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National Campaign

UCU national workload survey

UCU are running a national survey on workloads.  This is an issue that members frequently raise with the local branch with excessive workloads leading to work-related stress and absenteeism.

In order that we can understand more about workloads across the education sector, could you please complete the 2016 survey; it should take around 10-15 minutes and can be accessed via this link:

UCU workload survey 2016 

Everyone who completes the survey will go into a prize draw for a £100 John Lewis voucher.  Please feel free to forward this email to any interested colleagues who may not be UCU members.

Pay Claim Consultation

The employers have made a “final” offer of a 1% pay rise from August 2015. UCU is conducting a consultative ballot of our membership to find out if we are willing to engage in industrial action to improve the offer. There is some further information here:

and the recommendation from the UCU HE Conference is that we should reject the offer. As I understand it, the core offer is a 1% pay rise. This roughly matches RPI inflation (1.1% in March) and might at first sight look reasonable. Changes to USS (up 0.5%) and NI (up 1.4% on roughly £40,000 of pay because of the end to the opting out discount) contributions mean that our take-home cash will actually be reduced. Allowing for inflation, the value of our pay would fall rather more than 1%.

Our recent industrial actions over pay and pensions have been to some extent successful. In both cases, the employers improved their offer once the action had started. I imagine that well-supported industrial action might improve this offer to maybe 2%, and allow us to stand still in real terms. Currently, the employers can afford it. And our VCs are seeing much larger pay rises.

There are a few extra features to the offer:

  • For most institutions, the lowest paid will receive an additional boost so they all earn a living wage. Not, however, Southampton as our lowest paid have to work a 36-hour week to earn what should be a 35-hour living wage.
  • The employers have backed away from insistence on performance-related pay. Incremental progression within a grade should continue to be routine.
  • The employers showed no enthusiasm for addressing the gender pay gap in the sector.

PLEASE, PLEASE DO VOTE IN THE BALLOT. It’s painless, and a low turnout would make us very weak in negotiations. Here at Southampton, the UCU Committee is unenthusiastic about most sorts of action short of a strike. Often, our management seems not to even notice we are doing it. Examination boycotts have been effective but, at any given time, the burden falls on a small fraction of our membership; boycotts also tend to upset students who should be our natural supporters.

For what it’s worth, I am going to vote for strike action but against action short of a strike.

PLEASE VOTE, BUT ONLY SUPPORT ASOS OR STRIKES IF YOU YOURSELF ARE ACTUALLY GOING TO TAKE PART IF CALLED UPON. We cannot win an industrial action without solid support; voting for action which we do not deliver would just make us look weak. The employers would laugh at us. And next year’s offer would be even worse.

If you are having trouble finding your ballot Email, it looked like this

Date: Thu, 11 Jun 2015 11:29:59 -0400
From: “University and College Union (UCU)” <reply@ucu.org.uk>
To: dan@ecs.soton.ac.uk
Subject: UCU consultative ballot: higher education (HE) employers’ final offer 2015-16

and the voting link was at the bottom of quite a long message. Several members have reported that their Email system incorrectly marked it as spam.

Denis Nicole

Branch President

UCU Elections

You should all have received Electoral Reform Services ballots for the UCU elections. It is very important that you vote now; your ballot must be received by this Friday 27th February. There is something of a power-struggle in UCU between the “hard” Left (who seem to be associated with the old Socialist Workers Party) and the “mainstream” (who sometimes call themselves the Independent Broad Left). Currently, the Higher Education Committee and the other principal negotiators are led by the “mainstream” and I personally think they are doing a pretty good job under difficult circumstances. When I vote, I take care not to vote for UCULeft-backed candidates; I think they are divisive and tend to pursue wider political objectives to the detriment of our members’ interests. But that’s just me; you should, of course, make up your own minds. But VOTE. None of us are happy with the USS settlement; it is indeed a worse deal than the one the teachers and post-92’s managed for TPS. This is not, as commonly assumed, because of the accrual rate: our lump sum roughly compensates for their faster accrual. The difference is that the teachers managed to negotiate much better inflation protection. They get CPI+1.6%. We get CPI+0%, subject to some additional caps. We did, however, push the employers further than USS and the Government wanted to go. Getting any more would have required us to force, through industrial action, a government back-down. Could we have done that? I doubt it; our industrial strength is limited. We have four problems:

  • We don’t have enough members. Southampton is one of the bigger branches, but membership is nothing like universal. Could we “bring the University to its knees”?
  • Our members can be reluctant to take action. That’s a pity. Effective industrial action requires a membership who will act as a well-disciplined army; all must be willing to turn action on and off at short notice as required by the ebb and flow of negotiations.
  • Our house is divided; the hard left spends congress sniping at the leadership elected by the majority of members. Congress decreases our credibility amongst employers.
  • Unlike tube train drivers and teachers (parents have to stay home from work), action by university staff does not have an immediate impact on the general population.

The first paragraph might sound a bit hostile to the hard left. I’m particularly cross with them right now as they have exploited UCU’s rules (it only needs twenty branches to call one) to force a Special Sector Conference in Manchester tomorrow, and three of us have to spend the day there to vote against motions criticising our elected leadership. Apart from the public embarrassment—some at USS and EPF must be laughing—our membership fees are being frittered away on travelling expenses, probably about £200 each for 120 delegates, and booking a room at the Britannia Hotel. I’d guess an overall cost around £30,000.

Denis Nicole, Branch VP.

Commentary on the USS ballot

Several letters have been published about the on-going ballot.

…and please vote by Monday!

Denis Nicole,

Branch Vice-President

The USS pensions dispute

Many thanks to Joan for her very helpful summary.

Ed and I are just back from another meeting with Sarah Pook, Director of Finance. While we all hoped that the dispute could be settled quickly, I also emphasised that it is important that the small print, particularly the details of the defined contribution scheme that would come in over £55k, should not cause further problems later.  If DC happens, all risks will be borne by the members; we will in turn need real control so we can protect our interests.

Can I emphasise that it is essential that you vote in the ballot?  The worst possible outcome would be a rejection on a low turnout. We all have to decide between two unattractive prospects: an expensive ASOS/strike with no guarantee of success, and a worsened pension. It won’t help any of us to abstain because we don’t like either alternative.

For what it’s worth, I voted yes.

Denis Nicole,

Branch Vice-President.

EGM – Wednesday 21 January

Thanks to all the members who attend the EGM yesterday to discuss the revised USS proposals.

Our departmental representative in History, Joan Tumblety, has very helpfully written her own personal notes of the meeting that we share here.

 

Summary

The meeting was chaired by Denis Nicole of the local branch executive committee. He started by outlining the UCU’s Higher Education Committee’s agreed bargaining position in early November 2014. This included a push for:

  • 1/70th accrual rate in a career related benefits (CRB) scheme for all members, including those in the career average scheme who have joined since 2011, cf. the initial USS proposal’s push for 1/80th
  • The removal of the Defined Contribution element (in the initial USS proposal to be imposed on all salary over £40 000)
  • Increased employer contributions for future pensions (to 18.1%) cf. the former 14-16%

DN pointed out that the current USS revised proposals show movement in all these areas: they include a 1/75th accrual rate, an increase in the cap on earnings before the DC element kicks in (£55,000), and increased employer contributions (in the current proposals 18% on income up to £55,000, although only 12% on income above that cap). Although the current proposals would still give USS members a less good pension deal than the Teachers’ Pension Scheme (TPS), accepting them would have the advantage of ensuring an improvement for those members in the post-2011 career average scheme on what they have at present; and it would also abolish the current two-tier USS system, which is divisive and would arguably weaken any UCU negotiating position in future disputes. DN made it clear that he thought that this is as far as the employers and USS representatives will go at this point, and that members should probably vote to accept these proposals. He did emphasise that this advice represents his personal opinion.

DN also explained that the current round of reforms of the USS pension scheme was triggered by the most recent three-yearly mandatory review (USS has a legal obligation to The Pensions Regulator to conduct such things). Crucially, the review has taken place in a post-financial crash climate in which The Pensions Regulator (which is accountable to the Treasury) is keen to limit the potential risk to government of pension schemes that fail. In this climate, defined benefit pension schemes (like the current USS pension) are deemed inappropriate, risky and old-fashioned, and defined contribution schemes (like the one about to be imposed on all USS pension members) are preferred. In short, the DC scheme involves the shifting of risk away from the pension fund trustees (and ultimately government) and onto the individual (i.e. you and me).

 

Reflection and Q&A

One of the key points about the current reform proposals is precisely that the pension accrued on salary above the cap (the proposed £55,000) will be placed in a fund that will eventually pay out according to how successful its investment strategy has been. It seems that there is still quite a bit of uncertainty as to how the DC funds will be managed, how much individual members will have control over their own pot, and what kind of fees they will entail for members (in the Netherlands such DC funds are apparently quite costly to manage and the fees fall on individual members).

My understanding is that voting to accept the current USS proposals would establish the principle of a direct contribution model in lieu of a direct benefits one. This is a considerable sacrifice. But it isn’t clear to me what the UCU ‘bottom line’ would be if the industrial action resumes from 29 January, and whether it includes a total rejection of the DC element or merely negotiation over the cap.

There was much discussion about what could be achieved if the ballot resulted in a rejection of the current proposals. I think there was a mood in the room that carrying out further action short of a strike in a period when – for many – marking season is drawing to a close, may be fruitless. In the event of ineffective action short of a strike, it seems likely that the improved USS proposals would be withdrawn and we would be in a worse situation all round. There was some suggestion that UCU nationally might continue to think of more effective means of strike action anyway, action that can be carried out by all members (not just those who teach and who happen to have marking duties at any given moment). Perhaps the biggest strategic problem at present is that the employers – who have in many instances including our own been like-minded with the UCU position, at least in some respects – are not the biggest threat to our pensions. That means that taking industrial action against them doesn’t hit the real target – the USS trustees, The Pensions Regulator, and ultimately ideological support for the kind of de-mutualisation of which this recent shift to the de-risking of pension schemes is but one lamentable example. So what kinds of (non-strike) action might be employed to gain leverage against these foes – demonstrating outside banks? Seeking judicial review? Threatening legal action? As you can imagine, there was no definitive answer to this question…

In any case, voting in the UCU ballot is crucial, and if you are not inclined to take part in a protracted industrial dispute that would probably involve indefinite strike action, my advice is to vote to accept the proposals.

More information:

USS and employer statements (with a USS pension modeller) are here: https://isoton.wordpress.com/2015/01/20/potential-joint-proposal-on-pensions-uss-reform/

UCU pension modeller with links to other pages is here: http://defenduss.web.ucu.org.uk/whats-my-pension/

How to value a pension fund for an ongoing pre-92 higher education sector that is not about to become insolvent

Michael Otsuka, a Professor of Philosophy at the London School of Economics, has written a detailed critique of the USS approach to valuing pensions. More text here…

…the approach being taken by the trustee is not an unusual one and indeed may be quite reasonable for a scheme which is closed to accrual, has a weak employer and is aiming to get to a position where it can buy out benefits. (A position which does reflect the position of a large section of UK pension funds – and one reason why comparisons between USS and the approaches used by other schemes are unhelpful). The point is that USS is not in this situation. Large open schemes with strong employers do not need to take this approach to valuations ….

Ongoing versus Solvency Valuation a

USS – Vice-Chancellor accepts UCU petition

Prof Don Nutbeam accepts the UCU petition against USS pension changes

Local UCU officers, Denis Nicole and John Langley, hand a copy of the petition to UUK requesting a fair USS to the vice-chancellor, Professor Don Nutbeam.

 

 

 

 

LSE Pensions Advisory Group respond to USS valuation

We thought members would be interested in this excellent paper from the London School of Economics Pensions Advisory Group

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27 November 2014

Response by the London School of Economics Pensions Advisory Group to USS Consultation on Technical Provisions and Recovery Plan

Here, as requested, are our comments on “the underlying assumptions which will be used to complete the formal valuation and more broadly the trustee’s approach as set out in the Statement of Funding Principles.”1

The views expressed are those of the LSE’s Pensions Advisory Group. The Group accepts that the scheme is facing an important challenge and that there is a need to find an equitable and stable solution. We are also clear that suggesting alternative valuation assumptions is not by itself a solution and needs to be supplemented with further measures.2 We would, however, like a solution to be founded on assumptions that reflect the genuine funding realities of the pension scheme. We find unconvincing the explanations of some of these assumptions and would welcome indications of why other options were rejected or not considered.3 We begin by noting that we share the concerns about the valuation assumptions that have been voiced by the professors of statistics, financial mathematics, and actuarial science (hereafter ‘the statisticians’) in their letter to the Trustee, which we have attached as an appendix to this letter.

We regard the following observation of the statisticians as especially telling:

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

In other words, the assets exceed the liabilities on a neutral or best estimate – which is to say an estimate that is neither pessimistic nor optimistic – of the value of the pension fund. It now becomes difficult to see how anything other than an “overly prudent”4 series of pessimistic departures from genuinely neutral assumptions regarding the valuation of the liabilities could transform such a surplus into the £12.3 billion deficit that is reported in the draft valuation results, although it is noted that this £12.3 billion is on a technical basis.5 Such departures also overestimate the cost of contributions for future service of pensions benefits.6 These departures seem to go too far, especially given that the Ernst and Young investigation of the strength of the covenants in a sample of universities found that they were robust.7 Given the multiple objectives of pension schemes, the degree of prudence should be optimised not maximised. We therefore ask what would an appropriately, as opposed to an overly, prudent adjustment of such a neutral best estimate be?

In answering this question, we note first that UUK’s advisor Aon Hewitt has advised UUK that “the current Statement of Funding Principles …states that, other than the discount rate, and longevity assumptions, all assumptions will be chosen on a ‘best estimate’ basis.”8 Hence, by the Trustee’s current principles, there should be no quarrel with the statisticians’ introduction of “evidence-based assumptions on salary growth and RPI”. If there is any dispute between the statisticians and the Trustee here, it will need to be narrowed down to the question of what is the best estimate of salary growth and RPI.

INFLATION. With regard to the Trustee’s estimation of the rate of RPI itself, we are reliably informed that economists and others who are expert on this matter regard 3.4% as too high rather than the best available estimate of RPI. Such a forecast for RPI would be the best estimate only if the best estimate of the gap between CPI and RPI were about 0.5% greater than the AV consultation document’s assumed gap of 0.8%-1.0% (the accuracy of which has been confirmed by the advice we have received). We also note that if the larger gap that would be necessary to justify a 3.4% RPI is assumed, then UUK’s proposed cuts to pensions will be exacerbated, given the manner in which revaluation is tied to CPI.

SALARY GROWTH. With regard to salary growth, we concur with the statisticians’ conclusion that RPI + 1% is unsupported, given the historical data to the contrary. We also note that general pay growth along these lines is unrealistic when looking forward, since there is little prospect for  RPI + 1% increases in revenue for the pre-92 higher education sector as a whole during the next Parliament. The unreality becomes especially vivid when RPI + 1% is combined with the assumption that RPI itself will be 3.4%. Our employers could nevertheless make such assumed salary growth come true by awarding increases of 4.4% per annum (or its long run equivalent) for the next several years. If, therefore, UUK does not challenge this assumption, but later refuses to award such pay increases because, as they must now foresee, they will deem them unaffordable, then employees will feel hard done by their employers twice over: first for accepting an assumption that forced cuts to their pensions, and second for failing to deliver the assumed pay increases. If, as we believe, our employers are not prepared to start awarding 4.4% pay increases, then honesty requires that UUK should request the USS trustees to revise their assumption of salary growth downward. Given a best estimate of salary growth and RPI, what would constitute a reasonably prudent adjustment of the other assumptions? In particular, what would constitute a reasonably prudent adjustment to the discount rate?

DISCOUNT RATE AND DERISKING. The most fundamental assumption about the discount rate is that valuation is based on the “gilts plus” method, though the Pensions Regulator is also willing to entertain a methodology based on actual asset holdings. The latter methodology is also expected to be prudent. As we understand it the “gilts plus” method is favoured by actuaries as the most prudent method. The preference for using this method needs justification in the light of a robust covenant as does the one percent prudent deduction from gilts’ returns as used in the valuation.

Bound up with this question is the extent to which USS should de-risk its investments – an investment strategy which has been justified on grounds of prudence and which also lowers the discount rate. In its 22 October 2014 submission to the JNC, UUK wrote that it “recognized the need for some investment de-risking, principally to respond to the increasing reliance which the scheme will otherwise place on the sector over time, and to help in reducing funding (and contribution) volatility.”

AV similarly states that “The trustee’s plan to reduce risk within the scheme would, over the long term, deliver increased contribution stability enabling some confidence that contributions would not become unaffordable”. We would like to make the following points regarding derisking and the discount rate:

1. De-risking is an ineffective strategy for keeping contributions affordable, since it increases the need and demand for an increase in contribution rates in order to avoid reductions in the income that retirees receive from their pensions. It is also important to realize that the level of the employer contribution rates does not necessarily capture the full effects on employers of de-risking, as academics with international mobility are likely to expect salary compensation in the form of higher pensionable salary to counteract the effects of pension reduction arising from reforms to USS.

2. Insofar as funding and contribution volatility are concerned, it would seem a more rational response, as suggested above, to set a prudent discount rate in a manner that accurately reflects the actual mixture of return-seeking and other investments – namely, ‘best estimate minus’ – rather than to de-risk investments into a mixture that more closely approximates gilts.9 We are perplexed by the intransigence of the Trustee in sticking to gilts-plus in the face of the sound arguments to the contrary that have been offered in the exchange of technical letters with UCU.10

3. USS claims that their de-risking strategy is justified on grounds that gilts provide a good match to the liabilities of the pension scheme and hence constitute a liability-hedging asset. However “there are no assets that perfectly match pension liabilities (except for purchasing annuities where the insurer takes all the risk instead). Pension liabilities move with salary inflation (no matching asset), lpi [i.e., limited price indexation] (no matching asset), have long duration (no properly matching asset) and longevity (no matching asset). Therefore, trying to use bonds to ‘match’ pension liabilities is doomed to underperform the liabilities themselves.”11 There are, of course, many other methods of de-risking and it would be helpful to know why these were rejected and why given the assumption of continuing low discount rates this therefore expensive method of derisking was chosen.

4. Funding and contribution volatility are, in significant part, a function of how volatile the deficit is. The existence and volatility of the deficit, however, is an artefact of assumptions regarding salary growth and RPI that fail to provide best estimates of these factors. (See above discussion.) Once, therefore, assumptions regarding salary growth and RPI are corrected to conform to the evidence, the volatility-based argument for de-risking substantially decreases.

Speaking more generally, it is widely accepted that one of the main advantages of a large defined benefit pension scheme such as USS is provided by the pooling of investment risks, which allows for the reaping of high returns on investment in an efficient but prudent manner over a long period of time, by smoothing over variations above and below the expected returns on return-seeking assets.12 The de-risking strategy would therefore defeat a key purpose of a defined benefit scheme.

THE RECOVERY PERIOD. We note that the AV consultation document reports that “there is good visibility regarding the robustness of the covenant over a 20 year time horizon; beyond which visibility is reduced although the expectation is that the covenant will remain robust” (emphasis added). The Pension Regulator has also indicated that longer periods than the usual ten years may be allowed where the covenant is strong. More generally, the regulator is willing to allow somewhat more optimistic estimates in recovery plans. In the light of these facts, we do not think there should be any doubt regarding the adoption of a recovery period of at least 20 years. The Trustee’s recommendation of a 15 year recovery period is, we think, another instance of “over-prudence”.

CONCLUDING REMARKS. According to the Pensions Regulator’s Code, “The trustees’ key objective is to pay promised benefits as they fall due.”13 In meeting this key objective, trustees and employers must not lose sight of the reason why it would be bad to fail to make good on promised pension benefits: because employees would be made significantly worse off on account of shortfalls in their income in retirement. We believe, for the reasons offered above, that the proposed de-risking of investments and the assumptions underlying the valuation of the liabilities of the fund have lost sight of this objective. We therefore urge “trustees and employers to use the flexibilities in the funding regime and work collaboratively” towards the achievement of a solution that will result in far less of a reduction in pension income than UUK has proposed.14

 

1 “2014 Actuarial Valuation: A consultation on the proposed assumptions for the scheme’s technical provisions and recovery plan”, USS, October 2014 (hereafter “AV”).These comments also take account of “USS: Consultation on Technical Provisions and Recovery Plan”, UUK cover note, 4 November 2014. We regret that our Pensions Advisory Group did not receive a further UUK cover note of 21 November 2014 in time to make use of it by your noon 28 November deadline.

2 The Group will be issuing a further statement at a later date, which addresses wider issues of pensions reform that fall outside of the remit of this technical consultation.

3 A number of other assumptions need to be reconsidered. For example, it is said that allowing for commutation would have no effect on the deficit. This argument needs to be justified.

4 http://www.thepensionsregulator.gov.uk/press/pn13-17.aspx

5 AV, table C.2.

6 AV, tables C.2 and C.5.

7 “Scheme Funding within USS: an engagement with Universities UK”, USS, December 2013.

8 “USS: Consultation on Technical Provisions and Recovery Plan”, UUK cover note, 4 November 2014.

9 “I close with an appeal to the profession to stop using the gilt yield + x% method of setting the discount rate for a valuation. To tell trustees that their scheme is 100 percent funded and then say it is 60 percent funded a short while later, using a method represented as reflecting the actual assets of the scheme, risks bringing the profession into disrepute. It is time to move away from this method which has no sound rationale and instead use methods that have a real-world interpretation, fit better with the Pensions Act 2004 and provide a firm basis for advice.” (Derek Benstead, “Pensions: The going rate”, http://www.theactuary.com/archive/old-articles/part-6/pensions-3A-thegoing- rate/ )

10 http://www.ucu.org.uk/circ/pdf/UCUHE231_att1.pdf

http://www.ucu.org.uk/circ/pdf/UCUHE231_att2.pdf

http://www.ucu.org.uk/circ/pdf/UCUHE231_att3.pdf

11 Ros Altmann, private correspondence with the Pensions Advisory Group. (Altmann is an authority on pensions as well as a member of LSE’s Court of Governors.)

12 As Ros Altmann notes: “USS is a different type of scheme from most of those in the private sector, because it is an open scheme. The private sector schemes are now almost all closed (at least to new members), which means that they are in run-off and have a shorter time horizon than an open ongoing scheme. This should allow a longerterm investment perspective for the asset allocation and assumed returns.” (ibid.)

13 “Code of practice no. 3: Funding defined benefits”, the Pensions Regulator, July 2014, para 22.

14 Quotation from the statement of purposes, ibid., p. 7.

Imperial College London challenges the USS methodology

Members might be interested to read Imperial College London’s response to UUK on USS’s consultation on the proposed assumptions for the scheme’s technical provisions and recovery plan

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We are writing in response to your request of 4 November to provide feedback on the USS consultation on the assumptions used for the technical provisions and recovery plan and in particular to comment on your proposed response that was circulated on 21 November. We are publishing this response on our website and will be sharing it directly with USS.
We are disappointed and concerned by your proposed response.
We are disappointed that you appear to be focused on trying to fit your current proposed benefit solution to the perceived problem without first sufficiently challenging all the assumptions.
We are concerned that without this challenge you risk recommending a major downgrading of one of our employees’ most important benefits based on numbers which are as likely to be modelling artefacts as a reflection of the underlying economic reality.
You raise several good points about the assumptions used to set various modelling parameters; we provide more supporting detail below, however we believe that this is in many ways a second-order issue and you are missing the more important point of whether the output as presented can be relied upon.
Some of our academics with significant expertise in relevant fields have been analysing the assumptions and modelling approach used. The model they have used is, by their own admission, highly simplified; however when calibrated against the cases put forward in the USS consultation document it nevertheless gives a good approximation to the funding levels. This leads us to believe that the key conclusions that can be drawn from it are unlikely to be contradicted by the full model that the scheme’s actuaries will have used. As you will see in the attached paper, our simplified model includes additional cases to those presented in the USS paper, and those that have used the actual salary increments and investment performance of the last decade show the model fund in surplus.
This model demonstrates that the USS data are just showing how sensitive the actuarial model is to the input assumptions, rather than illustrating the volatility of the actual deficit itself. We note that so far USS have felt unable to respond to our request for more transparency.
We therefore strongly believe that at this point USS have not provided sufficient information for UUK to make any recommendations and that UUK must insist that USS step back and provide full transparency on its modelling approach and the sensitivity to the changes in assumptions. This point is crucial because only once we all understand the genuine risks we face will we be in a position to move on to the debate on changes to benefits.
Linked to this, now the potential impact of this reduction in volatility on the long-term cost and benefits available within the scheme is starting to become clearer, we believe that the distinction between achieving an average of 18% employer contribution over the long-
term versus the variability around this average in the short-term needs to be revisited as matter of urgency.
We acknowledge that many institutions have expressed a desire to reduce volatility within the scheme; our institution is not one that shares that view. We recognise that this is outside the scope of the consultation on technical provisions, but believe that it is essential that UUK in its role as the representative of all its members starts further discussions on this point in the very near future.
Moving onto the more specific issues, we fully support the point you make about the draft assumptions made by USS being excessively prudent. Frankly, we feel this point should be made more forcefully in the final response. The assumption of RPI+1% for a general salary increase, with additional increases on top on an age-related scale, is far removed from the experience within the sector in recent times and not something, unfortunately, that we feel can be reasonably envisaged going forwards given the financial constraints within which we need to operate. We have looked back at our own data within College over the period since 2001 and this would indicate that an assumption of RPI was more reasonable than RPI + 1%, without any additional, age-related, increments on top. It should also be noted that our College has not been part of the national wage bargaining process since 2004 and our salary increases have never been lower than the national agreement and have generally been above, reflecting the higher cost of living in London.
We feel you make an important point in your note of 21 November about how the discount rate proposed by the trustee does not reflect any deterioration in either market conditions or the strength of the employer’s covenant compared to three years ago, but rather a change in approach to risk by the trustees, which might be influenced at least in part by their perception of the Pension Regulator’s position.
We agree with the view that gilt yields are artificially low at the moment as a result of the Quantitative Easing programme and feel much more economic analysis is required to support the assumption put forward by USS. We believe the requirement for an appropriate level of consistency between the assumptions related to the assets and liabilities needs to be stressed, as in the current proposal the former is too prudent and the latter overly pessimistic.
We also support UUK’s position that the recovery period should be 20 rather than 15 years. The arguments you make about this are sound, and we believe USS are being unreasonable in seeking the extra prudence, on top of all the other pessimistic assumptions, of keeping to 15 years
We hope this note makes clear how important it is for UUK to obtain more details of the full range of scenarios that have been explored and the sensitivity analysis that has been undertaken. We appreciate the challenge of ascribing appropriate probability distributions to the various variables and determining the correlations between them; having knowledge of these would help us give a more informed view on the appropriateness of the choices made. USS notes in its consultation paper that: “Continuing engagement with the scheme’s stakeholders is important as the valuation progresses and the trustee envisages further consultation and engagement with both employers and members, and their representatives. The trustee wishes to be as transparent as possible about its approach to scheme funding.”
We have tried, unsuccessfully, to obtain the additional level of detail we feel is required on confidences intervals, error bars etc. to give a sense of the range of estimates; we feel the scale of the changes being contemplated fully justifies this being made available for consideration and comment.
In summary, by saying that you do not expect the trustees to respond to all of the points made on specific elements of the technical provisions, but rather to look at the overall level of prudence, gives the impression that you are limiting the scope of your response to establishing that UUK’s current proposed benefit reforms are affordable. This is inappropriate given the points we have made about the sensitivity of the model to assumptions. We feel it is important to focus on justifying appropriate distributions for each assumption before a fuller range of scenarios is tested. We encourage a more open debate at this level of detail; otherwise our members will feel that change is being imposed upon them because of the modelling approach and the way the Pensions Regulator considers schemes in general, rather than specific factors related to the USS scheme. This is likely to lead to more substantial industrial relations impact across the sector in the New Year.
Most importantly, we risk not fulfilling our duty as employers to think through clearly and carefully, with all the data in front of us, one of the most important decisions we will have to make about how we treat our academic community. We strongly urge UUK to ensure USS makes available the information needed to make the right decisions