A brief history of USS (1999–2013)

And a dilemma for USS regarding the alleged contribution holiday

[UPDATE 11 December 2019: USS has since released their 1993 and 1996 actuarial valuations, plus Accounts going back to 1996. Here is a thread which explains why the 1996 valuation was the first in USS’s history to record a surplus, and here is a thread on how different the valuation methodology USS employed was back in 1993 and 1996.]

I’ve been studying all the available online UK Universities Superannuation Scheme (USS) Annual Report and Accounts, which go back to 2009, and their triennial full Actuarial Valuations, which go back to 1999. An interesting history of scheme funding and investment in the period prior to CEO Bill Galvin emerges. The following links are to posts with my findings, which stitch together strings of Twitter threads in somewhat more readable fashion:

First, here is a history of the scheme from 2007 to 2013. 2007 is shortly after the point at which the current regulations arising from the Pensions Act 2004 took force, and 2013 is the point at which Galvin took over as CEO.

Second, here is a history of the scheme from 1999 to 2006. This covers the triennial valuations that took place during the period of Pensions Act 1995 regulation, with its much more USS-equity-investment-friendly ‘minimum funding requirement’ (MFR). It also covers the period of the controversial ‘contribution holiday’, during which employer contributions were reduced from 18.55% to 14%.

Third, here is a long post on whether the employer contribution holiday was justified. I argue that if you are in agreement with First Actuarial’s approach to the investment and valuation of the scheme, then you should also agree that the contribution holiday was justified. (First Actuarial is the UCU union’s actuary.)

[UPDATE 22 February 2020: Click here for my most up to date thoughts on the ‘contribution holiday’. tldr: employers didn’t actually go on such holiday.]

Fourth, here is a post in which I draw the following general lessons from the above: First Actuarial’s approach to the investment and valuation of USS is not some radical new theory. Rather, it’s in line with the way USS used to run things, before Bill Galvin took over as CEO.

I conclude with a further lesson. In light of the above, union members should pose the following dilemma for USS: Either the First Actuarial approach to the funding and investment of the scheme is sound or it is not.

First horn of the dilemma. Assume that the First Actuarial approach is sound. In this case, the scheme is prudently sustainable at the current levels of contributions and DB and DC benefits. There is no need for either an increase in contributions or a modification of benefits. In other words, No Detriment!

Second horn of the dilemma. Assume that First Actuarial’s equity-weighted approach to DB investment is unsound, because it should be rejected in favour of USS’s current bond-based, liability-matching approach to investment. In this case, since First Actuarial’s approach is the one that USS itself followed prior to Bill Galvin, the scheme was imprudently governed in the years prior to 2013. In particular, it follows that the 14% employer contribution holiday from 1999 to 2009 involved a reckless level of underfunding of an overly risky equity-weighted portfolio, for which both employers and USS must be held to accounts.

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Professor, Dept. of Philosophy, Logic & Scientific Method, LSE

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