UUK’s long-term plan?
You will recall that back in 2011 the USS pension scheme was adjusted to introduce a Career Average scheme for new entrants, and we were told that this was necessary to resolve the deficit that then existed. Scheme investments since then have met and surpassed targets and the scheme’s funds have grown faster than the FTSE. So why are we back in the same hole? Are universities blundering from deficit to deficit, or is there a long term plan
The UCU does not agree with the method of calculating the current deficit, and leading financial mathematicians and statisticians last week condemned the manner in which the “predicted salary increases assume a buoyant economy while investment returns assume a recession” (Times Higher) in the calculations, suggesting that the deficit construction is rigged to find the highest possible number. This seems contrary to the Pensions Regulator’s requirement that Trustees do not apply ‘overly prudent’ measures of calculation (Investments and Pensions Europe).
So why would you find the most exaggerated and inflated manner of calculating a deficit?
And let us remember, the pensions benefit cuts that we are being asked to swallow are not directly to address the supposed £8 billion deficit, but are quite clearly put in place to fund an adjusted investment strategy of ‘de-risking’ (see last week’s blog) which will deliberately and knowingly increase the deficit to as much as £13 billion. ‘De-risking’, then, doesn’t mean removing future risk to the scheme. The ‘risk’ that is being removed is the unknowable value of investment return. Of course, over the long term, equities have always out-performed other investment vehicles, but if you need to measure a deficit every three years, you want something more reliable, they argue. ‘De-risking’ is an investment strategy to buy more investments with predictable future income, and sell the equities, stocks and shares, that would have a higher return.
These more reliable investments include government bonds and gilts. The return on these is more predictable than stocks and shares. But also much lower. Because the return is lower, the deficit goes up, not down, but at least they can predict it better (i.e. It is less ‘volatile’). So investment strategy for our USS fund – your and my money – is to be governed by regulatory calculations, not growth planning. This has a number of consequences.
Firstly, the growth of the pension fund will be inhibited. The brakes are applied. The fund has been growing at rates higher than the FTSE in eight out of the last ten years. De-risking will potentially significantly slow down this growth. This in itself creates risk that the fund might have trouble in meeting future liabilities. Which makes it more likely that in the future they will come back to pare back our benefits further, to make them ‘affordable’ with that smaller pot of cash they have manufactured with de-risking.
Secondly, market forces straightforwardly dictate that the more bonds are bought, the more they cost and the less they yield. So the deficit goes up:
This excess demand for bonds, whether government or corporate, is problematic for pension funds. As the demand for bonds increased, pension funds have been buying these bonds at higher prices. This in turn has pushed down the yields on bonds, thereby increasing the present value of the liabilities that these firms are trying to match; consequently even more bonds have to be purchased to match the liability creating a vicious circle. (Iain Clacher and Peter Moizer, Accounting for Pensions, Leeds University Business School, p. 24)
This is not a sustainable investment strategy, as its short-termism is damaging to the long term health of the scheme. Further, by such big schemes as USS pulling out of the stock market, there is a consequent negative impact on economic growth.
Now, if as an employer your long-term goal was to wind down the scheme or degrade or remove defined benefits, this is exactly what you’d do. Why would the employers want to remove defined benefits from the picture? Because they carry some of the risk embedded in the requirement to pay a defined amount in the future. Much better, surely, to let the employees take all the risk with a defined contributions scheme?
So, if you were an employer that cared more for your burgeoning surpluses than for you staff, not only would you want to inhibit future income from investment growth in order to achieve that long term goal, you would want to further inhibit the growth of the scheme’s investments by also reducing the cash coming in to them. The employers quite clearly have factored this into their proposals. The cap on Additional Voluntary Contributions at 1% of salary is particularly telling in this regard. Why would you restrict people paying voluntarily into a fund that could grow all the faster with more money in it? This is inexplicable unless there is a deliberate plan to reduce income into the investments.
The reduction of employers’ contributions by 4% to 12% on salary over a £50k threshold is another such constriction on funds coming in. Now, back in the 2009 dispute they were trumpeting that our average salary was around this mark. Oddly, today they claim that this £50k threshold will only affect a third of us. Either they were lying then, or they are lying now.
And, let’s face it, the proposal to reduce net employee contributions adds to that, and is a cynical sweetener. All contributions will be at 6.5%, reducing some from 7.5%.
All this reduced income to the scheme puts pressure on investment growth for any future income to pay liabilities. But the de-risking plan to buy low-yield investments knocks that possibility into the long grass. Are you beginning to join the dots yet?
So, if we fail to get defined contributions off of the employers’ wish list, what do you reckon the chances are of a 2017 valuation being constructed to allow them to complete the possible long term plan to remove all risks from their institutional balance sheets and have us all on defined contributions?