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We haven’t called for an end to defined benefit pensions for university staff – honest! #USS

  • 20 February 2019

We recently published a new report on the history of the Universities Superannuation (USS) Scheme. It received a warm reception for recounting the little-known history of the foundation of the USS and its first 30+ years of stability as well as the origins of recent troubles.

@HEPI_news report on USS by is well worth reading. 2 random further (unrelated) observations: 1.Many USS employers are, like @LondonHigher, small but seem usually to get overlooked. And 2. Acc. to USS website the senior Group Executive of 7 are all men….— Jane Glanville (@Jane_Glanville) February 7, 2019

Untypically for HEPI reports, the paper received no coverage in the main national press – though we were grateful for the space it enjoyed in specialist outlets, including the Times Higher, the daily email from Wonkhe and HE*.

The lack of wider coverage was expected as the paper took a historical approach, largely avoiding detailed comments or new ideas on the current USS situation (which have been covered in huge detail elsewhere).

Nonetheless, some people chose to interpret the report as an attack on defined benefit pensions in general and the USS in particular. It is, sadly, an occasional unpalatable tendency of some in our sector, when presented with nuance, to spend more effort looking for division than for consensus. 

We were accused, for example, of ‘collaborating around another attack on #USS Defined Benefit pensions’. UCL’s UCU branch said the paper was a ‘one sided anti DB attack that favours employers at the cost of employees’.

Great thread on recent Hillman and HEPI_news take on USS – one sided anti DB attack that favour’s employers at cost of employees… — UCL-UCU (@UCL_UCU) February 8, 2019

It felt a little as if we had written up the early life of Oliver Cromwell and were then being blamed for the English Civil War. But it was not a surprise. Feelings about the USS dispute are raw and the future of the Scheme is far from settled – much the same goes for the Teachers’ Pensions Scheme that many university staff are in too, and which also faces rising costs. So any comment will be searched for apparent hidden meanings.

But it is clear that much of the commentary on our report was from people who were determined to find things that were not there or who had not looking closely at the actual report: one lecturer who publicly criticised our work said she was ‘disinclined’ to bother reading it.

So, to set the record straight, here are five reasons why anyone who thinks HEPI has opposed defined benefit pension provision is wrong.

1. The paper says the main trades union involved in USS matters has proved ‘prescient’ over time on pensions and may prove so again on the maintenance of defined benefit provision. The relevant part reads:

The primary trades union (the AUT and its successor the UCU) have often sought more than seems feasible in the short term, so have tended to look as if they have failed to achieve their objectives. But their positions have sometimes turned out to be prescient. On issues like protecting the value of pensions through increases after retirement, the union position shifted from being out-of-the-ordinary to mainstream (and even statutory). A similar pattern may now be taking place on retaining coverage of universities’ defined benefit pension provision.

2. As the author of the paper, I have long believed that defined benefit pensions provide real advantages to staff. (I just wish I was in one!) I have never hidden this view. In fact, over a decade ago, I wrote a paper, Quelling the Pensions Storm, that is referred to more than once in the new HEPI paper and which looked at the collapse in defined benefit provision. It included suggestions aimed at delivering ‘more access to defined benefit schemes’. My views have not changed.

3. The HEPI paper on the USS shines a light on how babyboomers have done exceptionally well at the cost of better pension provision for younger staff. Someone born in 1950 was there at the start of the USS in 1975, was coming towards the end of their career when new pension regulations made defined benefit pension schemes more secure and then left their role just before the big benefit reductions for current staff took effect. As the report explains, pension schemes must balance many different interests and the interests of babyboomers may have been put too far ahead of others in the USS (and in other schemes) at the cost of the pension entitlement of current staff, including in terms of their access to defined benefit provision. Much the most important paragraph in the whole paper, to my mind (though it has not been mentioned in any of the coverage), is this one:

The problem for universities as employers seeking to be fair to all their employees and unions hoping to help their members is that the baby boomers set the rules governing pensions. This makes pension changes exceptionally difficult and it protects their retirement income at the expense of others because the moveable variables do not include pensions in payment but do include future contributions and future benefits.

This is where pensions regulation seems, in my personal, view to have gone most wrong and to have had the opposite effect to the one intended: instead of protecting the likelihood that younger people will have access to defined benefit pensions, regulations have helped lead to the closure of such schemes. While pensions are partly about long-term planning, inflexibility ossifies them and history shows this ends up in scheme closure.

With only a little exaggeration, Tom Bailey of Imperial summed this point up neatly in a Tweet.

I found this from @HEPI_news interesting on the background of USS – my tl;dr would be: the baby boomers ruined everything, #428175182— Tom Bailey (@baileys72) February 7, 2019

4. Unlike almost all of HEPI’s other output, the USS paper did not put forward any specific policy recommendations. As the ‘P’ in HEPI’s name stands for ‘Policy’, this is very unusual. Indeed, we have often turned papers down because they are insufficiently related to policy and our new Style Guide says a failure to propose constructive solutions ‘is the most common reason why we turn work by academics down.’ This time, clear recommendations were intentionally avoided because we wanted to maximise engagement with the history of the USS by people on both sides of the recent dispute, which is not yet over.

5. The three tentative policy ideas in the press release accompanying the report are tentative and probably far from perfect, but they are designed to protect the pension interests of staff. The ideas are: i) considering whether to stop treating the USS as a one-size-fits-all scheme; ii) bringing pay and pension negotiations closer together; and iii) accepting both sides need to give as well as take. Taking the three points in turn: i) the current dispute, especially the reluctance of some employers to keep the USS open, can only be fully understood once the differences of opinion among the 350+ organisations in the USS are recognised; ii) if pay and pension discussions were brought closer together, it would be clearer that pension contributions are deferred pay and so pension benefits should not be treated in isolation as something that can be easily cut – academics often say they entered their profession on the understanding that they might earn less than elsewhere but also secure a better pension entitlement, yet this trade-off is not properly reflected in current pay and pensions negotiations; and iii) the ‘give and take’ point was primarily aimed at employers, whom consensus opinion now seems to accept have sometimes in the recent past expected too much of active USS members.

Even if it were to prove unfeasible in practice to end the one-size-fits-all nature of the USS now, the wisdom of hindsight suggests the original architects of the Scheme were naïve in putting all the employers in the same pot without ring-fencing each one and hoping this wouldn’t lead to problems – when the higher education sector became more diverse, more competitive and differently funded and when the USS took on so many employers, problems clearly did arise. Moreover, it was also naïve of the architects of the USS to think employers could reasonably cover all the increases in costs over time, though I am not sure this point needed hindsight to work out (and the 65:35 rule shows the expectation has of course since changed).

When I worked in the pensions sector, people’s eyes would glaze over when I told them what I did for a living. Perhaps that was just me … but pensions are regarded as inherently complex, incredibly dull and something that can be put off for another day. Yet, at their heart, the key issues in pensions policy are actually very simple as well as very important: in a funded defined benefit scheme, for example, if there isn’t enough money going in or if a fund isn’t growing fast enough, perhaps because of growing life expectancy or other changes, there won’t be enough to come out at the other end.

I would like to congratulate @HEPI_news @nickhillman for the report on #USS. Nick writes, “we don’t get bogged down in the technical details”, and we are delighted. Probably because Nick doesn’t understand or care, and at #USS we don’t understand or care either. #USSEngage— Billy Galvin (@USSGalvinator) February 7, 2019

Some commentary has taken the mickey out of us for avoiding detailed discussions on the valuation of the USS (see above), but it is not as if much more needs to be said. Moreover, standing provides a reminders that you can’t buck the basic facts of life when it comes to pensions.

Despite the enormous detail that has been published elsewhere, this is what the current dispute is really about and one reason why The Pensions Regulator is so interested in the USS. I see the huge advantages of defined benefit pension provision, and many academics say they might have accepted a better paid job elsewhere if they had thought their pension was insecure. But these important points do not alter the fact that defined benefit provision was never cheap and (as our report shows) has gradually become more expensive because of changes including lower returns, additional regulation and longer life expectancy over time.

Despite this, the history retold in the USS paper shows employers have, at least until very recently, been strong supporters of defined benefit provision. Indeed, the original motivation for a defined benefit scheme for university staff came from the top and, for decades after it began, universities didn’t seriously question its provision.

More recently, institutional support for the maintenance of defined benefit pension provision has waned for a myriad of reasons, concurrent with defined benefit provision largely disappearing, except in the public sector of which universities are not officially a part. But there are many options between a pure individualised defined contribution scheme and a fully-fledged final salary scheme.

In the end, the historical approach taken in our paper was illuminating because of the certainty that, if we pretend not much has changed over the years, then the USS’s problems will deepen rather than lessen – and the biggest losers in that instance would be university staff.

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