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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


  1. Denis Nicole says:

    The link in Susan Cooper’s paper to the July 2014 USS paper “USS – An integrated approach to scheme funding” does not work from outside Oxford. The Cambridge link is fine:

    Denis Nicole

  2. David Owen says:

    We might also add this further note by Professor Mike Otsuka at the LSE:

    How to close a final salary scheme properly. It’s very simple:

    “For all scheme members, any benefits built up in the final salary scheme [up until the date of closure] will be protected and remain in that scheme. When benefits are calculated at retirement, they will be linked to the member’s most recent pensionable earnings (but using the final salary scheme rules).”

    That’s what the Teachers Pension Scheme did when they moved everyone in the post-92 higher education sector over from final salary to career average salary defined benefits.

    Why did they do that? Because an Independent Commission said that the “Government must honour in full the pension promises that have been accrued by scheme members: their accrued rights. In doing so, the Commission recommends maintaining the final salary link for past service for current members.”

    We should accept nothing less.

  3. David Owen says:

    This recent letter in the Financial Times simply reinforces Ros Altman’s point:

    14 October 2014
    The Editor
    Financial Times
    1 Southwark Bridge
    SE1 9HL
    Dear Sir,
    Ros Altman’s article of November 10th, 2013 Scare stories about USS liabilities are Overblown, seems to have foreshadowed recent developments. The Universities Superannuation Scheme (USS) has recently made swingeing proposals to reduce the benefits offered to members, claiming that the forthcoming triennial valuation of the fund will prove devastating.
    On the basis of preliminary information, combined (employer plus
    employee) contribution rates are projected to rise from 23.5% after the 2011 valuation to around 35% and this, USS claims, is “unaffordable”. It has long been a principle of actuarial valuations of pension funds that valuations should ensure gentle changes in funding rates. This large increase would represent a failure by the fund or its actuaries to observe that principle.
    The valuation is performed on the basis of various assumptions about likely future experience. Having reviewed those given in the 2013 annual report (which we believe are indicative), as statisticians and financial mathematicians, we believe that each assumption is inadequately justified and that cumulatively they are unreasonably pessimistic.
    For example, the average annual rate of return on assets achieved
    by USS over the last 10 years was about 7%, over the last 5 years about 11% and over the financial year 12/13 it was 13.9%. Against this background it is difficult to understand the guidance from the Employers Pension Forum (EPF) which explains that “since 2011…The continuing global economic challenges … have had a detrimental impact on the value of USS’ assets”
    The rate of return assumed for the future for valuation purposes
    is 1.7% + the current rate of return on Gilts. As we are all aware, Gilt yields are directly depressed by quantitative easing at the moment and only 4.25% of USS investments are actually in Gilts. The comparison with Gilt yields may be an appropriate measure for a closed fund in run-off or for one seeking an insured buy-out but is clearly totally inappropriate for a cash-positive fund like USS.
    The 2013 annual report is based on an assumption that members’
    wages will grow by RPI + 1%: assumed to total 4.4%. Examination of pay scales over the last 20 years suggests an actual rate of about 2.7%, with a similar figure applying over the last 10. Post-2008 rates, which are arguably more consistent with assuming current Gilt returns, show substantially negative real pay growth. In addition, there is an age-related assumption of wage growth (1-4%) by progress up the salary scale: anecdotally these assumptions lead to substantially higher pay growth rates than the vast majority of academics have experienced over the last 10 or 20 years. As retirement rates at the last valuation were based on actual experience, it seems odd that these assumptions appear so out of line with actual experience.
    Crucially, it is very hard to imagine how the perpetuation of
    current conditions (a necessary assumption if returns based on current gilt yields are to be considered likely) could justify such buoyant earnings-growth assumptions.
    Finally, the brief summary in the 2013 actuarial report gives an
    actuarial assumption of long-term mortality improvements of 1.25% p.a. (all lives). This gives life expectancies significantly higher than those
    extrapolated for the highest (or any other) socioeconomic group by the Office for National Statistics (ONS). The assumption appears 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.
    Guidance from the Pensions Regulator suggests that valuations
    should not be based on only worst-case assumptions in every issue as “an appropriate overall level of prudence in the technical provisions should be the paramount objective” of a valuation.
    It would be regrettable if USS were hollowed-out under the guise of financial prudence, particularly when the nation’s employed are being
    continually exhorted to plan for retirement.
    Yours etc.
    Prof. John Aston, University of Cambridge
    Prof. Peter Green FRS, University of Bristol
    Prof. Jane Hutton, University of Warwick
    Prof. Saul Jacka, University of Warwick [Contact]
    Prof. Guy Nason, University of Bristol
    Prof. Charles Taylor, University of Leeds
    Dr Simon Wood, University of Bath
    Prof. Qiwei Yao, London School of Economics and Political Science
    Prof. Mihail Zervos, London School of Economics and Political Science

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