The latest development in the ongoing USS saga sees the revelation that USS themselves seem to have failed to correctly apply their own ’Test 1’, and that when this is corrected there is no deficit in the scheme as of March 2018. If there is no deficit, then there is no longer any argument for any change to our contributions or for any ‘benefit reform’, the euphemism we hear often which means changes to how much we receive in pension, and the means by which it is calculated. This seeming flaw has been exposed by Sam Marsh, a member of the Joint Negotiating Committee (JNC).
‘Test1’ and ‘self-sufficiency’
The USS have three tests which they apply in coming to a valuation.* Of these, Test 1 considers the viability of achieving a ‘self-sufficiency’ position in 20 years. ‘Self-sufficiency’ is, in effect, a position whereby all owed pensions can be paid without significant further contributions to the scheme from employers or employees. The Joint Expert Panel (JEP) expressed concern about Test 1 as “given too much weight in determining the valuation and its effects extend beyond its original purpose” (p. 8) and that specifically “Test 1 drives the investment strategy toward a low return investment strategy that results in a higher deficit and higher contributions than would be the case if the current investments strategy were maintained” (p. 24). In other words, the JEP argued that Test 1 was responsible for magnifying the very deficit that it seeks to address.
We should note that, of course, this calculation of a ‘self-sufficiency’ position is to ignore the fact that the contributions made to the scheme each month more than cover the pensions paid out each month, always have done, and are forecast do so safely for at least the next fifty years (JEP, p. 7). That is to say, the USS make a valuation of the scheme not on the basis of affordability in these income/outcome terms, but on a basis of whether we can reach ‘self-sufficiency’ in 20 years, regardless of the unlikely necessity of such a position. The ‘deficit’ is the projected amount needed to attain something close to that position. This is a response to the regulatory requirements put on the scheme to demonstrate its viability.
Test 1 can flag a problem even when none exists
Sam Marsh made a submission to the JEP on Test 1, but it was received too late to be factored into their report. He had concluded that Test 1 could flag a problem even if the projected value of assets in 20 years was greater than the cost of paying off all pensions at that point, because Test 1 as formulated does not take into account the projected value of the assets. What is more, USS confirmed his calculations that, applying their own measures and projections, there will indeed by a surplus in year 20. The deficit disappears. It’s just that USS, remarkably, never do this calculation of what the assets will be worth as part of Test 1.
USS have today begun to respond to the critique of their application of ‘Test 1’, and in doing so confirm that ”current contributions are ultimately adequate” (via @JosephineCumbo on Twitter). Sam Marsh comments on this admission that “this is pretty much the first time #USS have explicitly said this. I have a feeling that @UniversitiesUK and many VCs/finance directors around the country may be surprised to hear this.” (@Sam_Marsh101 on Twitter) In this Twitter thread, he responds to each of USS’s points
No deficit means no detriment
Where does this leave us? Well, if there is no deficit, then there should be no detriment. If the JEP report vindicated our strike action, this latest revelation furthers our cause: the status quo should be the outcome of any further deliberations, and JEP can continue their scrutiny and exposure of Test1, and appeal for better transparency from USS.
The JEP report: http://www.ussjep.org.uk
Sam Marsh’s blog ‘A flawed valuation’: https://medium.com/ussbriefs/a-flawed-valuation-the-laypersons-guide-to-my-findings-on-uss-s-test-1-b9e0c53f5d67
Michael Otsuka’s blog ‘USS’s valuation rests on a large and demonstrable mistake’: https://medium.com/@mikeotsuka/usss-valuation-rests-on-a-large-and-demonstrable-mistake-691103c94ca6
Michael Otsuka’s take-down of the USS’s response to the exposure of this flaw: https://medium.com/@mikeotsuka/a-response-to-usss-reply-to-my-claim-that-their-valuation-rests-on-a-mistake-6aad4f10eec7
USSbriefs’s clear and detailed article: https://medium.com/ussbriefs/there-must-be-something-missing-here-sam-marsh-exposes-new-problems-in-the-uss-valuation-351c90b1ab30
Michael Otsuka’s more detailed critical response to the USS response: https://medium.com/@mikeotsuka/test-1-de-risking-is-dead-long-live-de-risking-63540ad44e84
*Test 2 measures the stability of contributions to the scheme and Test 3 considers the ability the HE sector to underwrite the scheme in a disaster scenario. The recent report from the Joint Expert Panel (JEP) found that “Tests 2 and 3 appear not to play a significant role in either the valuation or the on-going monitoring” (p. 8)