By Mark Taylor-Batty

(Our pension investments are ‘de-risked’, due to a crazy excessive ‘prudence’)

There are 500 races between a tortoise and a hare. The hare wins 499 of them, but falls asleep on the 500th and doesn’t cross the line. The tortoise only wins that once, but always crosses the line. If you want to be 100% sure of backing a line-crosser, back the tortoise, but lose your bid 499/500 times. This is de-risking, to address the ‘volatility’ of the hare. It costs more in the end. But you cross the line always. You create a deficit that you then have to pay with deteriorated pension.

Put it another way. Every Friday you have to get to London from Leeds for a meeting in Kings Cross. Your train leaves at 9. You have to pay for every hour you spend travelling and spend before the meeting. You can schedule the weekly meeting for 12 noon, because the train gets in at 11.30, but you want to be 95% certain you’ll never be late for the meeting, and sometimes there are leaves on the line. So, set the meeting time for 4pm! De-risk. It costs much more, but you have that certainty.

And that’s the certainty the employers want – a high ‘prudence’ level that they will never have to pay more in contributions (never miss the meeting, never not cross the line), so investment levels are reduced to slow and steady, which costs much more, which then constructs a ‘deficit’, which we, not they, must pay for.

In reality, you de-risk investments closer to the point at which you might wish to withdraw them, not from the beginning. You back the hare until near the end of the race, then shift all the surplus you’ve made from doing so onto the tortoise, to make sure those earned surpluses pass the finishing line. You save all the money you don’t spend on those extended journey times on the train to pay for that one time you miss the meeting.

The 2017 USS pension investments grew by 20% in just one year to over £60bn. That’s bigger than the GDP of many small countries. It’s your and my money, colleagues. Best estimates of it growing indicate that it covers all future costs (pension to pay out) by 114%. No ‘deficit’ in reality. But regulations require ‘prudent’ not ‘best estimate’. BE is calculated as 50% likely. ‘Prudent’ is defined in regulation as ‘more than 50%’. USS decide that means 67%. So, they recommend de-risking the investment portfolio (selling high yielding hare assets and buying low yielding tortoise assets instead). So we won’t see 20% increases of our money again. Counter-intuitive, ‘de-risking’ increases the risk of lower returns on investments. And so it will cost more to pay future pensions. And so we must have lower pensions.

Resist.