UUK’s ‘Five Key Questions’

On 15 Feb, UUK released “Five Key Questions: USS Pensions”, which described the imposed changes to USS as “unwelcome but necessary” and attempted to rebut UCU’s criticisms. The document in fact fails almost comically to engage with these criticisms, instead merely reasserting UUK’s own position as if it were a matter of agreed fact. Our UCU colleagues in Sheffield have helpfully annotated this rather embarrassing document.

USS Five Opinions (1)

Our response

1. UUK’s claim that “[i]t would cost close to £1 billion extra each year to maintain current benefits” depends upon the November 2017 USS valuation, which replaced the less destructively risk-averse September valuation as a result of direct pressure from only 42% of employers. If the original September 2017 valuation — accepted by 58% of employers and the Pensions Regulator – is used, then current benefits could be maintained for additional contributions of around 2% of salary from members and 4% of salary from employers. This is well within the affordable range.  [p1 col 1]

2. UUK notes “[t]he law requires that USS takes a prudent approach”, and that the Pensions Regulator and PwC “have expressed very real concerns about the level of risk the scheme is bearing”. This is true, but fails to address what balance of risk and growth is suitable. The September valuation was acceptable to tPR, based on “prudent” (i.e., pessimistic) assumptions rather than “best estimate” (i.e., the figure in the middle of the probability distribution of possible outcomes). So this is no defence of the decision, driven by the employer consultation, to adopt the November valuation instead. [p1 col 2]

3. UUK states that it “modified its original proposal in January 2018”, while UCU refused to alter its position. This ignores the fact that the modifications did not address any of UCU’s concerns about USS members’ interests. There should be no credit for modifying an original proposal from outrageous to merely extremely bad for USS members. [p1 col 3]

4. The JNC decision was imposed.  All 5 USS members representatives voted against the proposals. The chair was the deciding vote. Not a single representative of USS members was convinced that the changes to be imposed were appropriate or necessary. [p1 col3]

5. UCU’s claim is that members will lose up to £200,000, and in most cases at least £60,000. UUK’s leaflet does not deny this. [p.2 col 1]

6. The claim repeated in p.2 col.1 that there would be enormous costs to maintaining current benefits again assumes the November 2017 valuation rather than the September valuation that was acceptable to tPR and the majority of employers. The need for this increase in expenditure is therefore the product of a tendentious approach to the financial calculations involved, not (as it is presented) a simple fact. [See point 1 above]

7. The claim that “current members should continue to receive retirement incomes equivalent to 80–90%” of current ones in fact concedes UCU’s position that losses will be at least 10% and probably more for most members. Note also that UUK presents this as a guess rather than a commitment, reflecting the accepted fact that the uncertainty under the new scheme is borne by USS members rather than, as at present, by employers. [p2 col 1]

8. The leaflet trumpets the “flexibility and choice” a DC scheme offers, as against a DB scheme. But a choice between several worse options – as everybody, including UUK, agrees is being imposed here – is worse than one option better than all of them. It is notable that all the other disadvantages of DB which the leaflet mentions are disadvantages for employers rather than employees. [p2 col 2]

9. The “excellent outcomes” possible with DC rely the possibility that “investment returns are good”. But the decision to close  DB  assumes that investments will either be intolerably risky or offer very poor returns. It is utterly misleading to compare DC outcomes in a booming economy with DB affordability in an assumed indefinite recession. The most likely outcome is, of course, somewhere between the two, in which case something close to the current DB arrangements would be well within the bounds of affordability for both employers and employees. [p2 col 2]

10.  The question of whether employers will contribute less depends on exactly how the question is phrased. Under the present scheme, a collective set of investments pays defined benefits to members on retirement, so it makes sense to assess contributions and costs in the aggregate. Under the proposed new scheme each member has an individual pension pot, so contributions to individual DC funds need to be separated out from other scheme expenses. Currently, employers pay 18% of salary into the scheme for each member.  Under the proposal, they will contribute 13.25% of salary into each member’s pension pot (with the remaining 4.75% going to deficit recovery contributions, death and incapacity benefits, and scheme expenses).  Although the employers’ total pensions spending will be unchanged — at least initially — it might still be asked whether 4.75% of salary represents a fair estimate of these expenses. Under the current scheme deficit recovery and scheme expenses consume only 2.5% of total salaries, and it’s hard to believe that death and incapacity benefits account for an additional 2.25%, which would be one-sixth of the 13% total spent on all DB benefits. The change also leaves open the possibility that the employers might seek to spend less on these in the future and thereby quietly reduce their total contribution. [p2 col 3]