A rebuttal of Alistair Jarvis’s reply to Jo Grady
Below is a rebuttal of UUK CEO Alistair Jarvis’s 31 January reply to UCU General Secretary Jo Grady’s 26 January letter in which she presents UCU’s proposals for USS. Excerpts from Jarvis’s letter underneath the headlines are followed by replies:
1. The case for a 2022 valuation:
A moderately prudent, evidence-based 2022 valuation is clearly in the best interests of both employers and USS scheme members, given the unnecessarily prudent assumptions of the 2020 valuation and the material changes in circumstances since then.
As the 2018 and 2020 valuations demonstrate, it is neither unlawful nor contrary to the regulations to conduct a valuation more frequently than every third year. The trustee could decide to conduct annual valuations and already provides annual actuarial reports on the scheme’s funding position.
In response to the worry that the scheme’s funding position would worsen in the meantime if we preserved current benefits until April 2023 while conducting a new valuation:
(i) The high level of prudence of the assumptions of the 2020 valuation, combined with returns on assets that have massively outperformed these assumptions, ensure that any short-term deterioration of market conditions would not be cause for concern.
(ii) The dual nature of the 2020 schedule of contributions which was submitted in September takes account of the funding needs of the scheme in the event that UUK’s cuts are not implemented.
(iii) Post-valuation experience since September reveals no deterioration in the level of funding of current benefits at present, in comparison with the valuation date. To the contrary, the scheme is currently funded to a high level. Hence, UUK’s claim that large cuts (euphemistically described as ‘reforms’) to member pensions are needed as a matter of urgency is unfounded.
UUK seeks clarity regarding the meaning of UCU’s call for a ‘moderately prudent’ valuation. One obvious point of reference is the call shared by UUK and UCU for the scheme to return to the 65–67th percentile confidence levels of the 2014, 2017, and 2018 valuations, rather than remaining at the ramped up the confidence levels of the 2020 and indicative 2021 valuations. Returning prudence to 65–67th percentile would alone be enough to largely eliminate the deficit reported in 2020 and to greatly reduce the cost of future service.
The length of the recovery plan for deficit recovery contributions is another area of excessive prudence which UUK has forcefully challenged in the past. The recovery plan was 15/18 years long for 2020, and of comparable lengths for the 2014 and 2017 valuations. However, it was reduced to 10 years for the indicative 2021 valuation without adequate justification. A moderately prudent 2022 valuation would retain an 18 year period to recover any deficit, especially given the security provided by the 20-year moratorium on scheme exit.
On account of the previously overlooked significance of the fact that the Office for Students (OfS) is among USS’s employers, greater confidence in the enduring strength of the employer covenant — i.e., ‘the ability of the employer to meet its obligations to the scheme’ — is also secured by the 20-year moratorium. According to USS:
Risk capacity is the financial ability of the employers as a group to withstand risks. In particular, it reflects the financial resources that we could call on to respond to risks, if we need to.
‘Available risk capacity’ is the most that employers could pay to secure all the benefits already promised to members in an extreme funding downside scenario.
USS must acknowledge that, on their above definition of ‘Available risk capacity’, OfS’s membership in the scheme for the next 20 years implies a much higher capacity than their current assessment indicates. On account of the extraordinary capacity of the UK government to meet OfS’s obligations which it underwrites to the scheme, this ability is much higher than USS’s assessment of £79bn.
In their remarks on Trinity’s departure, tPR has indicated that the presence or absence of a single employer with deep pockets can make a very large difference to their assessment of the strength of the covenant. If tPR is principled and consistent, they should now acknowledge that the covenant is strong on account of OfS membership combined with the moratorium on scheme exit.
As further grounds, beyond the significance of OfS’s scheme membership, in support of the view that a 2022 valuation should make a materially significant, positive difference to the overall contribution rate, we draw attention to the fact that Aon made the case in their submission to the consultation on the 2020 valuation for a smoothing of future service contributions via a 10% corridor. In their subsequent submission to the March 2021 documents on the 2020 valuation, Aon notes (see pp. 10–11) that USS’s rejection of such a smoothing approach was based on a misunderstanding of what they had proposed. A new valuation would provide USS with an opportunity to take proper account of Aon’s proposal.
Regarding what is meant by ‘evidence-based’, one point of reference is Professor Raghavendra Rau’s USS historic returns analysis, which he presented in the Cambridge webinar that Anthony Odgers organised, and which ‘shows that even if the conditions of the worst period of the twentieth century for returns (starting in 1906 and covering the two world wars and the Great Depression) recurred, a portfolio comparable to USS’s as at March 2021 would generate more than enough income to cover all the scheme’s liabilities and in fact a £30bn surplus on top of that.’
USS’s central or best estimates of returns on assets have been downgraded every year since 2011, and there is now such a mismatch between both historic and more recent returns and these estimates that the latter now lack credibility as central estimates. The best estimates also diverge significantly from USS’s own benchmarks for the fund.
USS quote four market indicators as support for a large reduction in projected best estimates, with no analysis that would justify a connection between the changes in the indicators and the best estimate. USS refers to their own short blog post that considers historical S&P 500 data. Correlation analysis does not support the reduction of 30 year forecasts suggested in the blog.
There is therefore ample justification for our call for employers to join us in calling for a moderately prudent, evidence-based 2022 valuation.
2. On the timing of a new valuation:
In response, we first refer to two precedents: (i) The 31 March 2017 valuation was originally scheduled for release for formal consultation at the end of June 2017. A draft of the valuation was released at around that time, which was very similar to the valuation that was released for formal consultation in early September. The time interval between the end of June and 1 April 2023 is 9 months. (ii) The 31 March 2018 valuation was released for formal consultation on 2 January 2019. The schedule of contributions for that valuation was signed on 16 September 2019–8.5 months later.
If, moreover, a statutory minimum 60-day consultation is required in order to implement listed changes involving cuts to benefits by 1 April 2023, there would be time for this, so long as JNC approves these changes by the end of September 2022. It is only if the consultation period is extended to about 75 days as the most recent one was that an earlier deadline might be necessary.
Such an end-of-September deadline for JNC approval is facilitated by the third of our proposals. Agreement on 25.2% and 9.8% caps on the employer and member contribution significantly narrows the potential for disagreement between the two sides on the specification of benefits and contributions and the time that needs to be allocated for resolution of these disagreements.
3. The UCU proposals would delay needed scheme reform:
Here we disagree for the following reason: Especially in the case of conditional indexation, progress will be rendered more difficult by a persisting industrial dispute and widespread distrust of both UUK and USS over the 2020 valuation and the high level of member cuts arising from that valuation that employers are now proposing. An agreement along lines of UCU’s proposals would provide a settlement of that dispute and a more collaborative environment in which to make progress in the exploration of the feasibility and promise of scheme design involving risk-sharing of benefits. Moreover, a 2022 valuation would not preclude implementation of conditional indexation via a 2023 valuation, should both parties agree that they wish to do so. As USS has indicated, the trustee could choose to perform annual valuations. The fact that such a valuation would make it possible to implement conditional indexation might provide strong justification for conducting a 2023 valuation a year after the 2022 valuation.
4. On the cost sharing protocol:
The claim regarding the underfunding of current benefits during the period leading up to its April supersession by a 2022 valuation has been addressed above. Grounds for a more favourable 2022 valuation have also been provided above.
UUK is mistaken in their claim that our proposals break the cost sharing protocol. The cost-sharing rule (64.10) applies only in the event that there is a mismatch between USS’s costing of current benefits and the prevailing contribution rate, and JNC comes to no agreement regarding adjustments to benefits or contributions to address this mismatch. Neither as a matter of historical fact nor of scheme rules does 35:65 cost-sharing apply otherwise. If, moreover, a cut to benefits would be required beyond April 2023, the cost sharing rule is irrelevant: for example because a lowering of member contributions or raising of employer contributions might be necessary as fair compensation to members for the cut in their future accrual.
UUK themselves departed from the 35:65 split of the cost-sharing rule in their August 2019 offer to preserve current benefits at a 9.1% member, 26.6% employer rate. They acknowledged this departure in noting that their offer involved a member contribution rate “1.3% lower than the rate that otherwise would have applied under the 2017 valuation backstop”. For UUK, it therefore appears to be one cost-sharing rule for them, and another one for members and the union that represents them.
5. On affordability for employers:
Post-92 institutions are now paying 23.68% in employer contributions and are generally less financially secure than USS institutions. So the claims that 21.4% is at the very limits of sustainability for the pre-92 sector, and that a contribution rate 1.5 points above the rate the post-92 sector pays would devastate the pre-92 sector, lack credibility. Moreover, the 25.2% rate which would be required from October 2022 to April 2023 under UCU’s proposals is below what has already been budgeted for. See the following demonstration of this point in Section III of this linked blog post:
For the 2021–22 fiscal year, employers budgeted for a 2.6 percentage point increase in their contributions from 21.1% to 23.7% in October 2021, as this is the rate at which contributions were then scheduled to rise under the last valuation. Therefore the 23.7% level of employer contributions required to retain current benefits from 1 April to 30 September 2022 is no greater than what employers have already budgeted. Moreover, this 23.7% level is only slightly higher than the 23.68% employer contribution that the generally less financially well off post-92 universities pay into the Teachers Pension Scheme.
By means of their resolution to cut member pensions, employers have managed to limit the scheduled and already budgeted 2.6 point rise to a minuscule 0.3 (i.e., to 21.4%), thereby reaping a windfall surplus. The further 2.3 point rise in contributions employers have avoided over the six months of 1 October 2021 to 31 March 2022 is greater than the 1.5 point rise from 23.7% to 25.2% that would be needed for the six months of 1 October 2022 to 31 March 2023 to retain current benefits throughout that period. Employers would therefore be quids in, relative to what they have already budgeted for, if they pay that which is necessary to retain current benefits until April 2023.
6. On affordability for members:
We take UUK at your word that we should be guided by responses to the member consultation in order to determine the level of member appetite for paying higher contributions to retain current benefits. As UUK wrote in this statement of 30 November:
the scheme’s members can make their voices heard through the current consultation, which could result in changes to the employers’ proposal. We want to hear from the silent majority and are encouraging them to respond before the deadline on 17 January 2022.
…[UCU] are calling for another valuation and want scheme members to pay in 11% of salary while this takes place, up from 9.8%. To our understanding they have not consulted their members, or the wider scheme membership, on their appetite for increased contributions, so this is a significant and untested assumption.
Members were officially consulted over a period of 77 days on whether they would prefer an increase in contributions to retain their current benefits to the pension cuts that UUK had proposed. They were asked to rank their preference for the former or the latter. As USS’s recently-released analysis shows, consultation responses revealed strong majority support for paying higher contributions to retain current benefits.
In contrast, the UUK proposals were overwhelmingly rejected in the recent consultation:
- 88% did not accept UUK proposals to reduce the salary threshold.
- 91% did not accept the UUK proposal to reduce the rate of accrual.
- 93% did not accept the UUK proposal to cut inflation protection.
- 78% did not accept the UUK proposal to contribute only 12% above the threshold to DC pensions.
- 96% of those commenting on the proposals had a negative view.
Although UUK might still try to claim — in an echo of Richard Nixon — that there is a “silent majority” who support their proposals, this seems unlikely given the landslide majorities in opposition above. It is worth noting that these responses are comparable to the responses received as part of the 2017/2018 valuation, in which 90% of respondents did not support the UUK proposals.
As the figure below demonstrates, UUK is also mistaken in their claim that the current non-participation rate is 15–20%. As USS’s annual accounts indicate, the rate in 2021 was 11%. This is the lowest since 2007. Moreover, opt-outs appear to be decreasing as contributions rates increase. It is also the case that non-participation rates rise in the aftermath of cuts, or threats of cuts, to member benefits, e.g. 2012, 2014, 2018. Hence, there is, if anything, a greater risk that opt outs will increase if benefits are slashed as UUK proposes, than if member contributions rise for a time-limited period to preserve benefits, before returning to the current 9.8% rate, as UCU proposes. This greater risk seems especially likely, given the much stronger level of antipathy towards cuts to benefits than increases in contributions revealed in the consultation responses.
Acknowledgements: Thanks to Sam Marsh and especially to Jackie Grant and Neil Davies for their comments on and contributions to this post.
Postscript 15 February 2022:
This blog addresses a new UUK objection to UCU’s proposals: