Text from email sent to members 21 April 2021
The USS pension scheme recently calculated that on a ‘best estimate’ basis, our pension scheme is £4bn in surplus.* ‘Best estimate’ (or ‘unbiased estimate’) means that this scenario is considered 50% likely to happen. The legal requirement for submitting a pension valuation, however, is that the calculations are done on a ‘prudent’ not ‘best estimate’ basis. ‘Prudent’, in this context, means more than 50% likely to happen. The £4bn surplus, then, is a starting point for those calculations, and the more ‘prudence’ is applied to them the lower the theoretical value of the scheme.
You will have heard of there being a significant deficit in the scheme, and it is likely that this has been represented to you as a fact, and probably without any reference to the ‘best estimate’ surplus. As a consequence of this narrated ‘deficit’, we are told, we must consider a possible reduction in our pension benefits – the amount we can rely on as income in retirement.
This ‘deficit’ is the mathematical consequence of applying excessive prudence to that best estimate surplus. Some people will argue that the deficit is a result of factors such as increased longevity and market conditions, and yet the Superannuation Arrangements of the University of London pension scheme (SAUL) recently posted a surplus in their valuation, not a deficit. If a surplus/deficit was really only down to market conditions and demographic features, as some would have us believe, then SAUL too would have posted a deficit. But market conditions etc. are simply some of the ingredients in the calculation of a valuation. It is the recipe that is used that ultimately defines the valuation, and the management of assets and liabilities are very different in SAUL and USS.
One of the key factors in a valuation, more so than longevity and market conditions, is a thing called the ‘discount rate’. This is because a valuation is not about whether there is an account currently in the red or black (in fact the USS assets are currently valued at £80bn, and less than £2bn is needed to be paid out annually, with more than £2bn coming in annually – the scheme remains cash-flow positive with growing assets). Instead, what a valuation does is ask if the current value of the assets matches the current size of all the future pensions that have been promised to date – yours and mine. Fundamentally that is a good question, though it is less crucial in an open and healthy scheme such as ours than in a closing or closed scheme. The ‘discount rate’ in effect is the amount by which you believe those assets will grow over time (because if you have a debt to pay long in the future, you don’t need to hold the full amount now if you can earn returns on it in the interim). As part of their excessively prudent approach, USS are suggesting that the assets will grow at around CPI + 0%, which is to say pretty much not at all – excessive prudence. That is a significantly dominant ingredient in their valuation recipe. Everything that you hear now about the ‘deficit’ has its origins here in decisions that USS make about the valuation.
The university will soon be sending round a survey of members, and the UUK template we have seen is disappointing, steering toward a pooled acceptance of benefit detriment. The UCU hopes to work with the university to make meaningful adjustments to this survey before it goes out, but please look out for communications from us at the point at which it is released.
Please alert colleagues in USS who are not UCU members to this post or forward the email on to them – we represent them too in matters of USS.
Do come to the UCU General Meeting tomorrow, at which we are proposing a motion on USS. See Ben’s email of earlier this afternoon.
There is a national Defend USS meeting this Friday that you might wish to sign up for: http://bit.ly/PensionFightBack
Pensions representative, University of Leeds UCU
*This figure is quoted in a First Actuarial note, quoting USS materials. First Actuarial themselves offer a ‘best estimate’ of £14bn surplus. The disparity is due to FA’s calculations being based on the actual assets that are held by USS, whereas USS calculates based on a theoretical model portfolio – another baked in aspect of prudence in any calculation of valuation.
Here are some recent links:
ABC of USS, jargon explained: http://www.leedsucu.org.uk/the-abc-of-uss-a-guide-to-the-jargon-that-surrounds-our-pension-scheme/
USS bite-sized: http://www.leedsucu.org.uk/uss-pensions-bite-sized/
The cost of opting out: http://www.leedsucu.org.uk/opting-out-of-the-uss-at-what-cost/
A crisis in USS governance: https://www.hepi.ac.uk/2021/04/06/the-uss-trustees-governance-crisis/
This page was last updated on 21 April 2021