In April 2017, the USS posted a ‘deficit’ of around £5.1 billion. This in itself did not imply a need for change to the pension scheme.

The ‘deficit’ is not an amount of missing money (in fact, the pension scheme funds increased in value in 2016-17 by 20% to around £60 billion) but is instead a calculation of what would be needed in extreme circumstances to ensure payment of all pensions going out now and of those to be paid to people in the future. That calculation makes a set of assumptions about things like future salary levels and stock market growth of assets, so different sets of assumptions can create different results. The 2014 valuation, for example, assumed salary growth of 16% over four years (It has been closer to 6%). The ‘deficit’ is always an intelligent guess of a future amount, not a fixed actual loss in the present day. The USS have an obligation to provide a valuation every three years.

But first – before we consider the current situation – a quick look back in history.

In 1997 our employers decided to reduce their contributions into pension scheme. From 1983 to 1997, they were paying 18.55% of salaries (today, they pay 18%). They decided our pension scheme was so healthy they reduced their contributions to 14% until 2009, when they were raised to 16%. Had the employers not made these reductions to their contributions, our pension scheme, it is calculated, would contain another £7 billion. This would remove the given ‘deficit’.

Between 2007 and 2010, HEFCE (the Chief Executive at that time was a certain Alan Langlands) gave £627,000 of funds to the Employers’ Pension Forum (a lobby group representing the university employers) to put together a ten year plan for reform of our pensions. The reports from this publicly funded research were never released.

The USS had been a Final Salary defined benefits* scheme since 1974. This meant that the calculation of pension in retirement was directly related to the individual’s salary approaching retirement. After the 2011 valuation, our scheme lost the Final Salary element for new entrants, who were instead enrolled on a career-average defined benefit* basis (whereby the calculation of pension in retirement was related to the average of individual’s salary throughout their career). A study concluded that the reduced wealth of post-2011 entrants was equivalent to an 11% drop in their total compensation or a 13% drop in their salaries.

After the 2014 valuation, the Final Salary element was lost to all members, and replaced by career-averaging from April 2016 for benefits accrued from that date. A defined contribution* element was also implemented, which members paid into from any salary above £55k.

From 2010 to 2017 it has been calculated that UCU members have seen a 16% cut in the take-home value of their pay, and this offers further context to the matter of pensions, which are a form of deferred salary.

Back to today’s dispute.

Affordability

At the same time as posting their £5.1 billion deficit, the USS commissioned PWC to assess the strength of the Universities’ covenant (the universites’ ability to sustain the pension scheme if things go wrong) and PWC found that the covenant was in good shape and strong. USS declared ‘A comprehensive, updated analysis carried out for the 2017 valuation has reinforced the confidence the trustee believes it can place in the covenant for at least the next 30 years’.

The USS did not feel the £5 billion deficit was big enough to warrant any significant changes to the scheme, and were confident that the adjustments to the scheme established after the 2014 evaluation (brought into effect in April 2016) should remain in place.

So, if your pension scheme was not in absolute peril, and the ‘deficit’ not enough for the USS to consider need for changes, why did we end up where we are?

The Pension Regulator

Later in 2017, the Pension Regulator assessed that the employers’ covenant was not ‘strong’, but ‘tending to strong’. The Pension Regulator is the UK regulator of work-based pensions, an arm of the Government’s Department for Work and Pensions.This decision on the part of the Regulator was not because there was not enough money in the sector to cover all eventualities – PwC had indicated there was – but because the Regulator recognised that the Universities had priorities that were potentially in competition with their priority of keeping their pension promise to their employees: “affordability is not unconstrained in this period as there is competition for cash from the institutions’ other expenditure priorities.”

There are two key reasons for this change of assessment on the part of the Regulator (after communication from UUK on behalf of the employers) and these are matters that the employers did not like about the pension arrangements:

1.) As part of the solution to the 2014 valuation deficit, the employers had agreed each to declare their share of  contribution to the ‘deficit’ in their accounts. This created a new, large liability in their books. In effect, we might argue, this is simply setting aside money to pay for something that wasn’t ever going to happen. But there sits this amount, affecting the bottom line in accounts. This measurably affects their ability to borrow money for new projects, such as campus buildings. The employers did not like this.
2.) Within the valuation was an assumption of ‘contingent contributions’, whereby, if needed, the pension scheme trustees could, at a moment’s notice if there was an extreme event call on the employers to pay up to a 7% increase in contributions for an indefinite period. The employers did not like this, even though they agreed there should be less than a 1 in 20 likelihood of it ever happening.

So, from the employers’ point of view, if changes could be made to the pension scheme that shrunk or removed that liability it would make getting loans easier and cheaper, and remove the albeit very rare possibility of a temporary uplift in contributions.

Universities UK (UUK) survey of members and the Defined Contributions proposal

At this point the Universities UK put round a survey to its members, and also to other USS employers. The survey asked if they wanted to a.) accept the amount of risk being proposed by the USS trustee b.) accept more risk or c.) accept less risk.

UUK then announced that 46% of respondents wanted less risk than the USS was itself proposing, and argued this was a strong enough mandate for changing the amount of risk built into the valuation. This change had the effect of increasing the ‘deficit’ from £5.1 billion to £7.5 billion. This latter is what has been referred to as ‘the November valuation’. The former is referred to as ‘the September valuation’ as it is the one established by USS for consultation in that month.

Now that they had a ‘deficit’ that needed addressing with a solution, UUK formulated the Defined Contribution* pension proposal that was at the root of the current dispute. This was a means of avoiding institutions taking on a small amount of extra risk, and transferring that risk to members, who would each take on a large amount of risk.

To arrive at this figure of 46% responses, UUK had included responses from organisation which it did not represent. It included, we learned, responses that were clearly marked as completed by people who were not authorised to represent their institution. It included all the responses from individual Oxford and Cambridge colleges (not eligible for UUK membership) in addition to those institutional responses. What is more, the Oxford and Cambridge colleges had met together in late 2017 and agreed to share their drafts. One Oxford college submitted the word-for-word the same response as Oxford itself. All of the Cambridge college responses were drafted by the same person, a consultant who works for a firm who specialise in de-risking defined benefit schemes in order to release money for businesses.

When confronted with these accusations, UUK argued that it had taken more into account than simply the survey results. When pushed to explain this, they indicated that they had also considered a.) a survey of members in September 2016 b.) consultation of members in February/March 2017 c.) consultation of UUK members in May 2017 and d.) the views of the UUK board members and of the Employers’ Pension Forum USS group and e.) advice received from their actuary. So, in effect, they admit not only double counting in their September survey, they compound this by essentially explaining they more than double counted university responses by considering the same Universities’ responses to multiple surveys. The only element that does not include the voice of the employers being counted over and over again is the response form their actuary, which they will not publish.

With the double-counting removed, the true number of universities wanting to lower risk was around a third of them. It has been calculated that 80% of USS members are at institutions that replied that they were happy with the level of risk that the USS trustee proposed. We could have avoided dispute, if this democratic road had been explored.

The Defined Contribution* proposal was then ‘agreed’ (by the casting vote of the chair) at the Joint Negotiating Committee (UUK and UCU) in January 2018. In principle, this was then to be forwarded to USS as the basis for the changes to how our pension benefits would be calculated.

Industrial action and the ACAS-brokered ‘agreement’

The Defined Contribution* pension proposal – the result, then, of the will of only a minority of our employers – represented such a significant drop in retirement income (up to 40%) for members, that it was soundly rejected by UCU members who voted to take industrial action. 88% of UCU members who voted backed strike action and 93% backed action short of a strike. The turnout was 58%.

Despite refusing to come to the table to discuss a return to defined benefits,* the effectiveness of the strike eventually managed to get the UUK to the ACAS-brokered negotiating table to do just that. But the proposal (often referred to as the ‘agreement’) that was reached as a result of that process was overwhelmingly rejected by members, voting in branch meetings across the country on Tuesday 13 March. These responses were conveyed to the meeting of the UCU Higher Education Committee (HEC) that afternoon in London. In the face of such overwhelming rejection of the proposal, the HEC withdrew the proposal.

Why had it been rejected? Although the proposal included a return to Defined Benefits,* it also contained an inflation cap and an accrual rate that would eat away at any value, effectively again meaning an up to 40% reduction in pensions for people. An inflation cap is a cap on which benefits could grow if inflation went above a certain amount. This has the effect of eating away the value of benefits when inflation is high. An accrual rate is the rate at which you build up benefits. The rate is used in the final calculation of how much income you will eventually be entitled to in retirement.

Measured against historic inflation, it was calculated that the value of benefits would be as little as a half of those in TPS (the pension at post-92 universities) over the same term under the same conditions. What is more, that 12 March proposal was structured around the ‘November valuation’, which had been engineered by UUK as detailed above.

The strike was not called off.

The new proposal

Then on Friday 23 March, a new proposal was offered by UUK. This included an offer to compose an independent panel to scrutinise the valuation. This proposal was a UUK text (i.e. not a UUK/UCU negotiated text) that was put to members in UCU meetings across the country on Tuesday 27 March. A significant response expressed repeatedly in branches nationwide was that, on the evidence of their behaviour and communications to date, people felt unable to trust UUK.

The UCU HEC met again on Wednesday 28 March, following a meeting of branch representatives conveying the results of their local consultations with members. HEC votes 10/8 to put the UUK proposal to a ballot of members.

Alastair Jarvis, the chief executive of UUK had written to Sally Hunt to indicate that ‘I can confirm that Universities UK does not intend to return to the January joint negotiating committee (JNC) proposal to consult on moving to a defined contributions (DC) scheme. Instead we are committed to maintaining a meaningful defined benefit pension offer at this valuation. Longer term we would like to work jointly with UCU to consider other risk sharing alternatives’. Sally Hunt indicated to members that the Pensions Regulator remained flexible on the matter of the deadline for the submission of a valuation, to allow all stakeholders to come to agreement.

Once news of the UCU HEC decision was released, UUK then announced an after-the-fact pre-condition for agreeing their proposal, insisting that industrial action be called off before any poll of members begins, let alone come to a result.

To be continued…

Further reading the history of the USS: https://en.m.wikipedia.org/wiki/Universities_Superannuation_Scheme

*Defined benefit = A pension for which you are able to calculate your income in retirement (your benefit is defined)
Defined contribution = A pension for which you know only how much you put in (your and your employer’s contribution is defined) not what you might get out.

Members will be receiving an ‘urgent update’ from the USS trustee today. We would like to offer some further information on this update.

We note that the trustee points out that “we rely on the employers’ collective financial strength and continued existence and ability to support member benefits over multiple decades” but avoids giving you the detail on this. USS’s actual assumption is that sponsoring employers will remain solvent for at least the next twenty years, and, moreover, in sufficient robust financial health that they could increase their employer pensions contributions to up to 25% of payroll (+7% more than the current 18%) for the duration of those twenty years. So, the USS make an assumption of affordability and increase in employer contributions that the employers nonetheless repeatedly deny – they can’t have it both ways.

As for the other assumptions they address in this urgent email, The USS and their actuarial advisers, Mercer, did list the assumptions used on page 106 of the most recent Report. In brief, they assume:

1. A fall in the expected long-term nominal investment return from 4.7% to 2.83% pa.
2. An increase in general pay growth in the year following the valuation from CPI (2.6%), to RPI + 1% (4.175% pa).
3. Life expectancy increasing by 1.5% per year.

You might want to pause to consider the assumption of a 4.175% pay rise, and the cruel irony of your employers voting to downgrade your pensions on this assumption, all the while having absolutely no intention of agreeing anything like that salary increase.

In 2014, at the last valuation, the USS assumed cumulative pay growth over the following four years – 2014 to 2018 – of 16%. But as we all know, general pay increases have fallen well short of this, cumulatively increasing by only 5.8%. Do recall that it was partially on the basis of this presumed 16% pay inflation at the 2014 valuation that the last set of changes were made and the Defined Contribution element was introduced to our pension. Now, the USS estimates of the deficit assume that, in future, general pay will rise at a rate of RPI +1% (approximately 4.2% per year). Is there any evidence that universities will award cost of living increases at this rate? Furthermore, the ONS and the RSS has repeatedly warned that the RPI is a flawed measure of inflation, and should not be used. And yet, USS continue to use it to estimate the deficit.

Today’s ‘urgent ‘ communication adds a detail not captured in the USS report, that longevity is now considered to be capping at 90 to 93. This seems to contradict the 1.5% linear growth in the actual report, so that still remains to be explained. And yet, there has been little increase in life expectancy in the UK since 2011. The Institute and Faculty of Actuaries estimates that mortality rates are around 11% higher in 2016 than would have been expected based on the historical trend. This means life expectancy is lower, which should lower the USS’s liabilities.

But let’s look at that fall in the expected long-term nominal interest return. First, how can expected investment returns have fallen by 40% in four years? Surely a collapse in returns on this scale would be reflected in the equity or bond markets? Equity markets in high income countries are up 51.7% in the last four years (approximately 11% per year). The USS assumptions are consistent with a long-run real return of just 0.33% per year if using CPI as an inflation measure and a negative real return if using RPI as an inflation measure. This is completely implausible unless a long-term global recession is expected.

Please be conscious of the massive PR effort that is now being launched by USS and UUK in the face of the overwhelming action you have undertaken to defend your pensions and read such ‘urgent’ messages with extreme caution.

Further reading: An open letter to the USS