All 7 entries tagged Pensions;

No other Warwick Blogs use the tag Pensions; on entries | View entries tagged Pensions; at Technorati | There are no images tagged Pensions; on this blog

September 23, 2014

USS Pensions: Reply to Private Eye

The current edition of Private Eye contains a highly misleading report about the universities' USS pension scheme (Gray-vy train, Eye no. 1375, 19 September-2 October 2014).

The report draws attention to the salary of the fund's chief investment officer, Roger Gray (up last year to £900k from the previous year's £600k) and suggests it is unjustified given the reported funding deficit leading to probable cuts in benefits to members.

It says:"While academic eyebrows will be raised over a pay packet more than 20 times as much as many of theirs, they might also question those running the scheme and responsible for the dubious investment policy."

This is actually a load of tripe (as the Eye might say). Last year the scheme's investment portfolio earned a respectable 7.6% return. (uss_warns_of_substantial_deficit_as_fund_returns_76_news_ipe.pdf.) It is the opposite of the truth to call that a dubious investment policy. Too often investors' bonuses are unrelated to performance but in this case Mr Gray's increase is actually based on good performance.

The article repeats criticisms of the USS investment policy that are familiar to anyone who has been following the debate. The deficit is actually a result of a controversial accounting methodology that treats the scheme as if it is one for employees of a small private company rather than the whole pre-92 Higher Education sector.

If the USS is regarded in the same way as other public sector schemes such as the Teachers Pension Scheme, on a pay-as-you-go basis, measuring its health in terms of its income and expenditure, it is actually in good shape: its income from its investment portfolio was over £1billion according to last year's accounts and with increasing membership.

Whether or not its investment strategy is wrong depends on which of these two views is taken. If it is a scheme for an important part of the UK education sector it wll have a very long (or indefinite) time horizon and will best be invested in equities to get the higher return over the long term. But if universities are seen as firms operating in the market place - and could go bust at any moment - then equities are too risky.

It is not clear that USS's investment strategy is wrong.


September 22, 2014

Letter to THE: Plea for more balanced reporting on USS

I have complained to the Times Higher Education magazine about their reporting about the USS. They tend to present deficit figures as if they are given facts rather than misleadng statistics derived from the misapplicaiton of financial theories. Fair reporting would at least acknowledge that the whole question of the deficit is political and highly controversial.

I would recommend that all should heed the advice of the Cambridge economist Ha-Joon Chang in his latest book "Economics: A Users Guide" and in his recent Guardian article "Economics is too important to leave to the experts" After all we are all participants in the economy and as such users of economics.


Letter to the Times Higher Education to be published on 25 September.

Dear Sir

I wish to complain about your reporting about USS pensions. Your reports tend to imply that statistics show a funding deficit as if the USS's assets and liabilities are objective scientific truths when in fact they are based on theories.

There are two principles on which DB (defined benefit) pension schemes are organised: pay-as-you-go - used throughout the public sector including the teachers' pension scheme - and funding - used for smaller pension schemes offered by private sector employers in the risky market place. How we think about the USS depends on which of these principles we apply. Viewed as a PAYG scheme USS appears to be financially strong with an annual surplus of over a billion pounds a year, a strongly performing investment portfolio and growing membership. The deficit figures you quote come from regarding USS as if it were the other type of scheme, one belonging to a small company that must be prudently managed against the likelihood of the firm failing. But to apply that approach to the whole pre-92 HE sector covered by USS is to misuse a theoretical model by applying it in circumstances it was not designed for and in which it will cease to work. We have heard a lot about economic models failing in the financial crash of 2008; we have the same issue today with pensions.

Can I suggest that you follow the advice of Ha-Joon Chang when he says "Economics is too important to leave to the experts"? Rather than taking on trust the opinion of someone styled as a pensions expert (as you frequently do) you actually get them to justify in detail what assumptions they are making, and recognise that the whole issue of the state of the USS is in fact highly controversial.

Dennis Leech
Professor of Economics
University of Warwick
Coventry CV4 8UW
d.leech@warwick.ac.uk
www2.warwick.ac.uk/fac/soc/economics/staff/faculty/leech
07712353201


January 14, 2014

Breach of the intergenerational social contract: my letter published in the FT

The Financial Times has today published my letter on pensions and intergenerational accounting responding to Janan Ganesh's article about how lucky the baby boomers have been. It can be downloaded from here.

I argue that it is not only bad luck but also a changed social contract - as neoliberalism replaces social solidarity as the principal idea underpinning pensions - it means that the young not only have to be satisfied with inferior pension arrangements but in addition are having to pay the transition costs of switching to this inferior situation.

In addition, I make the point that the intergenerational conflict is not as it is often portrayed - a zero sum game between young and old - but the young themselves will become the old in due course, so they have a direct personal interest in good pension arrangements.


November 11, 2013

Scare stories about USS pension scheme are overblown

There is an excellent article by Ros Altmann, the well known pensions expert, in the Financial Times today.

She says that the concerns about the USS deficit that have been expressed by John Ralfe (on BBC Newsnight and in the FT) are overblown.

Hers is a similar argument that Con Keating and myself put forward in somewhat less measured language last week.


November 05, 2013

Fantasy world of pension deficits

Last Monday the Financial Times ran an article, by independent pensions consultant, John Ralfe. that alleged that there was a massive 'black hole' in the Universities Superannuation Scheme, the USS, the second-largest private pension scheme in the UK. This repeats the sensational and irresponsible allegations he made on Newsnight the previous week.

Here is the reply by Con Keating and myself published in today's Financial Times pointing out that this is Alice in Wonderland economics.

John Ralfe famously, when he was finance director of Boots in 2000 and 2001, moved the investments of the pension scheme from a balanced portfolio to 100% bonds based on new theories from financial economics and against conventional actuarial practice.

About the same time actuaries were being told (by Ralfe and others, for example Exley, Mehta and Smith) that markets are efficient and market prices contain all the information there is. Therefore market prices of financial assets like shares and bonds must be objective, scientific values. This led to the development and enactment of supposedly objective accounting rules meaning that actuaries and accountants need do little more than calculate market values for assets and liabilities in order to value pensions. But the idea that markets are efficient in this fundamentalist manner has been questioned by many economists following the financial crisis where many market values turned out to be illusory.The evidence against the efficient markets hypothesis is surely by now overwhelming and it is shocking to find somebody still advocating it in the face of that.

Ralfe is saying is that pension schemes must always be fully funded - that is, they must have enough assets to cover their liabilities at all times. And any that do not - because they rely on payments from future service and new members - or because the calculation of the liabilities figure is unrealistic - are in deficit and must find the money to fill it. This is insisting on suddenly changing the model - a bit like telling all householders they are in deficit because they have a mortgage and have to pay it off - a model that is known to work well is replaced by one that does not - for what are essentially ideological reasons.


September 29, 2012

Effects of QE and low interest rates on pensions worse than SAGA study shows

Writing about web page http://www.saga.co.uk/newsroom/press-releases/2012/september/pensioners-billions-of-pounds-out-of-pocket.aspx

Ros Altman (Pensioners billions of pounds out of pocket and Pensioners left £11.5bn worse off by economic policies, Guardian website, 14 September) underestimates the damage done to pensions as a result of low interest rates due to quantitative easing. The report she quotes only looked at money purchase (defined contribution) pensions.

But low interest rates are also playing havoc with defined benefit (mostly final salary) pensions. Although many employers have closed them to new members still about a third of members paying in to these schemes work in the private sector. We usually think of final salary pensions as secure and immune from the vagaries of market forces but that is no longer true.

There is increasing evidence, both from academic research and lived experience, that legislation enacted by the last government aimed at protecting private pensions is in fact having the opposite effect when combined with QE. This situation has led to calls for reform of the way pensions funding levels are calculated, from the National Association of Pension Funds and the CBI.

An unintended consequence of the reforms brought in in 2004 is that very low interest rates like we have now create an artificial deficit for many pension schemes. The reason is technical, to do with the way the liabilities must be evaluated. This makes pension funds appear to be in deficit even though in reality they have enough income to pay the pensions on a sustainable basis.

The legislation requires companies to make extra payments (through a ‘recovery plan’) which many of them cannot afford. So they decide pensions are unaffordable, cut retirement benefits that existing members will receive, and increasingly close the schemes to new members.

The extra payments (estimated last year to be worth £11.6billion for the FTSE100 companies alone) that companies have to make are taking funds away from investment, dividends and wages which not only affects the supply side of the economy but also reduces demand, worsening the recession.



September 26, 2012

Is the recession made worse by company pensions recovery plans?

Many occupational pension schemes in the private sector are in difficulties because they are in deficit. The value of their investments in such as company shares and government bonds is not sufficient in present circumstances to cover their projected pensions to their members.

The consequence is that the companies sponsoring them are being required by the Pensions Regulator to make additional payments as part of a recovery plan - over and above their normal contributions.These payments have to come out of either wages, capital investment or dividends. The effect is likely to be heavily deflationary, taking spending power out of an already depressed economy, making the recession worse.

Although many defined benefit or final salary pension schemes are now closed to new members, they still represent over half of the assets in private funded pension schemes.

There is evidence that the effect in the whole UK economy could be very large. The publication Pension Trends from the Office of National Statistics suggests it might have been of the order of £15 billion per year in 2010.

Also an article on the website Pensions World (Pension Scheme Deficits Double over Last 12 Months) estimates that these payments for the FTSE100 companies alone last year were £11.6billion.

These big payments are a consequence of the rules governing defined benefit schemes. Every pension fund has to be fully funded at all times. But low interest rates (as now) artificially inflate the liabilities creating a funding gap. This is compounded by low asset prices and poor investment returns.

So far there has been no research on the macro-economics effects of these special payments. It would be good to have estimates of their effects on GDP and unemployment.


Blog archive

Loading…

Search this blog

Not signed in
Sign in

Powered by BlogBuilder
© MMXXIV