This is the first in a series of three blogs that HEPI is running today, tomorrow and the next day on the state of university pensions and particularly the Universities Superannuation Scheme (USS).
In one of their recent excellent morning emails, the HE team at Research Professional declared: ‘The hole in the [USS] pension fund is now so large that something will have to give’. Like many people, I agree.
Pension experts are like experts in most other fields: they convey the impression that their area is especially complex. The technical details of pensions are of course notoriously tricky: no one ever claimed actuarial science was easy (at least when it is done well).
But in one crucial sense, the complexity of pensions is superficial. At heart, they are very simple. Money is set aside for later use. If there isn’t enough money to match any promises, then there are two options: put more money in or take less money out.
A balance is generally the best approach. If a pension is underfunded, there should be contribution increases and adjustments to people’s pension entitlement. But neither option is popular and what actually happens is not a free choice, thanks to factors like legislation and regulators.
I have just finished reading the outstandingly good book While America Aged by Roger Lowenstein. It looks at the history of occupational pension schemes in the United States, particularly at behemoths like General Motors and New York’s Metropolitan Transportation Authority.
Perhaps the most shocking chapter in Lowenstein’s book looks at the fate of the pension scheme for city workers in San Diego, California. During the 1990s and 2000s, it was clear to those who looked closely that the city would struggle to pay its pension commitments.
So policymakers more than once struck a deal with union bosses, who agreed not to make a fuss on one condition: their members’ pension entitlements were increased. Higher benefits for the workers but no new calls on taxpayers – what’s not to like?
Yet as sure as night follows day, bigger promises from a pension fund that was already underfunded made the problems worse. The hole just kept on growing, meaning the day of reckoning was merely delayed. You can read about the ensuing scandal on Wikipedia.
This may all sound a long way from the challenges faced by UK universities in 2021 but it isn’t. The USS faces an astronomical deficit and, as Lowenstein shows, policymakers, managers and unions are often tempted to put tricky pension decisions off to another day.
It doesn’t change the fact that, as above, there are only two ways to reduce a pension deficit: increasing contributions or reducing benefits. Yet the first is very hard because the USS contributions are already huge and the second is also exceptionally tough.