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The USS Problem

The USS Problem. Dennis Leech University of Warwick 15/10/2014. USS in year ending March 2014 (£M). Income: 2,689.7 Contributions: 1,672.5 Investment earnings: 1,017.2 Benefits: 1,588.7 Pensions in payment Net surplus: 1,101.0 Pretty good!.

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The USS Problem

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  1. The USS Problem Dennis Leech University of Warwick 15/10/2014

  2. USS in year ending March 2014(£M) • Income: 2,689.7 • Contributions: 1,672.5 • Investment earnings: 1,017.2 • Benefits: 1,588.7 • Pensions in payment • Net surplus: 1,101.0 • Pretty good!

  3. Income and expenditure of USS

  4. Sources of income

  5. Where is the problem? • We are told there is a black hole in the USS: • Where does it come from? • It depends on trends: • Most members are (young) active members who will retire later • So liabilities are going to grow in the future • We are living longer in retirement • We need to be told how these affect the figures • But there are also essentially political issues

  6. Two main problems affecting USS • Employers wish to reduce contributions • Currently 16% of salary. • Reportedly ant to cut them to 10% • New regulatory regime imposed • Philosophy of neoliberalism (Thatcherism) • Market fundamentalism • Political shift from pensions based on collectivist to individualistic principles • Universities are treated like competitive firms in the market

  7. Neoliberalism and pensions • Individualism – NSTAS - all responsible for managing their own pensions – or not – we are free to choose to be poor in old age • Based on free-market Chicago economics • Switch in many countries - pioneered by UK under Thatcher and Chile under Pinochet • Unfolding pensions disaster - a lingering legacy of Thatcherism

  8. From collectivism to individualism • Switch from Defined Benefit (DB) to Defined Contributions (DC) taking place • DB: predictable pension defined by scheme rules. What you get is defined by years of contributions (by you & employer) and final salary/career revalued average salary • DC: you get a “pot” on retirement equal to what you and employer pay in + investment return - charges. But no pension as such. • DB schemes being closed and replaced by DC

  9. Collectivism vs individualism • DC (aka money purchase) • No certainty about what you will get – market values highly volatile • Have to turn your individual ‘pot’ into income somehow • Eke it out (drawdown) • Buy an annuity (but poor deals) • Invest it for income egBTL • Often high charges • Poor value

  10. Collectivism vs individualism • DB much superior because based on collectivist principles: • Risk pooling: • Investment risk: collective investment fund • longevity risk: pension for life (annuitisation) • Intergenerational solidarity: pay as you go • Long lived scheme can invest in higher return assets • Low management costs: economies of scale

  11. Collectivism vs individualism • DB schemes much cheaper (for society as a whole) to provide a given pension (eg 40%) • But being over-regulated to the point of closure (‘reckless prudence’) • But what replaces them? • Millions are not saving enough for retirement • An emerging tragedy due to failed economic ideas

  12. Too much prudence is killing DB • Regulation of DB changed in recent years by accountants and government • They must be funded • Enough Assets to cover Liabilities as if on a company balance sheet • Assets valued at market prices (not realistic) • Liabilities (pension promises) must also be valued – artificially - in the market place • But very volatile for reasons unconnected with the scheme • Method makes sense ONLY in the imagined perfect market of the neoliberals • Here is a clue to how this affects the USS …

  13. Same data + changes in market value of investments (volatility)

  14. Market-based balance sheet accounting: volatility of USS funding

  15. Liabilities figure is the problem • Must have a figure of the present value of actuarially estimated pension promises • Need a discount rate • Theory says use a ‘risk-free’ gilt rate • This is very low at the moment (QE) – so liabilities are artificially inflated • And very volatile • Yet real pension payments are not volatile - defined by the scheme

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