This guest blog has been kindly contributed by Jo Grady, the General Secretary of the University and College Union (UCU), who responds to this week’s series of three HEPI blogs on the Universities Superannuation Scheme (USS). Jo is on Twitter @DrJoGrady.
Pension schemes and the science of their valuation can be complicated, technical, and off-putting. The Universities Superannuation Scheme (USS), with hundreds of sponsoring employers and hundreds of thousands of members, is no exception.
But the complexity of USS is no excuse for dismissing debate about its viability out of hand, as Nick Hillman risks doing in his recent blogs for HEPI, where he ultimately reduces the matter to the declaration that ‘there are only two ways to reduce a pension deficit: increasing contributions or reducing benefits.’
In reality, the size of the USS deficit is far from a matter of objective fact. On the contrary, many pension professionals and employers have joined the University and College Union in strongly questioning USS’s opaque calculations and their results. Not just my union’s own negotiators, but our actuarial advisers, Universities UK’s actuarial advisers, a Joint Expert Panel appointed by UCU and UUK (the body representing member employers), the Universities of Oxford and Cambridge and their UCU branches, the former Governor of the Bank of England, a former member of USS’s own trustee board, and too many others to name here.
Across the board, critics agree that a central problem is USS’s continuing attachment to an implausible and overly pessimistic view of the scheme’s underlying strength.
First of all, USS receives more annually in contributions from employers and active members than it pays out to retired members, giving the scheme significant flexibility to ride out any bumps.
Simultaneously, USS’s asset base is huge and growing, having more than doubled in size since 2011. Time and again over the past decade, USS’s assumptions have failed to match up to reality, with this real-terms asset growth consistently outstripping the projections of the scheme’s managers. Rather than revising its assumptions upwards for the 2020 valuation, USS appears to be planning to revise them downwards again.
On top of that, USS has chosen to proceed with a valuation date of 31 March 2020, so the value of its assets has been measured at a stage in the global pandemic when markets were crashing. It could have waited until March 2021, but it chose not to.
A valuation more firmly rooted in evidence would show that there is enough money to match the promises which USS has been making to members. Then there would be no need to increase contributions or to reduce benefits. There is no inevitability here.
Again, it is clear the problem lies in USS’s unreasonably pessimistic calculations, and its choice of an approach that undervalues both the scheme and the sector that supports it.
Perhaps the worst consequence of this dogmatic pessimism is an assumption that USS needs to keep ‘de-risking’ its asset portfolio by shedding high-return investments and purchasing more low-return, fixed-income ones. Here, USS should listen to the Pensions Minister, who has recently said that open schemes with strong sponsoring employers should not be forced into an ‘inappropriate de-risking journey’.
Despite all this, USS is poised to press ahead and issue its decision to employers and members about the contribution rate required for the 2020 valuation. But the Pensions Minister’s comments present us with a political opening which all parties need to seize. Universities, including Oxford and Cambridge, are asking USS to go back to the drawing board. And the Pensions Regulator is under increasing pressure to explain whether it thinks USS’s hyper-conservative approach is necessary and if so, why.
Meanwhile, USS’s assets have performed well since the start of the pandemic and the short-term risks facing the higher education sector are negligible, with student intake soaring and demographic trends indicating that it will continue to do so for years to come. There is still time to reconsider the fundamental questions which USS’s critics have raised and reach a valuation outcome that satisfies all parties. That is the real challenge facing USS.
After a decade of pay and conditions being degraded, many precarious and low paid higher education workers can no longer afford to be USS members. Even more will quit the scheme if contribution rates go up further.
There is more at stake here than the interests of UCU’s members. The decline of defined benefits pensions since the 2008 financial crisis has led to a profound intergenerational unfairness, leaving younger workers in particular with no prospect of a guaranteed retirement income. Keeping USS alive and making it more affordable will raise the bar for workers everywhere.