DB targets rather than promises:

A feasible solution for USS

Please click this link for slides of a presentation about USS to members of my UCU union branch.* They include my take on USS’s proposed valuation (slides 2–3), the merits and feasibility of First Actuarial’s response on behalf of UCU (slides 4–5), the futility of a rise in employer contributions to save our pensions (slide 6), the inevitability of a reduction in the strength of our DB pension promise (slide 7), the proposed employer cuts to our pensions that we can expect (slide 8), the bad value for money of our employers’ preferred IDC replacement for DB (slide 9), and, finally, a way to preserve our pensions: First Actuarial’s WinRS proposal (slides 10–12), which it’s worth going on strike to achieve, as the best feasible means of preserving pensions payments at their current level (slide 13).

Under WinRS, we would receive pensions at least as good as those we are promised under our current DB arrangement, but only if investment returns are as good as expected. Such an approach involving targets rather than promises has support across an ideological spectrum:

WinRS has the strong backing of Terry Pullinger, Deputy General Secretary Postal of the Communications Workers Union (CWU), and has been embraced by his union in their dispute with Royal Mail. CWU was one of the earliest backers of Jeremy Corbyn and has recently affiliated with Momentum.

There is another closely related approach to collective pensions provision, involving targets rather than promises and known as collective defined contribution (CDC). Nobody else in this country has done more than Kevin Wesbroom, who is one of Aon’s two actuarial advisers for our employer (UUK), to advance the case for CDC. The green line in the graph below captures Wesbroom’s modelling of how CDC would have performed historically in comparison with a DC lifestyle approach (red line) along the lines of USS’s default DC pension fund.

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Wesbroom et al, ‘The Case for Collective DC’ (2013), p. 40.

So there is a convergence of expertise and support among the actuaries for UCU (First Actuarial’s Derek Benstead and Hilary Salt) and UUK (Wesbroom) for a design for collective pensions involving targets.

We can call this the Aon-First Actuarial, or, alternatively, the Benstead-Salt-Wesbroom, solution for USS. The challenge will be to bring the employers and the union they advise around to the perspective they share. I believe there is scope for this since, as I argue in paper called ‘How to guard against the risk of living too long: the case for collective pensions’, such an approach to pensions is to the mutual advantage of employers and workers. Here’s how I illustrated this point when I gave this paper as a talk:

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“By joining together as a collective in the manner famously depicted on the frontispiece of Hobbes’s Leviathan, it is possible to tame the longevity and investment risks we face as individuals each with our own private IDC pot.”

[*There are notes below the slides of my USS presentation, with further details, which should display in the attached format when it’s downloaded and opened in Microsoft Office. In order to navigate to the links, you’ll need to display the slides in ‘slide show’ format and click through. Click this link for a pdf that contains the notes below the slides but unfortunately lacks clickable links.]

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

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