Two major changes to the scheme at successive triennial valuations. It seems certain that even more radical changes will occur this time too

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2 Two major changes to the scheme at successive triennial valuations. It seems certain that even more radical changes will occur this time too 2

3 Up to a salary of 55000, now upgraded by CPI to about 55500, CRB applies. Above that, CRB is no longer possible, but a DC scheme applies, attracting a smaller contribution (12%) from Employers. All members can make voluntary contributions to the DC scheme, generating a tax-free savings sum to be drawn down at or approaching retirement. This is subject to matching at 1% of salary by an equal contribution from the employer (this is essentially free money).. 3

4 The USS website until 2016 boasted that the Defined Benefit pension scheme was the best sort of pension. This claim was abandoned, seen to ring hollow with the introduction of the Hybrid scheme last year. DC schemes are a much less efficient means of converting contributions into pensions. You buy an annuity at, currently, pitiful rates. Estimates vary widely as to how much worse DC schemes are, from 20% to about 75%. You can be sure they are far worse than CRB, itself worse than the Final Salary scheme we used to enjoy. 4

5 USS Valuation in 2014 yielded a deficit of 5.3bn, compared with assets worth ~ 42bn. This year s valuation yielded a 5.1bn deficit, on assets of 60bn. These deficits do not reflect a lack of ability to pay pensions in progress, rather, they are seen as a warning that, if pessimistic projections of investment are borne out, there will be a problem in future. However, in this year s Annual Report, USS revealed that a Best Estimate valuation yielded Surpluses in both years, of 3.5 and 8.1bn respectively! This information is in line with UCU s estimates at the time, and was only dragged out of USS at the insistence of Prof Jane Hutton, a UCU-nominated Trusteee of USS. Best Estimate is itself a prudent estimate, and relies upon assumptions that effectively represent current investment performance, resonable estimates of CPI and salary inflation etc. 5

6 These more positive analyses of USS performance are underscored by the above graph, taken from First Actuarial s analysis of USS. FA is a firm of actuaries who have a reputation for lateral thinking and objective analysis, rather than the perceived wisdom of the pensions industry, which is increasingly Risk Averse. The graph shows cash flow projections for USS, going forward 50 years, and at all times USS income (contributions from employer and employee, and investment income, NOT rise in asset value) is positive. With this positive cash flow, USS can afford to exercise restraint in changes to the scheme. 6

7 This slide shows the De-Risking that USS has exercised over the past 6 years, moving investments out of growth-seeking Equities into fixed return Gilts and Bonds. This policy of De-Risking was flagged up several years ago, reflecting the industry s distaste for uncertainty in investment returns. They would sooner buy assets (Gilts) that currently offer below-inflation returns than do their job of securing good returns from stock market and property investments (which they have done very well, as the increase in assets from 2014 to 2017 shows). It is now proposed to accelerate the shift into Gilts, rendering future returns smaller, and precipitating drastic changes to your pension scheme. 7

8 Valuation is a complex process. It must, by law, be prudent, i.e. take a relatively pessimistic view. The question is, how prudent? 8

9 The Employer Covenant combines the HE Sector s ability to bail out the scheme in extremis (in 2014, they agreed that, if pressed they could contribute 25% of salary rather than the present 18%) with the stability and security of the Sector. Bearing in mind that USS predominates in the pre-92 universities, with Russell Group having the vast majority of USS members, the sector is extremely secure. The Covenant is generally considered to be indefinite, but in 2014, 18 years was set. Proposals of 25, or 30, or even 50 years were rejected. The significance of a specific horizon is that if a deficit is settled upon at valuation, this defines the term over which it must be recovered. 9

10 These are the players. What should happen is that USS considers all the parameters alluded to earlier, arrives at a proposed valuation. This is discussed with the UCU negotiation team, and with Universities UK, an organisation that comprises the VCs and Principals of the Universities. (In practice, UUK represents Management.) UUK is advised by the Employers Pension Forum, an organisation set up by HE empoyers for this purpose in EPF has always adopted a hawkish attitude to pensions, and seems implacably opposed to DB schemes. A notable presence on EPF was our own former Registrary, Jonathan Nicholls. The final and crucial player is the Pensions Regulator (tpr), currently headed by Lesley Titcomb, but formerly by Bill Galvin, the present USS CEO. tpr has recently written to USS and advised that USS own estimate of the covenant is overly optimistic, and the valuation is not prudent enough. It also appears that tpr was involved in formulating USS policy prior to 2014, and insisting upon a very prudent analysis of the scheme, embodied in Test 1. It appears that tpr is acting outside its remit in so doing. There is no question that it is biasing the assessment that USS is making of its own finances. Further, these interactions are shrouded in secrecy. UCU negotiators have not been free to discuss negotiations; Interactions with tpr have been secret until very recently; UUK s consultation with Employer s has been secret, and only dragged from some of them by FoI application. In short, USS, tpr and UUK do not want you to know what their thinking is concerning YOUR pension. 10

11 Question marks surround the assumptions used by Mercers, the USS actuaries, to arrive at a valuation. In the example above, which depicts the proportion of women members dying with dependants, plotted against their age at death, three lines are shown. The dashed line is the data input used in 2014, but in fact this is the curve that applies to MEN, not women. The red line joins the actual data points, and the grey straight line is that used this year. It is presented as the best estimate, with a measure of prudence applied. It does not model the data accurately, and in fact simply joins the two highest data points. This yields a minor error in the valuation, amounting to about 100m. However, similar economies of endeavour seem to apply to many other parameters, where effects are much greater, and would substantially eliminate the reported deficit. What should happen is that rigorous and accurate estimates are made, a true best estimate valuation arrived at, then prudence applied to this total. The present methodology appears to be to apply prudence arbitrarily to all effects, then sum these biased and inaccurate calculations. If this suspicion is well-found, Mercer s might be considered not to be acting in line with its professional charter. 11

12 In response to tpr s downward revision of the strength of the HE sector covenant, UUK has panicked, and now proposes a revision of the valuation, to yield a 7.5bn deficit. USS Test 1 requires that the scheme always be within reach of recovering the deficit within the covenant horizon timeline by in extremis Employer contributions. This was 25% over 18 years. Now, Employers say they will not pay more than the present 18%, and they do not wish to extend the covenant horizon. Test 1 requires de-risking to occur in this situation, which means selling more growthseeking assets, which exacerbates the problem. This means the USS really is in crisis. 12

13 The UUK proposal now is to set the DB salary threshold at zero (not closing it finally, though in future, it seems unlikely to be restored) and making all future payments (12% employer contribution + 8% employee contribution) into DC. The long-term effect on pensions for recent joiners, who have not secured much Final Salary or CRB pension, will be very substantial, with the value of their pensions predicted to be AT LEAST 30% smaller than their expectations based on current salary. 13

14 But the now closed DB scheme will still exist, with its pension payments guaranteed. The lower gilt returns and absence of contributions will mean that assets need to be sold. This is a downward spiral, and Employers will have to contribute to preserve payments already in payment or promised. 14

15 A summary of UCAM s views, expressed in the UUK survey, is shown above. Some employers, Warwick, Sheffield and Glasgow, are known to favour the retention of DB, but not Cambridge, whose attitude has hardened since the last valuation. The reference to lending of balance sheet refers to the last man standing guarantee of the scheme: in extremis, as employers go bankrupt, the USS debt is past on to the other institutions. Our Head of Finance used this phrase in the response to UUK survey. However, it is not formally true. University balance sheets do indeed carry a debt that embodies its USS commitments, but this relates only to its own past and present staff, and does not reflect any other institutions share of USS debt. 15

16 The triangular nature of the negotiations ties our hands. We cannot strike directly against USS, unless we withdraw en masse from the scheme. We cannot strike against tpr. We cannot strike directly against UUK We can only strike against our Employers, and so pressure them into influencing UUK and USS into revising their valuation, reconsidering its assumptions, or possibly coming up with new pension arrangements that keep Defined Benefit open to its members. UCU is calling upon members to vote for strike action, and for action short of a strike in the present ballot. Cambridge Local Association fully endorses this call. 16

17 We urge you to help recruit new members to UCU to strengthen our hand with Employers. We beleive the actions of tpr and USS are politically motivated, and ultimately, the only way to shift their behaviour may be by political lobbying. We will be offering guidance as to how best to go about this. 17

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