USS pensions deficit artificial, say leading authorities on actuarial science

A group of leading authorities on statistics, financial mathematics and actuarial science have written to Sir Martin Harris, the chairman of the USS trustees, and members of the board, criticising the assumptions that have been made underpinning the estimation of the deficit, as detailed in the document ‘USS: 2014 Actuarial Valuation: A Consultation on the proposed assumptions…

They point out that some key assumptions the trustees have made, that underlie the calculations that produce a figure for the deficit of over £12 billion, are unrealistic and in fact unnecessarily pessimistic. In particular they criticise the trustees for assuming:

  • pessimistic investment performance based on gilts rather than the actual experience of the USS investment portfolio,
  • a far too high rate of price inflation,
  • a rate of salary growth above what has been achieved in the past,
  • an increase in the rate of increase of longevity without supporting data (indeed the latest actuarial estimates report a reduction in expected lifespans),
  • too short a time horizon for the employer covenant (one more appropriate to a private company than the university sector).

They also make some fundamental criticisms resulting from the methodology being used:

  • There is an element of circularity in the reasoning – much of the deficit is due to the expectation of poor returns in the future (because of the gilts-based approach) and the short 20-year time horizon for the employere covenant – which in turn is said to be necessary because of the unwillingness of employers to pay high contributons due to the deficit.
  • The assumptions are chosen in a manner which is economically incoherent – buoyant salary growth assumes a strongly growing economy while poor investment returns assume an economy permanently in recession – both these assumptions serve to inflate the deficit.
  • All the assumptions made assume a ‘worst case’ scenario. The combined effect is to be unduly pessimistic.
  • The estimates obtained by the trustees’ approach exhibit wild swings, with rapid instability over a period of months in the estimated liabilities, while the real liabilities are known to vary very slowly on a decadal beasis.

They conclude:

…moving to evidence‐based assumptions on salary growth and RPI would show the scheme to be in healthy surplus on a neutral assumptions basis. Remove the derisking assumptions and that surplus would be substantial. Substitute historic asset growth performance for Gilts plus and the neutral basis would show a very substantial surplus.


UCU’s Proposals

You can read UCU’s report and provisional proposal here (details on p8). 

  • UCU is proposing a ceiling for the scheme set at the 85 percentile of earnings point, which would be roughly £75k at the moment but would increase over the years along with earnings.
  • UCU is proposing all members move onto the CARE [Career Average] scheme but that all get accrual at 1/70th instead of 1/80th, ie a 14% higher pension for those already on CARE.

The employers are proposing an initial fixed point cap for DB [Defined Benefit] of £50k, but there is not the slightest doubt that if we allow any DC [Defined Contribution] element into the scheme then the employers will over the years press to expand that element until the DB scheme has disappeared altogether (just as we knew that if we allowed the CARE scheme in then they would want to force us all onto it eventually).  It is absolutely essential that we do not allow any DC element into the scheme. Most of us have friends whose DC pension has all but vanished in recent years.  As they say the City of London is built on the bones of pensioners.