All 7 entries tagged Pensions;Uss

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August 26, 2019

The USS dispute is not about cost sharing but the survival of defined benefit pensions: a rejoinder

What is at stake in the USS dispute is the survival of defined benefit pensions.

The UCU negotiators have repeatedly shown that there is no need for contribution increases or benefit cuts, that the scheme as it currently exists can continue in existence indefinitely provided it is managed in a way that seeks to make that happen. The reason is that it is a multi-employer scheme designed for a unique sector, the pre-92 universities. The pre-92 universities not only provide world class scholarship, research and education but, as a sector, can be seen as one of the UK’s most successful industries. That should be at the front and centre of all discussions about the USS: its unique nature means it has very little in common with other private sector schemes and should not therefore be compared with them.

Unfortunately the USS Employers in their latest response to the UCU have demonstrated that they are not engaging with that view and give no indication of their intention to do so. Their letter is full of innuendo and half-truth and does not deal with the arguments. It underestimates the intelligence of university staff and many will feel insulted and devalued by it.

The choice for the USS is between two possible alternative courses:

(1) that it continues to be an open ‘defined benefit’ scheme that provides guaranteed pensions based on salary and years of service, on an ongoing basis with an indefinite time horizon, open to new members, supported by a strong employer covenant that is continuously monitored; or

(2) that, in common with most private sector company schemes, it may decide that the various risks of staying open are too great, and do what they have done, close to further accrual, with consequent increases in contribution rates, as was proposed last year. New members will be offered an inferior ‘defined contribution’ plan that does not lead directly to a solid pension but uncertain benefits. Employers will take advantage of this change to cut their contributions as well as transferring all the risk.

These two alternatives require the scheme to be viewed in different ways that lead to different investment strategies and different ways of managing risk. And two different valuations. Any decision about the future of the scheme requires a comparison of both.

If the scheme is assumed to remain open, as in alternative (1), providing that there is positive cash flow available for long term investment, in a suitably diversified portfolio that includes high return assets such as equities, there will be healthy income to pay pensions in the future. The main source of investment risk - short term asset price volatility - can be managed. Since the pension payments are long in the future, it is long term investment returns that matter, and short term volatility can be ignored.

In fact in an open ongoing scheme that is cash flow positive like the USS, any downturn in the stock market is an advantage, not a threat - because it means assets can then be purchased more cheaply, reducing the cost of future service accrual.

The valuation of an open scheme ideally requires a comparison of projected income flows with projected outgo in pension payments. The UCU have repeatedly asked the USS to carry out such an analysis without one having yet been published. Our actuarial advisor First Actuarial have provided such analysis that strongly points to the scheme being sustainable. It would be good if the UUK joined us in demanding the USS carry out a similar analysis using the complete data set that they have available.

Alternative (1), of course, depends on there being a strong employer covenant. The covenant risk to the scheme is essentially the insolvency of all the pre-92 universities. The risk from insolvency of individual institutions is offset by the collective nature of the scheme, so called ‘last man standing’. The risks facing the scheme are essentially those facing the pre-92 higher education ‘market’ as a whole. That does not seem a likely prospect at the moment. If that begins to change it will be noticed in the periodic review of the scheme and in the triennial valuations. It does not seem realistic to assume it will happen suddenly without warning.

Alternative (2) is the only one that the USS employers, executive and most of the trustees seem to be willing to countenance. It denies the unique nature of the USS as a sector scheme and treats it as if it were a mature single employer scheme. It assumes the scheme matures and then the job of the trustees is to manage the ensuing runoff. The whole emphasis is on risk rather than return, making sure the invested funds can pay the pension promises with absolute certainty. Paying the pensions depends on the investments being risk-free which means investing in government bonds.

The problem - and the source of the dispute - is that government bonds are no longer a good investment. Twenty years ago they would have produced a return of perhaps 2% above inflation but today, thanks to post-crisis monetary policy and quantitative easing by the Bank of England, the rate of return after inflation is negative.

Yet the policy of the USS, supported by the UUK employers, ignoring the thinking of the Joint Expert Panel, of so-called de-risking, is to invest in assets that are guaranteed to lose money. This is regarded as a low risk strategy on the grounds that the loss is certain. This is surely an absurdity. De-risking actually increases the risk to the scheme that it cannot pay the pensions when they fall due because the loss on the gilts has to be paid for by the members and employers. This is what is driving up contributions and threatens the survival of the scheme.

It should be noted also that interest rates on government bonds are no indication of investment returns more generally. The expected long term return on equities and other forms of patient investment in the productive economy (rather than lending to the government) continues to be sufficiently high to pay the benefits.

Essentially the defined benefit scheme is being undermined by the herd mentality group think of the pensions experts in the USS executive. They are applying thinking from the past - when it was rational for pension schemes to invest in government bonds that produced a steady though modest return as part of its risk management - to today’s conditions of negative risk-free rates. It is an example of how real damage to people’s welfare can result from the continued unreflective use of an economic model when the conditions for its application do not hold or have changed.



August 18, 2016

Pension deficits: mark–to–market valuation is the elephant in the room

The chief economist of the Bank of England, Andy Haldane, has said he hasn’t a clue about pensions. It is not surprising when so many occupational schemes have a deficit that stubbornly just keeps on growing. They have agreed a recovery plan with the pensions regulator to ensure there will be enough money to pay the pensions promised when they fall due - but still the deficit grows seemingly uncontrollably.

The latest estimate for the total deficit for defined benefit schemes eligible for entry to the pension protection fund was £383.6bn at the end of June 2016, up from £294.6bn at the end of May an increase of £89bn in one month. The combined funding level has fallen to 78 per cent, close to its lowest ever level. There were 4,995 schemes in deficit and only 950 schemes in surplus.[1]

The blame for this is most often put on the fact that pensioners are living longer than expected. But that is not convincing and can be only part of the answer: deficits are changing too fast to be due to something as slow moving as longevity trends - that are anyway allowed for in the recovery plans that have been devised. The other explanation often trotted out is the catch-all ‘market conditions’ which covers a multitude of factors. This usually means low interest rates, casually and wrongly equated with poor investment returns.

No. It is the regulations governing pension scheme valuations that are mostly to blame for this unsustainable situation. They are the elephant in the room of the pension deficits story that is being ignored by most of the industry. They are not fit for purpose and urgently need to be revised. They force pension schemes to have to deal with extraneous – even spurious - risk factors which exaggerate deficits. The effect – as we have seen in recent years - is to force many schemes to close.

Deficits have grown substantially since the 1990s when minimum funding requirements were introduced. The 2004 Pensions Act set up the pension protection fund to reduce the risk of pensions failing due to the sponsoring company failing. But it also tightened up on funding rules and imposed an inappropriate market-based valuation methodology[2]. Accounting regulations based on this methodology are at variance with real-world economics. They are based on a purist belief in markets as a source of information - ignoring all evidence from academic economics, both empirical and theoretical, showing the limitations of markets as providers of information. They were intended to prevent pension schemes needing to enter the pension protection fund but in fact have had the reverse effect by making sponsor failure more likely.

It is only policy makers who can deal with this problem. They need to take an overview of the consequences of mark-to-market accounting and revise the valuation regulations in the light of experience.


... To continue reading access the full paper here or here.


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The paper has been submitted as evidence to the enquiry being conducted by the House of Commons DWP Select Committee (chair Frank Field MP) and to the DB Task Force by the Pensions and Lifetime Savings Association (chair Ashok Gupta).


October 27, 2014

The pensions crisis: recommended reading

The best account I have read of the pensions crisis is this booklet: 'You're on your own'

It explains how Defined Benefit pensions (whether final salary or career average salary) are far superior to Defined Contribution pensions (building up a 'pension pot' that you cash in on retirement and use in whatever way to support yourself for the rest of your life).

It also explains how we got to the present situation with good DB pension schemes being closed in company after company. It puts the current USS crisis in perspective.

youreonyourownaug11.pdf


October 15, 2014

Error in Times Higher Education article on USS corrected

The Times Higher Education reporter Jack Grove has now corrected his article after I pionted out his mistake in claiming a deficit of £8 billion PER YEAR. In fact there is a surplus of £1billion per year.

The article still repeats the claim trotted out by the employers that the deficit is caused by poor investment returns.

It would be good if the magazine were to be a bit more balanced and not simply take what the employers say at face value.


September 01, 2014

USS is highly solvent – so why do the employers want to cut it?

The question USS members are asking is why, given that their pension fund is highly solvent by normal standards, they are being told by Anton Muscatelli, on behalf of the employers, that, on the contrary, it is deep in deficit.

The figures show that the USS is immensely profitable: the latest annual report and accounts show an income of £2,585.4 million and expenditure on pensions in payment of £1,462.0 million, leaving a massive net surplus to invest for meeting future needs of £1,123.4 million.

Of course these figures tell only part of the story, and one must allow for future demands resulting from demographic changes, growth in membership and so on – the job of actuaries. Nevertheless, they surely indicate that there is currently plenty of headroom, which raises the question to which members deserve an answer from Muscatelli: how does an annual surplus become a deficit? Can we please be told?

Instead of giving a clear picture of how the accounts are likely to change in the future, he just announces that there will be deficits, without explaining the basis of their derivation. He, rather disingenuously, hints at arguments but does not turn them into reasons when he says: “People’s longer life expectancies and the current global economic upheavals make these challenging times for pension funds…”

In fact, the evidence is that longer life expectancies are a significant but still relatively small factor that does not threaten the survival of the USS final salary scheme: it simply requires minor changes in the rules. “Global economic upheavals” is a term so vague it could mean anything: perhaps it is intended to make members believe that the investment returns have been unusually poor. But investment returns to the USS compare well with the rest of the industry, and the fund’s assets have grown – so that cannot be the source of his growing deficit.

Muscatelli’s figures are smoke and mirrors. His is a flawed methodology for a number of reasons. And one of the most important, which Muscatelli does not mention, is the fact that the new methodology does not count income from contributions (£1,539.6 million – enough for all the pensions in payment).

Up until now the USS, like other pension schemes, has worked perfectly sustainably as a collective fund on a money-in-money-out basis. But this principle is now to be banned for reasons that can only be described as ideological: because it is collectivist.

Dennis Leech
Professor of economics
University of Warwick

This is the text of my letter as published in the Times Higher Education on 31 July 2014 (http://www.timeshighereducation.co.uk/comment/letters/short-changed-on-pension-details/2014838.article)


July 27, 2014

Letter to Times Higher Education on the latest re USS

In last week's THE Anton Muscatelli, the chair of the employers side in the universities pension scheme, the USS, announced radical changes to the scheme that would amount - in effect - to a substantial pay cut for academic and related staff consisting of loss of retirement benefits (a cut in deferred pay) and increased contributions (a pay cut). In my view the changes are not warranted and result more from a change in economic ideology towards neoliberal ideas than any objective necessity.

I have sent this letter to the editor in reply.


Letter to the Editor of Times Higher Education


Dear Sir

The question USS members are asking is exactly why, given that their pension fund is highly solvent by normal standards, they are being told by Anton Muscatelli, on behalf the the employers, that, on the contrary, it is deep in deficit. The figures show the USS is immensely profitable: the latest Annual Report and Accounts show an income of £2,585.4million and expenditure on pensions in payment of £1,462.0million, leaving a massive net surplus to invest for meeting future needs of £1,123.4million. Of course these figures only tell part of the story and one needs to allow for future demands due to demographic changes, growth in membership and so on - the job of actuaries. Nevertheless they surely indicate that there is currently plenty of headroom, which begs the question for Professor Muscatelli to which members deserve an answer: How does an annual surplus of over a billion pounds become a deficit? Can we please be told?

Instead of giving a clear picture of how the accounts are likely to change in the future, he just announces that there will be deficits, measured in astronomical figures of tens of billions of pounds, without explaining the basis of their derivation. He, rather disingenuously, hints at arguments but does not turn them into reasons when he says: "People’s longer life expectancies and the current global economic upheavals make these challenging times for pension funds..." In fact the evidence is that longer life expectancies are a significant - but still relatively small - factor that does not threaten the survival of the scheme: it simply requires minor changes in the rules. "Global economic upheavals" is a term so vague it could mean anything, perhaps intended to make members believe that the investment returns have been unusually poor. But investment returns to the USS compare well with the rest of the industry and the fund's assets have grown - so that cannot be the source of his growing deficit.

Professor Muscatelli's figures are smoke and mirrors - a flawed methodology for a number of reasons. And one of the most important - a point that Professsor Muscatelli does not mention - is the fact that the new methodology does not count income from contributions (£1,539.6million - enough for all the pensions in payment). Up until now the USS (like other pension schemes) has worked perfectly sustainably as a collective fund on a money-in-money-out basis. But this principle is now to be banned for reasons that can only be described as ideological: it is collectivist. The result of that will mean that this hole of £1.5billion per year has now to be filled which will mean members having to pay twice during the transition period for the retired members on the old pay-as-you-go basis and for themselves on the new fully funded basis.

Yours sincerely


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
(+44)(0)2476523047


November 07, 2013

Society is not a Ponzi scheme

The Times Higher have published my letter commenting on their article last week about the 'black hole' in the USS. When considered as an ongoing SOCIAL institution rather than in purely financial terms the black hole disappears and the picture looks different. My comments are about pension schemes in general not only the USS.

The original title of my letter was 'Society is not a Ponzi scheme' referring to the comments of a so-called pensions expert John Ralfe, who is someone who believes that pensions should be administered according to the purest maxims of neoliberal economics - as if all markets functioned perfectly at all times and all human beings were omniscient. Ralfe is an active campaigner who rejects the actuarial principles on which pension schemes are normally run, whereby it is normal to count contributions coming in from members to help towards paying pensions, as a 'Ponzi scheme'. This is convoluted logic with so many flaws there is not space or time here to cover them all. (The market cannot know how long human beings might live in the future, once they have retired, for example.) Market based solutions like this are so unrealistic they can never replace the role of society.

Ralfe is a self-style expert and an zealous campaigner for this neoliberal world view. See this report in the Financial Times.

There are many people pushing neoliberal politics. It is an ongoing legacy of Thatcherism. What is frightening is that they are not just being debated in the political space but actually being implemented in the field of pensions under our noses. We are sleepwalking into a tragedy where - because an impractical ideology has been allowed to go unchallenged - many millions will end up with an inadequate income in retirement or not be able to retire.


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