Southampton UCU Rotating Header Image

October, 2014:

False assumptions of the USS

Article published in the THES

Last week, the Employers Pension Forum published “Proposed Changes to USS – Myths, Misconceptions and Misunderstandings”. The document contains misinformation and a mistake. We focus on the section “M7: The assumptions used to value the fund have been chosen to artificially create a large deficit”.

Having reviewed the assumptions given in the 2013 annual report, we believe, as statisticians and financial mathematicians, that each assumption is inadequately justified and that cumulatively they are unreasonably pessimistic and incoherent. The predicted salary increases assume a buoyant economy while investment returns assume a recession.

For example, the average annual rate of return on assets achieved by the Universities Superannuation Scheme over the past 10 years was about 7 per cent and over the past five years about 11 per cent. It is therefore difficult to understand the EPF’s assertion that “since 2011…the continuing global economic challenges…have had a detrimental impact on the value of USS’ assets”.

Meanwhile, members’ wages are assumed to grow by the retail price index plus 1 per cent (taken to be 4.4 per cent) plus incremental increases. Over the past 20 years the actual rate was about 2.7 per cent, with similar growth over the past 10 years. Post-2008 rates show negative real-pay growth. The age-related assumption is wage growth (1 per cent to 4 per cent) by progress up the salary scale: anecdotally this assumption leads to higher pay growth rates than the majority of academics have experienced over the past 10 or 20 years. As the fund’s actual experience was used to give a mean retirement age of 62 years at the last valuation, it seems odd that salary assumptions do not also reflect actual experience.

The assumptions on mortality appear to be unchanged from the 2011 valuation, yet the EPF archly advances the statement that “members of the USS are living longer so the pension scheme has to pay pensions in retirement for longer than planned” as a reason for deterioration in the fund’s position since 2011.

A reasonable change in any one of these assumptions would give a lower estimated deficit. The EPF states that although changing the assumptions in this instance could affect the size of the deficit, “it cannot change a deficit into a surplus”. It takes little mathematical knowledge to recognise that this statement is wrong.

Saul Jacka, professor of statistics, University of Warwick
Peter Green FRS, professor emeritus of statistics, University of Bristol
Steven Haberman FIA, dean, Cass Business School
Jane Hutton, department of statistics, University of Warwick
John Aston, professor of statistics, University of Cambridge
Sir David Spiegelhalter FRS, Winton professor of the public understanding of risk, University of Cambridge
Charles Taylor, professor of statistics, University of Leeds
Simon Wood, professor of statistics, University of Bath
Qiwei Yao, professor of statistics, London School of Economics
Michalis Zervos, professor of mathematics, London School of Economics


Pensions: are the proposed changes legal?

I have received an enquiry from a member asking whether it is legal for USS to make the employers’ proposed changes to our pension. There are two issues:

  1. Can they close the Final Salary scheme and force us into another one, and
  2. Can they change our existing accrued Final Salary benefits to salary at scheme closure inflated with CPI benefits?

The short, sad answer seems to be yes to both, provided the proper consultation and governance processes are followed. Here follows my non-lawyer attempt at a longer answer.

There is some general advice to scheme operators from Pinsents.

Note the important comments in the fourth paragraph:

Even though a scheme has been closed to future accrual, in some cases
members may still retain a link to final salary. This means that although
they do not build up future benefits in the scheme, the pension benefit they
will eventually receive will be based on their salary at the date they leave
employment with the employer rather than their salary at the date of the
scheme closure. Again, checking the scheme’s rules is extremely important.

As I read the USS scheme rules, rule 79 applies, which in turn invokes rules 14 and 15. That  means that, if the scheme is wound up, the mechanism in the employers’  proposal (salary at scheme closure plus CPI) will apply.

There is some interesting (and continuing) case law from IBM about changes to  their pensions schemes; it is analysed here and here.

In a nutshell, the only way to preserve our pensions is to persuade the employers to withdraw their proposals.

Denis Nicole

USS Pensions and VC’s Letter

Dear Colleagues

I was somewhat bemused by the VC’s e-letter concerning the proposed changes to the USS pension scheme and relatedly the UCU strike ballot so I went searching for some more information (happily Professor Mike Otsuka at the LSE had already collected most of it) so here are the links for those who wish to follow them.

1.  Oxford University’s response to the USS/UUK proposals which is much more sceptical (perhaps because Oxford still has a civic structure, it seems to take it’s academics interest seriously):

2.  This response is informed by an analysis done by Susan Cooper, who is Oxford’s UCU Pensions Officer and also a Physics Professor there and a former member of their Council. It’s clear that her analysis had a significant impact on the position that Oxford’s senior management took.

3.  Additionally pensions expert and LSE governor Ros Altmann makes a cogent argument here:

4.  For a counter-briefing on the UUK view, see Dennis Leech at Warwick’s powerpoint:

5.  Support for the claim that DC schemes are far more inefficient is given by a large Canadian study:

6.  Finally on the proven incompetence/duplicity of UUK ‘fact sheets’ see these links: &

Professor David Owen

School of Social Sciences

University of Southampton

Recording of USS presentation by Malcolm Ace

We had an excellent attendance at Malcolm’s talk today: all seats filled and Professors sitting at his feet.

We used Panopto to record him ; you can view the video at:

It’s probably best to start about 1m 45s in; we’ll edit it properly later.

Don’t forget to vote in the ballot; you need to post your paper by tomorrow.

Denis Nicole