instead they tell us there is a deficit that is not only large but getting bigger (and increasingly volatile). But the methodology they use is highly questionable, being based on untested economic beliefs from the neoliberal faith. It assumes it is possible to assess the health of a pension scheme solely by looking at the market value of its assets (its investments) and estimated liabilities (an imputed figure to represent the pensions already promised) at a moment in time, without needing to worry about the cash flows that are actually needed to pay the pensions promises.

A lot of assumptions are required for this methodology, many of them highly debatable - they are held as articles of faith by the practitioners. The main idea is that 'the market' knows more than any human ever can: specifically it can forecast the future - ergo there is no need for actuaries to bother trying to model the future income and pensions: asset prices contain all information about future investment returns and after some more assumptions are swallowed a valuation for liabilities is calculated as well. These figures are presented without any estimates of error and the difference is called 'the deficit'.

Although these criticisms have been made by academic experts, economists, statisticians, financial mathematicians, actuarial scientists, philosophers and others (both as individual academics and through their institutions, notably LSE, Warwick and Imperial) as well as UCU negotiators, the UUK and the USS trustees will not discuss them. They behave as if their approach is a kind of orthodoxy to which there can be no alternative and refuse to engage in open intellectual debate. They present their opinion as objective fact.

So they have told us that the deficit as of March 2014 is estimated at over £12 billion, but has increased to £20 billion by January 2015 due to unspecified 'market conditions'. In the past, before this mark-to-market methodology was adopted, actuaries used to calculate pension scheme variations over periods of decades reflecting demographic and economic trends. If there was a funding problem it would show up over many years and could be dealt with soberly and responsibly. Yet here we have a massive two-thirds increase in the deficit in a matter of a few months. That should surely show us all that the method is not fit for purpose.

The methodology: requiring all pension schemes to be funded, in the technical sense of assets being always at least equal to liabilities, in order to protect the pension protection fund - was actually made law by the Pensions Act 2005 and associated regulations. Like much Blair-era legislaton it has had dire unforeseen consequences that has led to many workers in the private sector losing their pensions as schemes have closed.

The problem is that the liabilities calculation is not reliable. When government bond rates (gilts) go lower - as they are now under the government's so called quantitative-easing policy the liabilities figure becomes larger and more unstable. That is what is happening - but it has little if anything to do with the actual future pension requirements. Some gilt rates are even so low they are below inflation, hence negative in real terms: when that happens the method would seem to fail.

The fact that so many university managements are unthinkingly following the USS management and going along with this is a real intellectual failure on the part of British universities. They are not doing their job of independent enquiry leading to their taking a view of the true situation - and moreover on a matter that applies to their own material interests where they should have a strong incentive to get it right. It is not the role of universities to simply follow convention, even if some of the negotiators have claimed it to be 'economic orthodoxy'.

The trustees' role is to ensure there will be enough funds to meet the pension payments when they fall due. They means - fundamentally - looking at income and expenditure going forward into the long distant future. That means taking a broad overview - and not relying on the belief that the market provides superior information.

Dennis Leech : 17 Mar 2015 15:03 |  Tags: Emh Pensions; Uss; |  Comments (0) |  Report a problem