Guest Post: Ten reasons why USS is a scandal waiting to bite back


Sam Marsh, Sheffield UCU, follows up on his earlier post for HE Marketisation (6 November 2017), giving 10 reasons why USS is a “scandal waiting to bite back”. The University and College Union will announce the results of its national ballot for strike action in response to the threat from universities to end guaranteed pension benefits on 19 January. 


If you’re reading this, you probably know that there’s a lot of fuss over the Universities Superannuation Scheme (USS), the pension fund for academic and related staff at some of the biggest universities in the country. You’ve probably heard that things aren’t as black and white as some would lead you to believe. But what is it that’s getting people upset? Quite simply, the process of determining the health of the fund appears to be rotten. Here are ten reasons why you might consider what’s happening to be close to scandalous.


Reason 1: a huge best-estimate surplus

As part of their 2017 valuation, USS included a `best-estimate’ of the fund’s health. The result was quite startling. On this measure, they hold a huge surplus, significantly over £8bn. That’s more than £20k for every USS member. And this figure is up on 2014, where it has recently been admitted that the scheme held a £3.5bn best-estimate surplus.


Source: USS 2017 Actuarial Valuation, September 2017


Reason 2: we’re probably overpaying for the current benefits

The 2017 valuation also included a best-estimate for how much of our salaries needs putting aside to secure the current benefits. Our current contributions of 18% for employers and 8% for employees turn out to be a significant over-payment, with USS estimating that 22.5% in total would be sufficient.


Source: USS 2017 Actuarial Valuation, September 2017


Reason 3: ‘de-risking’ causes all the problems

Much has been made by USS of the need to de-risk the scheme, with plans to sell off growth assets (equities, property etc) and replace them with low return investments such as government bonds, in order to ‘match liabilities’’ Much less has been made of the fact that this de-risking is responsible for almost all of the deficit, and that canceling it would allow benefits to remain unchanged at the current contribution rate.

Source: Letter to Sir Keith Burnett by Sheffield UCU, 29 November 2017


Reason 4: de-risking is hugely expensive

Using USS’s projections for investment returns, we can compare the asset growth both with and without the de-risking plans. And the results aren’t pretty. The de-risking is expected to cost universities an eye-watering £11bn over the next 20 years. This will come in the form of increased employer contributions, and will almost certainly be found by squeezing the amount being paid towards future pension benefits.

asset growth.jpg

Source: data based on figures from USS’s Actuarial Valuations, available on Sheffield UCU’s USS: 2017 valuation resources page


Reason 5: the de-risking doesn’t reduce risk!

The most shocking thing about the plans to de-risk investments comes from the graphs below, taken from a USS presentation to Imperial College. The graphs show that, 10 years into the future, the de-risking offers almost no protection against adverse events. Here, the figures for the worst 1% of possibilities (next to the ‘99%’ arrow) are extremely similar whether de-risking or not. In other words, the risk has barely been reduced by the costly change to investment plans. Inexplicably, universities had not been shown this information when they were consulted on how much de-risking they thought appropriate.


Source: USS presentation to Imperial, November 2017


Reason 6: USS have been resistant to showing their workings

In September, USS sent its draft valuation to universities, but had no plans to release it publicly. After significant pressure from USS members, including a petition signed by almost 2,000, the draft valuation finally entered the public domain, courtesy of the University of Sheffield. Unfortunately, the document still left plenty of unanswered questions, with the justifications for the assumptions offered way below academic standards.


Source: ‘Academics urge universities’ pension fund to explain shortfall‘, Josephine Cumbo, Financial Times, 19 September 2017


Reason 7: the Pensions Regulator intervened at a crucial point

Just as USS started consulting with universities over the draft valuation, the Pensions Regulator wrote an explosive letter to the USS trustee board questioning their assessment of the robustness of the university sector. This intervention, while not publicly released, was passed to universities as they were forming their responses, and is mentioned explicitly in some of their submissions. It may well have contributed to the calls for increased de-risking that Universities UK (UUK) say characterised the responses.


Source: ‘UK universities retirement fund `weaker’ than claimed, fears watchdog‘, Josephine Cumbo, Financial Times, 11 October 2017


Reason 8: closing the defined benefit scheme could cause spiraling costs

Counter-intuitively, USS is more stable as an ongoing scheme than if its defined benefit section is closed. Presently, USS has more coming in each month than it pays out (positive cash flow), and is forecast to do so far into the future. Closing the scheme will quickly push it into negative cash flow, at which point assets must be cashed in to pay benefits. The result will be increasing pressure to de-risk as the scheme winds down, which will lead to increasing costs. Warnings of taking such an approach have come from Ros Altman (former pensions minister) and Brian Souter (President of the Institute of Chartered Accountants of Scotland) among others.


Source: Sir Brian Souter, BBC Today Programme, 4 December


Reason 9: UUK tried to spin the effects of their proposal on income

After Universities UK tabled a proposal in November to close the defined benefit section of USS, it was inevitable that people would want to know the effect on their retirement income. After a significant delay, UUK released modelling in December which, they claimed, showed that people would receive 80-90% of what they would under the previous arrangements. Unfortunately, this modelling was a masterpiece in spin, with investment forecasts used which were significantly higher than those in the USS valuation (and which would show a surplus if applied there!) along with a host of other sleights of hand. Un-spinning the proposals shows that 50-75% would have been a more accurate claim.


Source: UUK can’t transform a sow’s ear into a silk purse, Mike Otsuka, 13 December 2017


Reason 10: much better solutions are available

Even accepting some of the dubious calculations and de-risking plans, there are much, much better solutions than that which Universities UK is painting as the only option. Defined benefits could be retained with a small increase in contributions subject to slightly reduced terms. UUK could rethink their requests for heavy de-risking and hence keep the costs down. Thinking longer-term, solutions could be found which look towards collective defined contribution, a way of fairly apportioning all proceeds of a fund’s growth to the members of the scheme. It is worth noting that this final approach seems to have broken a deadlock in the dispute over pensions in Royal Mail, which for a long time appeared to be heading nowhere.


Source: ‘How UUK’s pension proposal could be greatly improved on, at no cost or risk to employers‘, Mike Otsuka, 26 November 2017


So there we have it. Whether or not this valuation ends up widely acknowledged as a scandal, time will tell. But Universities UK have done serious damage to their reputation by attempting to pull the wool over the eyes of their staff. And it’s hard to see how that won’t bite them back.


More resources

The Sheffield UCU 2017 Valuation Resources page:


What can be done for USS? By Sam Marsh

Source: Wadler’s Blog


Sam Marsh gives background to the current dispute between the University and College Union (UCU) and Universities UK (UUK) regarding the Universities Superannuation Scheme (USS) – a ‘defined benefits’ private pension scheme covering the majority of staff the older ‘pre-92 universities’, including Oxford, Cambridge, and Manchester Universities. Last month, 87% of pre-1992 university UCU members who voted in a consultative ballot supported industrial action to protect the existing benefits of the USS pension scheme.

As Sam Marsh explains: “The existence of the USS as a means for providing a secure, predictable income for staff from pre-92 universities is hanging in the balance, with talk of severe downgrades to benefit levels or closure of the scheme altogether.”

“Much has been written of soaring deficits and unaffordable commitments,” he adds. “And while this pervasive story of a fund in crisis seems hard to shake, many, including USS themselves, find the fund is healthier than ever.”

In the following article, Sam – a teacher in the School of Mathematics and Statistics at the University of Sheffield and Communications Officer for the Sheffield UCU branch (previously holding the role of Pensions Officer) – asks “What is going on?”


What is a defined benefit scheme?

Defined benefit pension schemes such as USS offer a good degree of certainty on the income to be received in retirement. This certainty comes from a promised benefit payment based on the salary of the contributing member. In USS, those earning less than £55,000 will, for every year they work and pay into the scheme, be promised 1/75th of that year’s salary to be paid annually in retirement.

The pension promises made by USS must, by law, be funded. That is, the scheme must hold sufficient assets as to cover the promises that have been made to date. To make sure that defined benefit schemes are doing this properly, the government’s Pensions Regulator requires that they undergo a valuation every three years.


The valuation and a best-estimate of USS’s health

A valuation for a defined benefit scheme like USS involves three parts:

  1. Totalling the scheme’s assets (built up from the contributions received);
  2. Comparing these to an estimate of the fund’s liabilities (the benefit payments
    which have already been promised);
  3. Estimating the contribution rate required to allow the scheme’s future promises to be fully funded given no change to the benefit structure.

The above involve predictions about the future, including how invested assets and wages will grow, what will happen to interest rates, how long people will live and more. The assets should be larger than the liabilities (a surplus); a shortfall is known as a deficit. But the problem that arises here is that, with the future unknown, any prediction will be an estimate. There are no right answers to numbers 2 and 3.

So what does the USS trustee make of the scheme’s prospects? The answer is in their draft valuation, where they state their best-estimate of the scheme’s health. And it is good news! To pay the benefits accrued to date, their £60 billion of assets correspond to a surplus of £8.3 billion. This is a huge amount, around a tenth of the government’s annual spend on education.

Not only that, but to continue to provide the current benefit structure, employers and employees are required to put aside a total of just 22.5% of salary, lower than the 26% (18% employer and 8% employee) contributions currently being made.

Figure 1; Source: Universities Superannuation Scheme, 2017 Actuarial Valuation

And things get even better: USS’s best-estimate position is based on some fairly pessimistic views of the future, involving ten years of almost total stagnation in their investment growth, before a modest assumption of investment returns picking up. The most likely scenario, if things are left unchanged, is that the current large surplus will continue to grow over time. This is already evident: USS have recently revealed that their current position is up from that of 2014, where they had a smaller, £3.5 billion best estimate surplus.



Before you celebrate too soon, you need to bear in mind the following important point: the Pensions Regulator does not accept a best-estimate approach to valuations, instead requiring a buffer in case the assumptions turn out to have been over-optimistic. This is known as prudence, and it is not, in itself, a bad thing: it is in nobody’s interests to have a fund that might fail if things turn out worse than expected.

But there is more good news! On a prudent basis, figures con- firmed by USS show that the fund has a small (approximately £0.5 billion) deficit, and the contribution rate required for future promises remains at 26%. So things are OK, right?

Unfortunately not. The figures that USS are actually reporting to the Pensions Regulator are of a £5.1 billion deficit and, more worryingly, a contribution rate of 32.6% needed to allow the scheme to continue in its current form. Why? This is where things get messy, and what’s happening behind the scenes becomes important.


The pressure to ’de-risk’

The real source of USS’s woes, it turns out, is a proposed change in their investment strategy, which they refer to as “de-risking”. This de-risking involves a plan to sell a large chunk of their growth-assets (equities, property etc) and replace them with gilts (government bonds). Unlike like equities, gilts guarantee a fixed annual income and, for this reason, are seen as safe investments.

The downside is that they are expected to give significantly lower returns, on average, than the equivalent amount of growth-assets. So, if USS shifts its investments towards gilts they expect to make lower returns from their assets in doing so, and this pushes up the price of providing pensions. Not only that, but the gilt market is seen by many, including USS, as overpriced at present; investing in gilts now is almost guaranteed to end up with USS losing money in real terms over the coming years.

So why would USS want to de-risk its investments in this way?

Actuarial groupthink. Firstly, de-risking is just the way that the pensions industry does things nowadays. Investing in the productive economy has become unfashionable for pensions funds, with the actuarial profession now solidly of the mindset that pensions should be funded by securing benefits with gilts. That this will lead to funded defined benefit schemes being pushed out of existence does not concern those actuaries. Why would it? Thankfully, there is an increasing amount being written about why this groupthink may be harmful, not only to pension scheme members and sponsoring employers, but also to the economy as a whole.

Misguided risk-management. Secondly, Universities UK have been at best ambivalent and at worst encouraging of the approach proposed by USS. Their reasoning could be summarised as a concern around downside risk. That is, they are asking themselves: what if things go really, really wrong and we have to pick up the pieces? They are managing to convince themselves that running a defined benefit scheme is just too risky, unless it is made ultra-safe by investing predominantly in gilts. This is in spite of the extremely healthy best-estimate position of USS, in spite of the fact that USS has more money coming in each year than it pays out, and in spite of the fact that the investment returns required to fully fund the scheme in the future are very modest compared to historical performance.

External pressure. Finally, and probably most importantly, USS is advocating de-risking to appease the Pensions Regulator. Because of its duty to ensure that benefits already promised will be paid, and because BHS is still in the back of its mind, the Pensions Regulator is pushing hard for the safest way to make sure USS’s promised benefits are secure. But the Pensions Regulator is not at all interested making sure that future generations are treated well: for them, the ideal situation is that the defined benefit scheme ceases and past promises are secured by buying an adequate quantity of gilts. Satisfying the regulator will make it very hard for USS to continue to offer attractive defined benefits for a reasonable cost.


What is the solution?

UCU have spent the three years since the 2014 valuation working with Universities UK, and individual institutions, discussing alternative viewpoints on the health nof USS, hoping that when given close scrutiny both parties would agree that the nvaluation was giving a misleading impression of the situation. It has now become clear that this has had only limited success, and it seems that Universities UK are unable to look past their worries over financial risk to consider progressive solutions.

It is also clear that the Pensions Regulator has no interest in supporting defined benefit schemes. The methods of valuation it endorses are narrowly focussed on gilt-rates and market-derived figures, and these methods in the current economic climate make it very hard for defined benefit schemes to prove themselves to be healthy. It seems that the Pensions Regulator will not allow USS to demonstrate its health by non-standard means.

This leaves UCU in a difficult position. But there is hope! The recent consultative ballot over willingness to strike to defend pensions was overwhelming a vote in favour. This gives UCU’s negotiators a strong position: any viable solution that they propose must be given a good hearing by Universities UK and USS. But UCU’s negotiators must bear in mind that the potential for strike action will have little effect on the Pensions Regulator.


UCU’s priorities

It is of utmost importance that we resist any further move towards a defined contribution scheme: such schemes place all risk on individuals, with no guaranteed level of annual income in retirement. We should also be wary of asking universities to pay more into the fund. We don’t believe that the fund needs higher contribution rates as it is already shown to be healthy.

Instead, our priorities should be to look for collective approaches to providing pensions, ideally ones which are defined benefit in nature, and ones which have a chance of satisfying all parties concerned. Once we have found such a viable model, Universities UK cannot afford to write it off without a fair hearing, as doing so could risk substantial disruption.


A scheme to satisfy all parties?

One approach for a solution comes from looking at the pensions stand-off at Royal Mail. The Communication Workers Union are currently involved in a dispute to save their defined benefit scheme. What they are proposing is that it be changed to a ’Wage in Retirement Scheme’, a form of defined benefit scheme devised by the First Actuarial: the same actuaries who advise UCU.

The Wage in Retirement Scheme manages investments collectively and guarantees a modest level of benefits in retirement, allowing for and expecting benefits to be increased when the future investment performance actually becomes known. This approach would mitigate a large amount of the risk which Universities UK are concerned about, and in doing so should appease the Pensions Regulator.

The Wage in Retirement Scheme must be looked into by UCU urgently. If we believe that USS is as healthy as the best-estimates say it is then we have nothing to lose by moving to such a scheme. In fact, we potentially have an awful lot to gain.



Universities Superannuation Scheme, 2017 Actuarial Valuation, 1 September 2017, available here.

Universities Superannuation Scheme, 2017 Annual Report, July 2017, available here