UKC

Nearly all of the pre-92 Universities (aka 'old' Universities) will almost certainly be facing industrial action this year due to the proposed shift of the academic pension scheme from a defined benefit (DB) provision to a defined contribution scheme (DC). The issue is that their pension in USS has now been said to be unaffordable. On the face of it the scheme has moved from a safe position a few years back where major changes were made to ensure future viability including increased payments, a move to CARE and some delayed benefits. From that time the real assets of the scheme have grown at an average annual 12.5% increase and there is no huge change in staff numbers or salary distributions and a lot of the risk from the distorting effect of final salary arrangements has been removed as pensions are now based on career average. So what has happened? The deficit calculation causing concern is very real but it comes from the bizzarre and arcane accounting mechanism chosen to value the pension. This accounting mechanism piles caution upon caution upon caution in its estimates to ensure payment will always be avilable; to the point that safe  predicted growth being so far below averege likely predicted growth and vice versa for costs, that even a successful fast growing Defined Benefit model becomes impossible. Appropriate caution is vital in such scheme valuations but caution upon caution upon caution is clearly stupid as most schemes will grow much faster nor suffer these costs. Why would goverment, employer organisations, employees and public find this politically acceptable? Sadly there are clear incentives to the first two to move the risk of potential asset liabilities off public sector deficits or balance sheets onto the employees, who are rightly upset. I think the public in these schemes should be scandalised, as a good model is being lost for their kids and their country, but sadly are too often ignorant and often have much worse arrangements themselves.

I think this is a massive scandal. DB schemes have helped millions have a better retirement. They are strong recruitment and retention incentives. They are safer and fairer than DC as less affected by market variations and less succeptable to parasitic annual costs (ie less profit to pension providers, so more to the scheme). We even have examples where other doom laden schemes have turned out to be in massive surplus,  like the coal miners scheme, where government are busy skimming cream from the top at an annual rate in the hundreds of millions when this was predicted a decade ago to be a seriously major taxpayer liability in the Telegraph.

One of the UKs great success stories, its Univerity system faces yet more salami slicing of employee benefits and industrial action disruption. Academic salaries in an internationally competative market have dropped about 30% compared to our competior nations since 2009 given the double whammy of austerity and devaluation of the pound. Academic workloads in the UK have increased and our reliance on recruitment of overseas staff is huge when we are talking of reducing immigration in a way that is scaring many new appointees. Who would choose UK academia as a career path in such times? Who would pay to study in such a savaged system?

Sadly, the response from the public will be some combination of apathy, envy because you're seen as well off anyway and "I'm getting screwed, so screw you too".

I can see that is a likely outcome but it has serious implications... any bright kid should aspire to HE and nearly all middle class kids already do.. We punch well above our weight in research terms on worldwide measures and bring in many billions to the economy in a way that rewards investment like no other sector.

It seems like a perfect storm at the moment. Fee problems, immigration threats to overseas staff and students, brexit threats to research income, massive political meddling bringing in new systems to make pigs fatter by weighing them more (subject based TEF is coming next) pressures on experienced academics to leave for better pay and conditions elsewhere, or retire. Fewer incentives to become an academic in a system that has way too few PhD qualified prospective staff in the crucial shortage areas for the economy, leaving a huge reliance on overseas recruitment. Managements intent on feathering their own nests and putting up buildings and administartive centres for special initiatives, rather than supporting and rewarding staff on the coal face.

You missed an increasing shift to an administrative culture coming first (how many of your governing body are going into the next REF?), and the ever widening pay gulf with VCs at the top regularly getting 10% pay rises, then vast golden goodbyes before cropping up somewhere else.  Not to mention a growing perception of science research being a big loss making activity under the 80% FEC model, or the increased difficulty of maintaining fair accademic standards in an increasingly customer centred world.  Best pretend that many places aren’t going on boom-or-bust building sprees or at least pretend that the sector can sustain the results of widespread growth.

I agree with your analysis, that the only "problem" with the current scheme is an absurdly conservative method of valuation. 

But, if the current contribution rates are *actually* sufficient to fund the current DB scheme (which I think they are), and we then move to a DC scheme with the same contribution rates, then the DC scheme should give the same average payouts as the DB scheme.

The employers are putting 18% of salary into the scheme.  That seems a decent deal to me, and one that would be sufficient to attract people into the sector.     

I'm certainly not going on strike claiming that 18% is insufficient. 

I also think it's unfair to blame the employers for the valuation method and thus the supposed lack of viability of the scheme, since aren't the rules on that set by the government?    

What is the strike supposed to achieve? Asking for the 18% to be raised to whatever would close the supposed "deficit" in the ludicrously conservative valuation method is just unrealistic (and would quickly build up a large and real surplus). 

I don't see why a DC scheme need have higher costs than a DB scheme?  

On a more general point, a DB scheme means that an employer taking on a 30-yr old is committing themselves to  investment risk over a timescale of up to 60 years or so.   That seems to be somewhat beyond the call of duty for an employer.

Its very fair to blame employers as only a handful have spoken up, like Warwick and Glasgow. Also a significant minority supported reducing investment risk by moving to gilts, enough that this was the model by selected by USS. The model is one that reduces growth, and so, one that requires higher contributions and makes the scheme unaffordable. If they stuck to the old model things have still got worse, as the model is still broken, but not so much that it becomes unaffordable. The choice of the new model supported by nearly half the employers and not publicly challenged by more than a handful is what broke the scheme.

Yes the government are interfering and the Pension Regulator seems to me to have overstepped their remit and become actively political.

You would think that DC would the same but the actuaries are saying differences could be huge. I don't know the details why yet. Normally DC schemes are poor due to high annual fee levels sucking money out of the scheme and poor scheme management (USS are currently good value for fee costs and well managed)

I never exoected  you to strike and am suprised you are a UCU member such that you could strike, given your politics here. In contrast around 90% of those who voted favoured industrial action of some kind. The strike action is to fight the change. I don't think it will win in a balance of probability, mainly due to feraful or ignorant younger academics and selfish unaffected  older academics who will be retired soon not coming out enough in support.  Also for the reasons put forward by Mike ... a massive critic of the scheme and its valuation but ever the realist.... https://medium.com/@mikeotsuka

On your employer risk point the benefit is recruitment, retention and scheme efficiency and simplicity. The risk is mitigated as its shared across all employers and backed by a government safety scheme. The scheme is huge and has enough money to fund all pensions for the next 40 years even with no more income.

What specifically is the strike action hoping to achieve? Or - putting it better, perhaps - what would be a sufficient 'win' for the strike action to be halted, or for it be deemed to have been a success?

The recent record of UCU industrial action is not encouraging.

I actually got most of those in that they are subsumed in my broad themes... payback on massive building investments as a sub-theme is a huge risk in some institutions. If numbers drop some institutions will be seriously stuck on their loan interest payments. Some Universities (Coventry is a good example) are planning massive expansion based on success in TEF and other such areas - that are regarded as less than concrete measures, by sensible HE commentators (Coventry being top in TEF metrics, they would argue, shows the flaws in TEF... Coventry has good systems and a careful narrative but the student experience is just not that special) - continuing to feed through.

A key problem with DC schemes is the lack of any risk sharing between participants. All have to plan to live to 100 (say), which means the effective value of any contribution is much less. Unfortunately UCU have spent 20 years crying wolf and striking over minor points so now no one will listen to them over this, which is a serious errosion of benefits.

This is what UCU say  https://www.ucu.org.uk/strikeforuss  but then read Mikes blog I linked above... proper immovable object and irresistable force and this will be a massive mess either way.  All because USS chose a new model based on enough minority support in USS intitutions for derisking into gilts.  It really is all happening at the worst possible time.

I'm lost.  Isn't the scheme currently a mix of investments, including a lot of shares, and isn't it "broken" only in the sense of a ludicrous valuation method, rather than actually broken? 

But USS can simply continue with its current scheme management, with the same costs as now, but as DC not DB. 

Just as a quick point of note - from the previous discussion I contributed to on this I thought the main bone of contention was the accounting basis, which discounts based on bond yields. 

The basis on which contributions would be set would generally be the funding basis, which is set (and owned) differently and is potentially more closely tied to the scheme investments, although I believe unlike the accounting basis it is required to be set prudently.

My guess is that DC schemes usually have lower employer contributions because employers have a direct choice rather than the contribution level being only indirectly in their control (via changes to the pension terms and the investment strategy, the latter of which is only indirectly in their gift). I doubt that many DB scheme sponsors actively wanted to have 18, 20, 25% contributions as part of their benefit package, it's crept up on them as the economics have changed.

?

I do agree that switching now to mostly-gilts is utterly dumb, and would indeed massively reduce people's future pensions.  If a strike is aimed against *that*, and in favour of sensible investment in shares, then it has some sense to it. 

Again, though, the fetish about gilts originates from government and the regulators.

USS are moving to proportionately much more gilts supported by more than 40% of employers.

Could does what could does but actuarial advice indictes some massive losses, the headline is upto £200, 000 over a lifetime. A lot of this will be due to the new less risky investment strategy but I've not seen the model details as yet.

http://www.pensionsage.com/pa/USS-proposals-mean-university-staff-could-see...

Though the DC funding level gets negotiated between the employers and the unions, so the UCU could say they agree to a switch from DB to DC so long as the contribution rate stayed the same.

My prediction, based on UCU industrial action over the past ten or so years, is that this will all just fizzle out. Again.

UCU has more power than it realizes, but it seems tactically incompetent to me. One example of that is the ludicrous 'two-hour' strikes of recent years.

18 % by employers into the current scheme.!is that correct. 

If do then the scheme is living in cloud cuckoo land. I do not know of any private scheme that funnels that much employers cash into any scheme. 

What a waste . Knock it down to 10% and put the money towards research or other areas. 

Those numbers of up to 18% are only required due to the accounting methodology using gilt values affected by QE in a position of austerity. In different times the accounting mechanism showed huge but artificial surpluses in DB schemes allowing massive pension raids. Its not that such schemes are always undervalued, its that they extrapolate the current position in ludicrous ways, in this case, worse still, using economic distorted values on gilts.

And lose large numbers of employees to international competition? Its the total rewards that matter, salaries are on the low side internationally for UK academics.

I think the members not supporting past action properly was way more important than any fault in UCU tactics. Most ordinary academics I knew who voted to strike, didn't. The 2 hour strikes worked really well in disruption terms in some places as the University had to start then stop then restart. Most institutions in revenge deducted a whole days pay based on 265ths, both aspects of which they might have to pay back following test cases (265ths is already lost).

Which is why I think the UCU should say:

1) Yes we accept the move to DC,
2) Lock in the 18%
3) Ongoing investment largely in shares (*always* the best return over any longer term),

... and that would fund sufficiently generous pensions.

Well if that's how thing are panning out, then you're f*cked matey! But you can't blame anybody else.

This THE article has some concrete modelled examples.

https://www.timeshighereducation.com/news/uss-reforms-seen-as-radical-attac...

I think you mean young to middle age academics will suffer, as I'll almost certainly be safely retired before any change hits me (unless austerity gets so bad they start to steal from pensioners). I've actually taken strike action I voted against in the past, as any honest Trade Union member should if the democratic vote is to strike..

I meant, collectively.

Precisely. But if what you describe is at all representative, UCU must have a lot of dishonest - or at least, rather stupid - members. That's very disappointing - but maybe that's what we need to be pondering.

18% is a stunning contribution by an employer. I doubt many overseas institutions put that much money into their equivalent salaries. I also doubt that - apart from a few -thousands of employees would up and leave. 

Call it what it is an excellent scheme in comparison with others and count your lucky stars. 

I will add that most uk and western countries pension schemes are stuffed . Try talking to Japanese people about what they have experienced .

A spot figure that changes each valuation. Hardly stunning when based on pay levels on average now about 30% lower than overseas competition sinec 2009. Also having faced masive drift when compared to other professions :  when I started top of career grade old Uni SL pay was equivalent to an MP.

Edit.. I forgot to add we are the possibly the only major western economy where academics don't have tenure. The effects of this job insecurity is concrete and has resulted in many redundancies, even in what are now some of the key shortage areas eg Engineering. I thought academia was a job for life when I started, and currently job security looks as fragile as it ever has.

As I said, contributions derive from the funding basis not the accounting basis, to the best of my knowledge. I'm not sure if you're using "accounting" in that context, from your reply, but just for accuracy. 

Yes, of course. It was a generality rather than a specific. 

I see you mentioned shares in a later post - DC often gives individuals an investment choice, or sometimes a "lifestyling" option which is broadly shares when young moving into bonds towards retirement to match annuity rates better. 

Sure, just a laymans description.

A more direct link to Mike's blog that will remain visible. 

https://medium.com/@mikeotsuka/the-magnitude-of-the-challenge-facing-ucu-8f...

Quite a challenge, and most of which the left of the Union seem in complete denial about (they are always delighted with any strike action). In this case I firmly believe UCU are helping save UUK and USS from their own idiocy. This only happened because of the decision to de-risk coinciding with a long period of austerity... any logic must regard such a huge scheme with impressive asset growth and no sudden change likely in outgoings, as not suddenly financially unviable.

I am really worried about the future of UK academia in this constant stormy weather, especially given the UK lack of protections that exist elsewhere, like tenure and direct definitions of protections for academic freedom.

That does paint a challenging picture. It feels unlikely that the regulatory view would be shifted by strike action - papering over the hole via a valuation basis they disapprove of seems to offer a regulator downside without much upside. That would seem to leave the employer and the union stuck with a problem and a lot of water between their different positions.

I think this is why the USS will change - everyone's on a race to the bottom.  

Obviously VC salaries don't seem to get reduced because some other VC gets paid less.

It was always part of the pay package, and is in that sense a pay cut, but easier to do as it's not part of the headline salary figure.

I think UUK's proposal is for it to be reduced to 13.25% anyway. (It was 18% plus 8% employee contribution).

I can't find it now, but I'm sure I saw some modeling that was suggesting the different to an employee would not be so great, but the model assumed a much better fund growth than that for the DB fund...

I think that's about the previous changes, which was DB upto a threshold.

Apologies...thats right. THE is a pain to access due to the limited free views. There were supoosed to be some models somewhere.  I won't subcribe to THE as I feel they are the opposite of what an HE news outlet should be... job advert driven traffic paying only lip service to the real issues in HE.

There are precendents where things that couldn't change in such areas did change. It does however need a will to sort out the mess. With tPR being intransigent (and illogical and arguably political: the scheme cannot be a sudden problem with 12% year on year asset growth since the last major review), its hard to see movement without nearly all UUK members blinking. UCU strike action has been way too patchy in the past and there is some strike fatigue in the membership, yet this one is really serious with a 90% vote.  It's potentially an awful mess if major strike action occurs especially with the customer focus of our student body increasing every year and them being stuck in the middle based on what might look like weird technical arguments.  It brings back memories of the old AUT banner which said "rectify the anomaly" that sounded obscurely retentive... the opposite of what was needed. The scheme needs to be defended in simple terms:

How can several years of 12.5% annual growth on a pretty fixed membership base have possibly led to a financial crisis in USS? This is a clearly a manufactured crisis and therefore political (even if inadventant/ incompetant).

We had a similar discussion a while back and I didn't really feel it enhanced my day, so I've little appetite to repeat again .

It's helpful though to go back to basics and think of cash flows - ones coming in from investments and ones going out for payments. I doubt they will have provided it, but a useful breakdown of that 12.5% growth would show how much is arising from expecting extra cash flows and how much is just a change in the present value of the same cash flows due mainly to interest rates. A fall in sterling generates extra (sterling) inflows from foreign bonds and companies with earnings abroad, whereas fluctuations in the value of a fixed cashflow sterling bond mostly just reflects the present value. 

The same breakdown would also be useful on the liability side, since some of the change in liability value will be due to changes in the cash flows, due for example to assumptions around future inflation, and some again will be down to interest rates affecting the present value of otherwise unchanged cashflows. 

That would help split the increase in the calculated shortfall into two elements: one related to changes in inflows and outflows and one relating to any mismatch in interest rate sensitivity (which is basically an indicator of how reliant the scheme is on future investment returns, versus currently locked-in returns, to make its payments). That's a far more informative picture to have.

While I appreciate the importance of such work to those who manage such funds the general public don't need to understand that. Its a pot of money and its growing much faster than inflation since the last scheme reorganisation and the liabilities are curremtly pretty static. A crisis simply can't logically arise in such situations. In public terms I feel your suggestion encourages the smoke and mirrors that has led to the problem.

For those who want the split detail, USS scheme growth is currently severely underestimated as its linked to gilts which are currently depressed by the economic situation (including QE) and this is extrapolated for the future. USS liabilities are overestimated by assuming continuous above inflation pay growth in a period where average pay has actually dropped 16% since 2009 on the inflation measure used and no likelihood of above inflation pay growth any time soon.

The same smoke and mirrors was argued for the Coal Miners Scheme being a massive public liability in the Telegraph a decade ago. The reality has turned out that the closed scheme, then taken on by the government, is now in major surplus and the government is skimming hundred of millions annually that arguably could have gone to scheme members to assist with widespread ongoing industrial related health problems.

For the people doing the management that information will be essential, of course - I actually thought given the difficulties most people have with understanding pension schemes and the way they behave that splitting the movement into more obvious and understandable drivers would help explain better. 

Why would complicating it possibly make it easier to understand? Do you think liabilities are massivley increasing or that fund growth of 10% or so above inflation is completely illusory?  Imagine a letter from any other sort of fund.. Because annual real asset  growth is only 10% or so above inflation and despite not having a decent pay rise for a decade ( which we assume is much higher when we calculate benefits) we are going to increase your charges and or reduce benefits??.

I would say it makes it less opaque.

I think that without the right information and the right understanding it's going to be difficult for people to ask the right questions, make the right challenges and propose the right alternatives when changes of this kind are proposed. 

Maybe for scheme members or those with deeper interest  but certainly not the majority of the public. Strikes in Universities are a general matter of public political concern.  The Junior Doctor strikes also struggled with a simple message by getting too bogged down in detail. Detail suits the spin doctors.

Unless the UCU massively improve their tactics from previous disputes this will be a(nother) complete farce.

A simple straight forward work to rule and a simple straight forward action that exerts pressure on the Universities (ie has students and parents saying "something must be done") and a simple and straight forward response to, "partial performance", (ie "no pay" = "no work" or all out strike) or don't bother.

The mood is there - people in the sector are genuinely alarmed and pissed off.  

That's my prediction. Unfortunately.

Offwidth: I cannot tell if you are for or against the proposed strike. If you're for it, what would you personally consider to be a 'win'? What would be a sufficient enough concession to stop the action?

Yes I'm for it. The UCU has no choice but to strike soon and hard as per Mike's blog. I already gave my views on likely success: very possible but likely messy unless UUk fold early; any strike action will need to be sustained and relying on membership holding fast.

I can understand why those unfamilar with UCU politics could regard past UCU tactics as flawed but in reality the union was split in those days and the hard left undermined things by constant attacks on the leadership. I was steeped in UCU politics then and saw the complexity of chosing strike days across very different institutions, and saw the data coming back from branches showing UCU Left views of solid support for strike action across the whole sector were pure fantasy (and the initial strike votes were never anything like 90%). The strikes were further devalued because support was low in the majority of Universities from the very first day but there were honorable exceptions, like Liverpool. Nevertheless no past strikes failed to achieved any movement; the new offer was made, consultative ballots were held, UCU leadership acted on these and claimed some success, UCU Left always accused the leadership of selling out.  All strikes on local issues (like major redundancies) have been much better supported and are nearly always a resounding success. My view remains the tactics can never suit everyone and the main problem was and will be members not striking. Tactics this time are much simpler than normal: fast and hard and only pre 92 to consider. As a UCU moderate (ie a social liberal on the far right of the union) it was particularly galling to be on a picket line when certain leftist members went in (or I later discovered they said they had worked to their line manager so that they didn't lose the days pay).

You are very lucky these days in practical circumstances to be able to take action short of a strike (or working to rule). UUK strongly encourage all local management to deduct a full days pay for any such action producing partial performance, most Universties comply, so you may as well be on strike. That  some longstanding UCU members still don't know this after multiple precendents and endless messages to that effect also pisses me off.

And what's an acceptable out come for you?

Whatever improvements the membership agree to if, as is very likely, UUK change position. That's TU democracy. As Mike points out, acheiving a result retaining the current scheme will likely be tricky without sustained strikes and some other factors changing (ie retaining DB as now...without the current proposed 'derisking' that caused the DB scheme to crash) and so that might not be the outcome.

I'd prefer better but the UK seems to be embracing the free market zeal of the US without their statutory protections.  For professionals this bad new. In the US they have tenure, much better pay and explicit protections for academic freedom.

Well OK, but that’s exactly what I don’t get about TUs - I have and value my own aims and opinions and am not happy being at the whim of others.

I note the DB scheme isn’t entirely abandoned but will be reviewed after three years. I don’t know how credible that is currently but it sounds like a starting point for a compromise to me.

That's not exactly a 'log of claims', is it? How is reaching resolution on this supposed to happen in the middle of a strike: tentative postal ballots every couple of days?

This sounds like 'Whadda we want!? Rectify the anomaly! When do we want it!? Um - we're not sure!' all over again.

Good luck. But I think I can see what's going to happen here.

Its not incremental though is it? Improvements are not 'checked' formally each time. It only goes back to the members when there is clear evidence that they will likely accept from branch soundings after significant movement. Some unions do get this wrong sometimes, misunderstanding just how angry their members are (like the JDs who rejected the first new position recommended by their leadership and fought on for a bit)

I forgot to add that I prefer: "What don't we want"   "Pension Cuts"  "When don't we want them"  "Now"

Usually the goal is to force the employers to resume meaningful negotiations.

That's a reasonable answer.

Can you (seriously) help us all out here by outlining the current positions of the two sides, and indicating what a mutually satisfactory compromise position might be? Because this isn't at all clear, to me anyway. If the fundamental difference is whether or not the current DB pension is to be replaced by a DC one, then I don't see how any compromise position *can* be reached: one side will have to 'lose.'

Maybe should have replied earlier. Perhaps the 18% employer contribution is one of the reasons why tenure and terms and conditions have not improved.That is one hell of a contribution.Maybe the only way the employer can afford the 18%  it is by cutting back in other areas? So what you are seeing is almost inevitable.

You need to stop obsessing over 18%.   It's the total salary+pension+otherstuff that matters.  Currently that sum is somewhat less than competitive with other leading university nations (e.g. US, Canada, Australia, Switzerland).  By removing the DB scheme the balance will shift further, and salaries would have to rise for the UK universities to remain competitive, so it all adds up to much the same cost.... except that a DB scheme reduces the risk to individuals in a way that  can only be compensated by a substantially higher cost to employers if a DC scheme is used.

It's a spot cost in a system that is designed but turns out to be stupid in economic times such as these, made worse by the USS decision to de-risk. Such scheme costs are adjusted every three years (even if the scheme closes). At some point the extra income and large growth will overtake the idiocy of the valuation mechanism and employer contribution requirements will drop. The scheme real assets have grown 12.5% annually since the last USS reorganisation ( one designed to increase income, move to CARE and hence put the scheme back on track). The liability balance in terms of people retiring since then hasn't changed much. Its clearly a bullshit valuation logically but  that is the current rules. Everywhere you see this talk of deficits in DB schemes similar  idiocy occurs.. it's a major political issue closing schemes based on illogical valuations as such valuation rules were based on differemt economic times and the current low gilt growth and wage stagnation was never anticipated.

As MG says, why is something like a temporary less than 10% extra pension cost cf competitor significant when international equivalent salaries providing the competition,  have gone up by more than 30% over UK academic salaries since 2009.

You mean actuarial evidence/predictions. Just because the actuarial predictions supports a different outcome does not mean it is ideologically driven.

DB schemes are a wishful thinking last century anachronism to most people these days.

I am still stunned that you get away with an 18% employers contribution. 

Considering those in tenure are probably shovelling away another 10% or more from their salaries  as they know it’s a good thing to do. And getting tax relief. Then I cannot help but think it’s an unreal world in academia .

Tenure is a (rather odd) US, not UK, thing.

You seem to think academics are too highly paid.  Is that your view?

I am talking about your pension scheme. I have never mentioned your salary .

Out of interest what age are you allowed to retire at under the scheme. 

You still seem to be missing the point they are one and the same

67 is the normal age.

Sorry but I can't.  I am a UCU branch officer but in a post 92, so we've not really been involved in this as TPS is the pension for our academic staff.  I'm not sufficiently well versed in the ins and outs to give an accurate summary of the issues.  We do have some members in USS but they aren't included in this industrial action because USS isn't the recognised pension scheme at our University.

No problem - thanks for the reply.

Thats not true. 65 is the normal age but you can go earlier.

https://www.uss.co.uk/members/members-home/retiring

Those retiring early face actuarial reductions, like all such schemes.

Also tenure is the norm elsewhere in 'western' Universities.  The UK is the odd one out not having it.

That's right now. For anyone under about 50, it will be 67.

Actually I was the one wrong in that,: as we are talking mainly about the effects on younger academics yes the shift in NPA is the most relevant number.

Fine.  The flexibility of retirement age (with corresponding reductions/additions) is actually another benefit of the scheme, although this is perhaps getting more common.

Latest letter with some telling detail.

"Dear Sir Paul

We are writing to express our extreme disquiet about the recent proposals from USS which are designed effectively to close the defined benefit provisions of the pension scheme to future accrual.

As you probably know, some of us have written along with other leading academics (from institutions that include Oxford, Cambridge, Warwick, LSE, Bristol, LSHTM, UCL, Imperial, Leeds, Cardiff, Sheffield, Loughborough) to USS (and the media) with our serious concerns about the models, methodology and assumptions that USS and their advisers are deploying.

A major concern relates to the transparency of decision making in the USS pension scheme. The USS has announced a substantial deficit, but the data and methods they have published are very limited, making them impossible to judge. When there is considerable dispute about the models, methodologies and assumptions that are being used to justify such a major decision, we believe that there needs to be much stronger efforts to explain, discuss and listen to counter arguments.

The USS manages £60bn in assets on behalf of its members. The most recent USS Report and Accounts (2017) indicate that the scheme has a large deficit. However, the USS provides insufficient information about the methods used to value its assets and liabilities. They present no confidence intervals around the point estimate of the deficit, no indication of estimation error, nor any sensitivity analyses. They provide virtually no details of what data or analytic code they have used to come to their conclusions. The cited report underpinning the mortality assumptions is not publicly available."

.....continued

..... continued

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.

..... continued

"A further important point is that we wanted to investigate the assumption regarding the rate of interest used to discount the liabilities and, in particular, its relationship with the assumption regarding future salary growth, since these are key drivers of the results. However, when comparing the assumptions set out on page 106 of “Universities Superannuation Scheme Report & Accounts for the ended 31 March 2017” with those set out on pages 14/15 of “A consultation with Universities UK on the proposed assumptions for the scheme’s technical provisions and Statement of Funding Principles” dated 1 September it was very unclear what assumption had been used in respect of the rate of interest used to discount the liabilities in the most recent valuation. It is very concerning that such clarity is lacking. Indeed, omitting a key input parameter is not consistent with the Financial Reporting Council’s Technical Actuarial Standard (TAS) 100 which requires “clear, comprehensive and comprehensible” communications in actuarial reports so that “users are able to make informed decisions”.  This seems to be another example of the unsatisfactory nature of the way in which the models, methodology and assumptions have been presented.

.....Continued.......

The limited disclosure on mortality is unhelpful.

The standard model used across the industry (may or may not be used in this case, bu very widely used) does have an assumption of a long term rate of improvement, and 1.5% is a commonly used value. It's below that seen in the noughties but above that seen in the population as a whole since then (it may still be below the rates seen in higher socioeconomic groups, who tend to dominate pension liabilities, but that's a matter of debate in itself).

The important thing though is that it is a long term rate, and that the model projection launches off from historic data - whilst the long term rate may not move, the shorter term rates of improvement would therefore show some of the decreases that the authors observe. 

In terms of the negative real rates, I think this is a feature out in the markets - the prices of market trades on nominal and index linked long dated gilts reflect negative assumed real risk free rates in the long term. It's a bit odd that they are,  but people are actually investing money now on that assumption. That's not a comment on the comparison of the blended investment rate and RPI, to be clear, just a reference to the assumption which I believe is being made based on the prices on equivalent risk assets. (Edit: https://www.bankofengland.co.uk/statistics/yield-curves has graphs)

The longevity assumptions don't worry me too much... time will tell and reduce costs at some point. Its caution upon caution upon caution such that the scheme needs to be closed that is the issue.

One of my concerns is the damage this might do to your profession and industry, as well as to future potential pension arrangements. Its hard enough to get the young interested in pensions as it is and too much of the population seem to regard anyone in finance as borderline evil.. A normal person would expect sensibly cautious rules but a pension that was significantly changed and then was regarded as  OK just 5 years back with no demographic shift and asset growth  of  12.5% annually since then, on £60 billion, simply can't be in such trouble. In my opinion its beyond actuarial arguments and moved into the realm of pure bullshit. I never expected to see a pension scheme moved so far into post truth terrain.

Well the simple answer is that it is better in surplus than deficit . So count your lucky stars it is not the other way round like so many other schemes. Do you fancy being in the Carillion scheme with a £1 billion defection! 

the longevity assumptions will impact the point in time valuation of the liabilities in the same way as inflation or investment yields though - they’ll all unwind and self correct over time if they’re wrong, and they can all drive decisions made now. You should be as interested in those as anything else.

You make an interesting observation about the profession and industry. Whilst I do have an interest in the actual results of the USS valuation I attempt to clarify or explain mainly through some vague sense of obligation - in reality it doesn’t directly impact my life whether anyone on the forums gets it or not, I just vaguely feel that I should. I’ve attempted to give up arguing about it - I don’t think anyone could do anything to change your mind, and I’ve grown immune to the repeated assertion that the actuaries involved are mad, incompetent, part of some stitch up that would require violating a whole host of professional requirements, obligations to the membership and whistleblowing requirements, and all that - and try just to improve clarity here and there. I can only hope that in this and previous threads there’s enough detail there that others might find it helpful.

From my perspective the actuaries are in part the messenger in this drama - after all the low rate environment comes out of the wider economy and a lot of the choice of what to do about it comes from the sponsoring employer - and I suppose it depends whether people react to bad news by shooting the messenger or not. 

I've been roughly following this thread.... finally, the hard numbers. Thanks!

These are more-or-less the assumptions I make about about my retirement looking forward. The key thing being "nominal investment return" which I assume means (actual return - cost of living adjustment). I have, throughout my career, made a point of not being much dependent on government or employer handouts (i.e, save a lot). It always astonishes me that otherwise smart people can live paycheck to paycheck and then complain about not getting a juicy pension at the end. 

Admittedly I have a US-centric view, but it's not really a lot different, barring a total collapse of a currency, hyperinflation or some black swan event. 

Nominal return is just the plain return.

Real return would be adjusted for inflation.

Something I've noticed about this thread. Quite embarrassing, really. Just how verbose and, frankly, so inept many of our 'better educated' are at expressing themselves clearly and concisely. Not good.

Yikes. So that would be a negative real return, probably. That's just bonkers. Although possible with high inflation. 

I recently looked at all the 20-year annual returns (monthly) for a hypothetical tracker fund for the US S+P 500, with the cost of living subtracted, going back to 1960. 

Max   11.67%

Min  -3.20%

Ave   7.82%

Median 8.77%

The min values were during the 1980 recession when inflation was running at 13%. I'm sure the UK numbers using the FTSE would be similar. It would be interesting to add a sensible level of gilts to the mix - modern portfolio theory would have the max, average and median reduced and the min increased 

edit: (1) trying to tidy the formatting with no joy and (2) to say that an 18% contribution by the employer (Coel, somewhere near the beginning of the thread) sounds about right and almost generous. The general recommendation is that one should sock away about 20% to avoid penury in old age - I think this amount also assumes a bit of a reluctance to be dependent on governments.  

If you look at the graphs from my post yesterday afternoon that suggests negative real returns across the piece based on gilt prices - -1.5% or something as an average?

Add in low additional yield on corporate bonds, which mean a chunk of corporate bond holdings will probably fail to earn inflation.

And then add a scheme inflation assumption of 1% above inflation, to push the hurdle up a bit .

I don't know the equity:corporate:gilt blend but of the 3 asset classes you'd have to guess that only the equities will be forecasting above inflation+1 growth, unless they're investing in comparatively high yield corporate bonds .

Thats a very important bit those Business School academics miss from their letter. The liabilibilties of USS are shared across all USS institutions and backed by government scheme. The odd Uni might crash in the brave new UK free market but nearly all ? ...that's a big black swan. Its irrelevant how you plan in such circumstances: if your assets consitently and massively outperformed your benchmark growth and liabilities stayed significantly under benchmark growth you would be pretty annoyed if those managing your assets said they were no longer viable long term.

Ok I was being lax with language again. If I argue about longevity I'm aware that the error margins are huge and hardly anyone listens. The asset liability balance on the finance side simply doesn't match common sense (very healthy assets and nothing odd about the liability side since the move to CARE and yet the scheme is crashing); let alone the growth and liability detail the business experts raise in the letter above. I simply don't see major reality gaps with those age growth numbers from the industry perspective. However...

When you look at the scheme demographic, things are a little different on longevity. Those who retired a decade or two back HAVE been living longer than predicted. This is no surprise to me as compared to the general population they are much better educated and made better health decisions, probably used the NHS more intelligently (as the middle class do) and had a job role with a lot of job satisfaction and plenty of autonomy.  The only hope of any improvement on items on that list for those mid career in academia is general improvements in the UK health system. USS longevity growth that high looks very dubious.

Over to your industry.  It's helped most of the population have financial security in very beneficial ways for them and society. I ask myself the way things are going why anyone should bother at all with pensions. You can invest in a house , a business or asset funds etc where growth predictions are different from pensions based around average expectation. A scheme of defered pay (thats what a DB pension is)  backed by significant employer contributions is deemed to be performing about the same as saving your own money in your own way with the much improved emergency access you have in investments on you own. The industry is effectively saying its product is shit (when it isnt). 

Way more important than USS, I look at my many graduate friends in their 20's and 30s (thats a consequence of staying keen in climbing when approaching retirement age) and their investment for retirement is mainly a big mortgage on a house (or a hope for one). By 40 (like many graduates at that time)  I had payed a good lump off my mortgage (certainly such that repayment changes on interest rates were no longer a risk and the house was worth double what I paid for it), I was building other investments and I had 18 years in a good job (fabulous job satisfaction and autonomy... where, except in marking periods or overseas trips, working over 40 hours in a week was on my terms for something I wanted... and easily enough flexibility and holiday entitlement for a climbing guide book worker!) in a role with annual increments and promotion prospects and a final salary pension. For those less well educated things have probably even got comparatively worse. Our country will face many social problems and probably unrest if retirement situations don't improve soon. Each new government parks the issue as its scary (and getting scarier).

Yes, the whole issue of retirement is a can being forever kicked down the road, along with its neighbouring cans of elderly care costs and a few others related to the costs of retirement. Nobody wants to really hear the message and so noone really has the courage to deliver it. It's an enormous challenge.

Low rates are a fundamental challenge to providing long term savings and income streams at the rates which people are accustomed to paying. In simplest terms, a retirement annuity is a given set of payments in the future, paid for with a lump sum now. Those payments are partly funded from the premium itself (X) and partly from the interest you earn on it (1-x). When you could earn 6% or 10% or whatever by plonking the money into corporate bonds then X could be a lot lower than when you can earn 2% or 3%. 

So something has got to give. You can condition people to pay more for the same benefit (increase X), or you can take on more risk to maintain the interest earnings. That leads along 2 strands - normal annuity rates have got worse, and other products such as drawdown products have become more popular which essentially allow investment in higher yielding assets, although often by shifting some of the investment risk back onto the policyholder.

Defined benefit pension scheme are "just" a far more complicated version of above. As investment rates fall, the premium (the scheme liability value) shoots up because the you assume that interest earned can contribute less towards the expected payments (which may themselves be more stable as you suggest, although they will be very sensitive to inflation).

Your asset values behave the same way. A lot of the investment growth in the scheme wont come from getting more income coming in in future (the cashflows on the gilts and bonds are fixed), it comes from the fact that in a lower rate environment investors will pay more for that income stream than they would have done previously.

So to some extent your growth in assets and your growth in liabilities mirror each other, because both reflect a fall in investment rates. The liabilities react more because they're often longer term .

And essentially the same options are open. The funding rate can increase, to push up the X, or they can take on more risk to chase the same yield as previously. 

The USS scheme isn't like that though, its growing well (even though it was predicted not to by the scheme rules for the last 5 years). The liability growth also seems way too pessimistic compared to other DB schemes (a scheme type I think is structurally disadvantaged in any case, the way the goverment and tPR are currently looking at things). The coal miners' scheme was reported to be massively underfunded in the Telegraph a decade ago and a huge risk to the public,  since the government had taken it on,  now it's in massive surplus. These are unusual economic times and plenty of actuaries and business researchers are saying the way we measure pension funds (especially the issue of using highly distorted gilts) should change.

This difference between the current huge negativity on likely pensions returns and the way other investments are usually portrayed, on average likely outcomes  is a big problem for the pension industry.

It is a big problem for every one.And partly goes back to so called Endowment misselling, Maxwell and others. The fundamental issue being the shift away from being allowed to invest in equities and the shift  for less risk taken by funds to satisfy a risk averse govt and also a risk averse public.Both of whom got bitten in past pension failures. The points you make have been around for a long time easily 20 plus years and are well known.

see above - if most of that growth just comes from falling interest rates then it's inevitable that it will be more than matched by the growth in the liabilities from the same cause. 

I feel we are circling . I get your point. My point is the scheme has gone from rescued to bust in a few years with strong growth in assets. I understand what you are saying about parallel growth in liabilities when some growth relates to things like the devaluing pound affecting shares  (even if I simply don't believe the effect is as big as you imply ... nothing would ever grow otherwise). However,  I can't understand any logical way you can explain USS has gone bust in such circumstances. Why don't you pull apart some of the CASS business academics arguments, such that the logic gap becomes closed. These are not small issues pretty much all of the problems are needed to generate the failing valuation.  All the cautions, of caution upon caution upon caution...., must be right at the same time for the scheme to be truly bust.

Endowments were an interesting parallel. I made 100% profit on my misold policy (a miselling in the mid 1980s I was aware of, based on the bonus the building society salesman got, but I took the deal anyway as it was better at the time than other options). A lot of the misselling of PPIs was also usually obvious to anyone with half a brain. All investmenst can go dwn as well as up. Much less well known is how much pensions took a massive hit when Brown taxed them.

 https://www.ftadviser.com/2014/05/07/opinion/tony-hazell/savers-could-have-...

Maxwell and others could steal from pensions as it was legal and because the flawed model (that I am attacking in this thread)  said in those times that the pension was in surplus (if you believe the valuation model, they often did nothing wrong). Of course the model was bullshit then as welll... it overestimated asset growth and underestimated liability growth and the pension wasn't really in strong surplus at all. The only time you can see the surplus is real is when the scheme is closed and assets are still growing much faster than any likely liability, as per the Coal Miners scheme scandal..

http://www.huffingtonpost.co.uk/rachel-heeds/miners-pensions_b_12191740.htm...

Strike details now out

https://www.ucu.org.uk/article/9242/UCU-announces-14-strike-dates-at-61-uni...

It doesn't say what their demands are.  

Firstly, apologies, I have the delights of my child's birthday with visiting grandparents to deal with this weekend so am likely to respond slowly and certainly won't be able to comment much more on the Cass letter.

More importantly though I'm not sure what I can say that would help . If you genuinely get my point that the point value of scheme assets will rise by less than scheme liabilities when interest rates fall, but can't understand how that could lead to a worsening in the position in a scenario where interest rates have fallen, then I genuinely don't know what to say because one following from the other two is just logical consequence. 

The defecit is the difference between two big numbers. If at the start of the period assets and liabilities were equal, it would only take a 10% misalignment in sensitivity to generate 6bn hole. 

You might try navigating the news section of the site...

https://www.ucu.org.uk/article/9196/University-pensions-strike-update-Unive...

Apology accepted but you can do better than that. As an expert, just talking tritely about the difference between two big numbers doesn't wash. The CASS letter details problems point by point, yet if you're too busy for that now, thats OK, as the action will take months there is no rush.

It's clear you feel the model is correct and the reason behind the fast growing assets of USS are actually a disaster as its increased  the real liabilities even more (with no explanation of why that number would be larger). My case is when your model seems to contradict reality, the model is wrong. As with any such data.you can test it by seeing how it applied to the past few years and the predictions are clearly nonsense and the seperation from reality seems to be getting worse. Plenty of pension research experts are saying the same now. The assets are obviously real (at least as real as assets in any fund are) and the liabilitiy predictions almost certainly heavily distorted.

Why not explain how the Coal Miners' scheme is doing so well, when the same models predicted it should be in a real mess. I'm saying this is because the predicted liabilites were ridiculous there as well and once the scheme closed that soon became evident.

You seem to know what you are talking about. What is the thinking behind assuming gilt type investment returns when most investments are in shares. It seems odd.

I thought I explained the point on liabilities above. The cash flows on the liabilities will stretch further into the future than the cash flows you can obtain on most bonds. Since the present value of a cash flow is cashflow/(1+interest)^time, the longer the time the more sensitive the present value is.

I'm not quite sure where the separation of the model from reality that you refer to is, so I’m not sure I can really address that point - rates have dropped and the scheme deficit has behaved as I’ve said I would have expected it to. The only way I can make sense if this is if I assume that “reality” is set as equal to your view, which is not really a line of argument I see much point in engaging in.

On the subject of the cash flows being stable, just as an aside, the letter suggests an increase of what, 1.5% pa in assumed inflation. If you assumed that somewhere in the 20-30 year point is an average duration for the cash flows (I don’t know, but if someone asked me to guess that’s what I’d guess) then at that point that’s a 30%+ increase in any cashflow directly linked to inflation. Some of that might be matched by a change in assumed inflation on the asset prices, but another key change is from a measure of inflation to +1 above that, which is a change that only impacts the liabilities. So it’s not like the cash flows themselves are being assumed to stay constant either.

The rate quoted by offwidth above is 2.8%pa - there are no gilts I’m aware of currently earning that much. From a quick look on the ft the spot curve currently tops out at about 2%, and that’s the high end whereas a single rate quoted in pension scheme reports is usually some kind of representative rate from across a curve (which inevitably starts lower - short end gilts earn far less)

There are two ways of valuing pension schemes that I’m aware of. I’m not sure which rate is being quoted in that letter, but

- theres the accounting (ias19) way, which values the scheme based on something approximating to the yields on AA bonds. The main advantage this has is increasing comparability between different schemes, as far as I can see, because the liabilities will all be discounted in a similar way. I imagine that’s quite useful for stock market analysts. The key disadvantage, which is the one I find frustrating, is that there’s a disconnect between the behaviour of the assets and the liabilities. If you value something using the yields on AA bonds, then it will behave a bit like an AA bond, and therefore not really like the mix of bonds, equities and whatever else the scheme holds as its actual investments. It’s quite difficult to manage the difference between two things when they behave in quite different ways.

- there’s then the funding basis, which is the one on which the contribution levels are set. That would typically be set using a return based on the assets, so you might assume your gilts earn the gilt rate, the corporates earn gilts+x, your equities gilts+y and so on and you take an average based on how you have invested. I don’t really know but you might be able to find out the detail from a funding report, I’ve never looked. The reason for assuming they all move in a similar way relative to gilts is that it would be very odd to assume that returns on different classes of assets act in a vacuum from each other. The difference in perceived risk between gilts (nominally risk free), corporate bonds (exposure to a given firm but with a guaranteed income stream and some claim on bankruptcy) and equities (exposure to a given firm but with no fixed income stream and limited protection against failure) will vary over time, and will vary between firms, but is probably static enough that it’s more sensible to assume the difference stays static than the total return stays static., in the context of a really long modelling horizon. This should mean the assets and liabilities move a bit more stably as investment markets change because by valuing the liabilities with reference to the assets their present value moves more like that of the assets. The key challenge which I mentioned in my reply above to offwidth is that if the cashflow streams are of differing lengths then different interest rate sensitivity will still be seen.

So I suppose the start answer is that they aren’t assuming gilt level investment returns. The second answer is that I don’t know whether the figures quoted are from the first or second basis but given the context I would assume the second, in which case the uplift over a blended gilt rate depends on the asset mix and on the assumed extra return being earned. I can see the former from the internet but don’t know about the latter so I’m afraid can’t completely close off your question, sorry.

Modelling against reality involves a simple experiment. Look back in time and see where you should be on the model right now. If the model diverges it's worthless. That's the increasing position of many experts on gilt valuations in current economic times. Your analysis in laymans terms amounts to saying ' thats the equation' and showing how well you know it and failing to understand the equation may be wrong.

http://www.actuarialpost.co.uk/article/half-of-schemes-feel-gilts-plus-valu...

https://www.hymans.co.uk/news-and-insights/news-and-blogs/blog/db-pensions-...

http://www.cityam.com/248535/dont-overreact-vast-pension-scheme-deficits-we...

I haven't followed all the detail in this thread. However, following the above: is the aim of the industrial action to have the valuation of the existing scheme (assumptions; techniques; etc.) completely revisited? Or is it to have the proposed change to a DC scheme dropped, irrespective of any valuation?

If the former: has this argument been had already (I assume it must have featured)? If so, what did Cubie have to say on the detailed matter?

Your first point, that the model now should match the figures it generated in the past, is all well and good if the assumptions stay as you set them. A model which doesn't change the result as the underlying assumptions change is a pretty useless model. 

Your obsession seems to be with the model, rather than the assumptions that drive it and what they mean. As the hymams article notes, other methods can show a similar increase.

The trustees have increased their assumed rate of inflation; that will increase future liabilities. Theyve changed both the measure and the uplift, both in the onerous direction. 

And even if you attempt to disconnect everything you assume about equities from the yields in the corporate debt markets, you've still got 30% of the scheme assets in fixed interest assets, and the yield you can earn on those has fallen which in the real world means the scheme needs to pay more to earn the same return, or take on more risk.

All models are wrong, but nevertheless some can be useful, and a model which didn't put those two points together to show a worsened position would not be a useful one.

Thanks for the full answer (and the others) which are all interesting. 

Thanks in return - this discussion can often feel like a thankless task so I'm glad someone finds it of some use.

No one has answered the detailed questions from the CASS staff (and probably no one will). UCU aims are in the link I replied to Coel. Cubie is very much part of the problem in my view.

I find what you are saying useful. I just wish you would acknowledge other actuaries think differently (and the people who do the research to form the valuation methods  are more likley to be in a Buisness School than working as an actuary).  Also explain why a pension is so special that fast growth in equities and property in USS are a bad thing (how else would the deficit get worse) and in  other investment types are a good thing (I don't think you can).  Also explain how the actuarial doom and gloom on the Coal Miners' schene turned out to be so wrong. Your models have to meet reality in an explainable way at some point. Like most in academic STEM I work with way more complex models than those behind pensions but have to explain them to reasonably intelligent students who are not experts.

This thread is getting rather long, and I'm not sure what link you mean.

What I am still wondering about are the tactical aspects, and the potential for any compromise solution. If the argument's about the valuation, then presumably a compromise would involve each side putting their case to an 'independent' third party (or, at least, a third party acceptable to both sides), and then accepting the decision. But if the argument's a binary one regarding either DC or DB, then I don't see how any compromise position can be reached.

I didn’t think I’d said other actuaries don’t think differently. You can model it in any number of ways - I’d probably do it differently myself - but as the link you provided noted most of them would show the same direction of movement even if not the same value.

I’ve no interest in playing the “I can explain things so much clearer than you” game, nor the “my models are so much more complicated than yours” (by inference “I deal with way more complicated shit than you”) game because I can’t see a way out of that that doesn’t involve someone calling someone else an idiot.

The cass letter did ask some of the right questions, but I was slightly disappointed that they failed to get the whole price vs yield issue either given you might have assumed their background had a bit more economics in it than that. I was also a bit surprised that they claimed that if yields had fallen by that much someone would surely have noticed, as if it hadn’t been reported in umpteen not-that-specialist pieces of financial news.

I don’t actually think that fast asset growth is uniformly good everywhere, just to pick up on that point. I was thinking on the way home and had one idea that might help get the mindset change which currently separates us. 

Stripping back a lot of the complexity for a second, whether high prices are a benefit or not depends on whether you’re a net buyer or seller. Say for a second you are a reasonable way from retirement and have a btl worth 100k on which you can earn 500 per month rent, and your intention is to use the income to fund your retirement. But one btl isn’t enough to retire on, so you take your pay checks and your rental income and you diligently save towards a second and a third. But by the time you get to the point of buying one, your house costs 120k. Is that good? Your house has gone up in value, you have more money towards retirement, so perhaps? But the house wasn’t enough by itself.  If your £120k gets you 600 a month, then it probably is good. If you’re now having to spend 120k on the second of third btl and it yields 500 a month still, then less so - you’re now earning 5% rather than 6% on your investment and so the compounding of earnings will be that bit slower.

Even more simply, the only people who benefit from high house prices are those looking to cash out - it’s a hindrance to first time buyers and in the middle of the chain it just widens the gaps between properties, which only helps if you’re downsizing.

Coming back to the pension scheme, your corporate bonds are definitely a house earning 500 because the coupons are fixed - you’re definitely paying more for the same thing. You can probably debate equity and property more, but I’d be surprised if people really assume a 50% growth in company dividends to go with the 50% growth in prices the cass letter quoted. Older “net seller” schemes which are closed and aging out would tend not to have high proportions in equity - if you think you might have to sell the equity to fund payments then the price volatility is a bit of a disadvantage versus the more predictable income from bonds - which combined with the fact it’s still open suggests that uss is a “net buyer” scheme - all those employer and employee contributions and the earnings on the existing assets are going to be way more than the current outgoings so need to be invested for the future. Buyers prefer buying low!

Have just read this (https://www.uss.co.uk/how-uss-is-run/valuation/annual-report-and-accounts-2...) which seems to suggest that the report and accounts, which look to be where the CASS letter quotes it’s investment return, were published mid year at which point the triennial valuation, from the link, was still ongoing. 

That leads me to wonder whether the figures in the back of the report, and the low investment return quoted, are in fact representative of the first of the two bases I mentioned, the accounting basis which discounts off AA corporate bond yields. The mortality model, which I had assumed would be updated, has in fact remained the same (CMI2014) which again is something that makes me wonder if it’s a mechanistic update of the accounting valuation rather than anything to do with the funding basis. 2.8% wouldn’t surprise me as an aggregate AA yield in current market.

The CASS letter reads as though they are assumptions which determine the future scheme funding, but if they’re quoting from an accounting basis report that may not be the case.

I couldn’t see a triennial valuation report elsewhere on the site mind you. <edit> - https://www.uss.co.uk/how-uss-is-run/valuation/2017-valuation-updates/consu... - this gives enough detail on the proposed funding basis rate to confirm the stuff from page 106 that CASS quote is the accounting not the funding basis

Come on, you can do it. Why did the Telegraph 2008 estimates of the Miners Scheme 'deficit problems' prove so wrong.  Why did average 12.5% annual growth in total assets (including bonds) over little more than a few years lead from a stable resolution of the USS DB pension to a crash.  You're an expert, you have posted several times at length so why is it so hard for you to explain this in relatively simple terms (I still think you can't, without admitting gilt plus is flawed and the propsed scheme change is a bout of foot shooting dressed up as another unnecesary layer of caution). Nothing you have said so far comes close to explaining these two key issues (although it does usefully help explain how such pensions work). The CASS points were also useful, thanks; still most of those cautions upon cautions are still in place.

Your hectoring, sneering tone is really unpleasant.

I don't know anything much about the coal miners scheme, and have little desire to read into it to humour you. Go pay someone to give you an answer if you want it rather than trying to get me to spend my time on it for free. I did more extra background reading into USS because it affects me, whereas noone in my family are coal miners.

Obsessing over gilts+ or other modelling solutions is deflecting away from what the model is actually telling you about the levers which affect the scheme. This, and probably any other, model, would tell you the scheme is exposed to falling yields (which given price and yield are inverse means rising prices) because as a net buyer of assets (2.1bn of contribution per annum, expected to swell by another 30bn) it is more beneficial for prices to be low to earn higher yields now since it only expects to buy at current prices, not sell. Ive explained that message in my previous - all the liability valuation is doing, if you understand how it works, is telling you the same thing via different numbers. If it still didn't work then I'm going to call time on it. Obviously text is a terrible medium, because I roadtested it on my wife in a few minutes to check out the explanation before posting ir, and given ttha struggling endlessly to get you to understand via a text link doesn't feel a good use of anyone's time.

+1

I used to think Offwidth was one of those people on ukc who it would be interesting to meet in the real world, but since this and the previous thread my view on that has shifted quite dramatically not because we disagree but because of the way in which he argues and treats the people with whom he disagrees. 

I rarely just give up on contributing to threads on ukc midway through because it just doesn't feel worth the hassle any more - this one and the predecessor to which I contributed are the only ones I can think of recently, and as a result of the same person both times.

As a last contribution, I thought I'd point this one out to anyone who might be interested:

http://wonkhe.com/blogs/would-a-shift-from-bonds-to-growth-assets-keep-the-...

I haven't read the underlying report but thought the areas of agreement and difference between the trustees and the unions advisors might be of interest. From the summary posted, it looks like the main answer was to propose a change in investment strategy, to argue that the scheme structure allows it to take on higher risk investment than might be expected and therefore chase the required returns.

Well I apologise if thats how you feel as it wasn't my intent. Passions can run high in such disputes and altermative intelligent views are always welcome from my perspective. I really am stuck as to why people think gilt plus is working OK with all the evidence to the contrary and more than that still, how derisking could possibly be a good idea. So far your explanations have highlighted some of the potentially overstated assumptions... I just wish you could go a little further. I am certainly  tenacious but have no ill intent.. putting facts before hate was one of the big reasons why I got involved in UCU and its predecesors  (as too many reps seemed hate based and stuck in ideology and academics often needed help from someone less like that.)

From  the wonk HE post (Id not seen this before and I think its as good an explantion of the conundrum as I've seen)

"In comparing USS’s approach to investment with First Actuarial’s, the following question arises: According to USS’s own best estimates, the expected 30 year returns on growth assets such as equity and property are 3.64% and 3.23% above CPI respectively, whereas the expected return on LDI such as index-linked bonds is CPI minus 0.76%. Therefore, even if cash flows from growth assets track pensions liabilities less well than cash flows from LDI, the fact that the expected total volume of cash flows from growth assets is much higher than the expected total volume of cash flows from equivalently priced LDI ensures that the liabilities will be covered, even on a prudent rather than a best estimate basis. Why match pensions liabilities with a small stream of income that has the same shape as the liabilities rather than fund them from a less well matched but large stream of income that should more than cover the liabilities, whatever the mismatch?

The soundness of any call in future weeks for cuts to defined benefit pensions will turn on the presence or absence of a compelling answer to this question."

This is precisly why I was prodding you (yes an annoying tactic but who else here would try?) .. to explore the gap from your perspective.

Thank you. 

One of the things that's quite apparent to me from the September description of the discount rate is that they're doing way more than just taking an average of gilts, gilts+1 and gilts+5. They're looking at returns relative to inflation, as an obvious start point of difference, but they're also looking at asset returns over different investment horizons and so on.

I thought the wonk post was useful too, which is why I thought it might be of interest.

As far as the investment question goes I think their thought process is likely more about uncertainty of outcome than mean outcome

- lower yield investments provide a better exact match to the cash flows but a lower overall return

- higher yield the opposite - higher but more volatile returns.

So as a sponsor, you can basically pay predictably more now, or risk an unpredictable cash demand at some unknown future point (since the higher risk assets are more volatile in value and cashflow, and you're the one on the hook if you happen to hit the bottom end of the possible return distribution). 

Andas a trustee you can either try to get more money into the scheme from sponsors and safely invested now, or you can hope that higher risk investments will fill the schemes coffers for you, but with the risk that if your predictions don't come good you need to call on the sponsors at some period in the future where you have far less certainty over their ability to provide than you do now. I think that short term Vs long term timing of potential stresses to (cash demands on) the employer covenant may be a factor.

In this case it looked like the trustees had a limit on the level of risk they wanted to expose the scheme to to minimise the payments into the scheme now, and the regulator had doubts over the strength of the sponsors covenant which would tend to push to getting the money in now rather than later. And it looks like enough universities didn't want the uncertainty of their future contributions, even at the expense of paying more or closing the scheme to future accrual, which helps stabilise their exposure at the expense of the anger of the staff.

Not intended that way but (look at the time) maybe thats what a 5 hour drive round trip to Bolton  to a NW BMC area meeting does to you?! Even the journey back was a nightmare as they closed the M60.  Apart from Jim Gregson (from the MoNC 30) who apparently still sees conspiracy everywhere, the debate was mostly reasonable and diverse  but very different from the Peak Area. They certainty could do with more members, especially the younger than 50 and women. One thing we did in the Peak that helped was welcome non members interested in the issues (and of course  encouraged them to join).

So they think that shares are too risky, and prefer to go to gilts, despite the near-certainty that they'll be much worse in the long run. 

Shares are really only "risky" if you might be a forced into a firesale  near the bottom of a downturn.  Under all other scenarios they always outperform gilts in the long run.

So might USS ever be forced into a firesale of assets? Well, universities are surely here for the long term.  It's hard to imagine that our society would be without them.  (That's why, for example, universities such as Oxford are able to place 100-yr-dated bonds).

So it's hard to imagine USS that far from a "steady state" in which there are both inflows (from people paying in) and outflows (to retirees).  And if those are not too far out of balance then you're not going to be forced into a firesale, since you have an income stream comparable to your immediate outgoings -- especially if you do have some chunk of your assets on gilts for if you do have to sell. 

So I'm beginning to suspect that this whole issue is about:

The employers think that their current 18% contribution is too high (which is understandable, by any historical comparison it is very high).  

They thus want to reduce it to 13.25% -- the proposed rate in the DC scheme they want. 

They thus want a valuation method that makes the scheme *look* unaffordable, so that they can force through change, and that's why they're going for an ultra-cautious valuation in terms of gilts.

That needs comparing to the average employer contribution to USS over the years which is a lot lower than 18%. If, as is highly likely,  economic times change and valuations become more positive, employer contributions will drop again... 13.25 seems a poor exchange as it will be locked in on a scheme predicted to be worth much less than the current DB scheme; just at a time when recruitemnt is sure to become a lot harder. We are 'closing borders' at a time when local supply has probably never been as low nor our salaries so uncompetiitve in the western English speaking world. More foot shooting!

The trustees own the valuation and the investment strategy, not the employers. I've not done much work with trustees, but my experience of people with statutory roles like that is that they tend to take those roles quite seriously. Without knowing the specifics, it's hard to imagine the trustees (and the scheme actuary, who also has statutory responsibilities) choosing to forgo all that to bend to the employers will. And the employers are entirely within their rights to close to future accrual based on their own view of when enough is enough without needing a valuation to be rigged to force it.

One thing I don't know is whether the trustees have a greater responsibility to protect the benefits already earned than to protect the scheme as open to accrual. No idea on that but it would tilt the balance of how you might think and act.

Universities are going to stick around, but will all today's ones be around - new replacements wouldn't step in to fill the gap after all. I've no idea, but clearly the pensions regulator wasn't entirely convinced on the covenant strength and their view is more informed than mine.

I think the thing with shares is perhaps it also depends where it gets you how you weigh up the return versus volatility question. From what I thought I remembered, the First proposal still barely got to an even position. If that was set at 2/3 chance of that or better, that means a significant risk of shortfall with more surrounding volatility. If the higher risk got you to a significant surplus (say breakeven in 90% of scenarios), maybe the thought process would have been different since the chance of a future stress to the sponsors would be far less. Who knows? 

Aren't the trustees half appointed by the employers, half by the unions, and one independent chair with a casting vote (who tends to decide things, since the rest divide equally)?

All the ones in USS are likely to be around indefinitely (the USS ones tend to be the older, well-established ones, not the newer ones, some of which might not survive).  If nothing else, nearly all the older ones have property portfolios whose values  dwarf any supposed pension-fund deficit.

That sounds like the JNC.

http://www.ucea.ac.uk/en/empres/pensions/uss/governance/

I can't seem to get any link under USS.co.uk to work currently so don't know if the trustee company board is split in the same way. I got the impression JNC decides what to do with the valuation result, rather than how to conduct a valuation, but that may be a misinterpreting of the roles and responsibilities. The timelines I looked at seemed only to mention JNC fairly late on (so when finalised not during).

Either way, to rig the result that still requires coercion of the chair and the actuarial advisors which is a fairly serious charge to level at the employers!

<Edit> to some extent I exaggerate, the point is that I don't think the seperation of roles should be underplayed in all this. The different actors all have their own responsibilities and key requirements from the process and I think the interplay could adequately explain the end point without needing to assume that it's all a fix up to generate a particular outcome, especially since a massive split down the middle of the universities in at least one discussion suggests that there was no shared outcome even in one of the blocks.

Plus dial in the perfect storm of decreasing STEM demographic over the next 3 or 4 years. Engineering numbers are already dropping.

PS I spent 16 years at a RG uni, and never met an academic in a union. What happened?

Which one?

Sheffield, Engineering Faculty. Unless everyone played their cards very close to their chests -)

Ok, thanks. In which case I think you are giving the wrong impression.

Looking at the 2017 report the other day, they seem to be mainly invested in shares - well over 60% - with other bits like property.  Bond and gilts are a relatively small part of the portfolio.  (Their web site appears to be broken - maybe they have already gone bust!?).  Given this, I do find it puzzling the assumed return has dropped from 4.something to 2.somthing% between valuations.  Otherwise I don't see big problems with the valuation.  What I would like is some stability rather than endless changes every couple of years so its possibly to plan sensibly for other provision for retirement. I'd also like to see risk being pooled between participants continuing somehow, even if its a DC scheme in future.

I can assure you there will be plenty of Engineering academics at Sheffield in UCU.   Engineers tend to be less militant in outlook than some other subject areas but they are not stupid. Branch managerial 'issues', on an individual or group basis, occur form time-to-time everywhere and staff need protection when the local system does something very stupid. Even engineers mostly believe in things like academic freedom and collegiality and UCU is one of the few organisations left in HE that care. 20 years back many Engineering, Physics and Chemisty departments were under massive pressure due to declining applications and being much more expensive to run (with the government top-up being inadequate) and many such departments closed or were otherwise reorganised across the UK; at the time when their last graduates had a choice of prime jobs. Staff less likely to be in UCU include younger, non UK resident, lower grade and casualised labour... a horrible combination as it shows fear must be a real issue. Ignorance is also partly involved: as a young academic it's difficult to believe how crazy and obviously unfair some management decisions can occasionally be in a University ; until of course you witness them.  From my experience where things were really bad (eg deprtmental closures), below 5% in Engineering or Physical Sciences would never join. Affordability was a problem once but much less so these days as the fee levels shifted sensibly (eg PhD students on occasional  teaching  contracts now get free membership, as the exploitation of such is the worst of any group and the membership benefits least clear to new entrants). I see some academics as plain greedy and cynical as they are very aware of the benefits arising from UCU and can easily afford to join but save the annual fee and never having to deal with pesky things like democratic driven industrial action. A minority have philosophical problems with Trade Unions (on the edges of that, some were happy in AUT but not in UCU), more have problems with UCU tactics or individual beefs with their local branch; some branches, even in the Russell group, are still dominated or heavily influenced by trots (or ex trots now members of Labour.. I know these people). One of the reasons I got involved at the local branch level is you can't complain about far left distortions of branch views if you do nothing about it. Another reason is it's hard work and a bit scary facing off against senior managers and someone has to do it (but its worthy and was great for my personal development). The trots will always fill any available volunteer gaps.. they are always motivated and see union work (what I regard as working together with management for mutual gain) as a fight that is a small step in the revolution. 

Do they believe in paragraphs?

"Something I've noticed about this thread. Quite embarrassing, really. Just how verbose and, frankly, so inept many of our 'better educated' are at expressing themselves clearly and concisely. Not good."

Very Trumpian rhetoric there, Gordon. "They say they are better educated. Well, we'll see. All I can say is. We'll see. Frankly, I think it's quite embarrassing, quite embarrassing. Not good. Not good."

I thought I'd replied to you on that although may have imagined it - I believe the numbers quoted in the Cass letter, the 4.x to 2.8, are from the accounting basis so are based on bond yields rather than the investments actually made. The yield used for the funding discussions I think is the one expressed relative to CPI from the September update. 

Hiya

thanks for the reply. I was surprised that there was substantial UCU membership there compared to very little amongst the academics during my time there. Certainly not a bad thing!

i left for a PVCR post in a New Uni, which was the first time I had to deal with unions across the table. A bit of a shock to the system, but really rewarding experience. We worked together to get a good REF out without throwing the baby out with the bath water.

I can't speak for all Engineers but I do; however, the edit process lost them at some point and I had run out of time and had to go. I apologise if my editing, grammar and spelling sometimes falls below standards I would prefer.

Most posts here are typed fast on a tablet, edited, read as a public post and re-edited (I have discovered having a post in public somehow leads me to spot errors way more effectively and so saves time). My declining eyesight and stiffening fingers doesn't help.