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University pensions: ‘If something cannot go on forever, it will stop.’ PART I: THE UNDERLYING CHALLENGE

  • 9 February 2021
  • By Nick Hillman

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.

The second part of this three-part blog will be posted tomorrow here. The third part will appear on the following day here.


  1. Thanks for taking the time to share the benefits of your expertise and opinions on the USS valuation.

    Could you clarify a couple of things:

    a) What discount rate did the schemes Lowenstein wrote about use, and how does this compare to the discount rates the USS is proposing for the 2020 valuation?
    b) The San Diego pension scheme actions were unlawful, and the SEC sought prosecutions for fraud. Could you explain the relevance of this fraud for the USS? Are you claiming the USS is committing fraud?
    c) You claim “The USS faces an astronomical deficit” under what assumptions, what discount rate and “level of prudence” are you claiming the scheme has a deficit? The USS Trustee has proposed increasing the level of prudence from the 67% used, and deeded acceptable in 2018 valuation to between 73% and 85% for the 2020 valuation. This change to the valuation methodology appears to increase the scheme’s deficit by between c£7.4bn and c£9.5bn. The Trustee has provide little credible evidence to support making this change.
    d) The USS’s assets have increased by £12.4bn between the valuation date in March and November 2020. The only way to maintain the pretence that the scheme has a deficit is by using an extraordinarily low real discount rate of (e.g. -0.69% in the USS’s Nov FMP). This discount rate assumes that the scheme will lose 20% of its value over the next 20 years. Do you believe this scenario is likely?

    You claim that “The technical details of pensions are of course notoriously tricky”. While it is true that some people may find the details of DB pensions valuations tricky, it is challenging to make credible contributions to the debate without engaging with them.

  2. Bertram Düring says:

    In my opinion you missed an opportunity here to engage with some of the real issues behind the dispute involving university employers, employees and administrators of the USS pension scheme, instead dwelling on a false analogy with another pension scheme which had different issues in different times.

    You put forward the premise that “USS faces an astronomical deficit”. But this is exactly what has been disputed. Indeed, an independent joint expert panel scrutinizing the matter has concluded that the USS pension scheme could continue with only small contribution increases. But the changes suggested by this panel were never fully implemented. Why not?

  3. Sam Marsh says:

    I very much agree with Neil Davies’s concluding statement, namely “while it is true that some people may find the details of DB pensions valuations tricky, it is challenging to make credible contributions to the debate without engaging with them”. Those who are interested in an easy starter for why there’s such controversy over the size or existence of the deficit might like to watch my 15 minute video below comparing the investment forecasts used in valuations over the past decade with returns actually achieved by the fund.

  4. Julie Macdonald says:

    What I am really struggling to get to grips with is why university lecturers educate staff to work in the NHS, nurses, doctors social workers etc. yet they are paid less and are not allowed to join the NHS pension scheme which is funded by the government, instead we were moved in to universities and lost access to the NHS pension. If one wants to educate future nurses then there is no other option that education in universities and practice on wards. Fed up of working all hours with no unsocial hours pay and the chance of my pension being reduced or the payments being too high to manage.

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