Does USS’s valuation implement JEP in full?
Yes, with one exception which it’s hard to fault them for rejecting
[Note 13 May 2019: This post reflects what was publicly known only prior to the release of USS’s 7 May statement on the 2018 valuation, in which they added a new ‘Option 3’ involving a 30.7% contribution rate until October 2021. See this post for a discussion of the extent to which this new option implements JEP in full.]
USS’s January consultation document on the 2018 valuation involves a rise in the current 26% contribution to a minimum of 29.7%, in order to sustain the current level of pension benefits. USS insists, however, that contributions as low as 29.7% would be acceptable only if combined with “sufficiently strong contingent support” in the form, for example, of triggers of higher contributions if either the technical provisions deficit or the ‘self-sufficiency deficit’ increases beyond a certain limit between this valuation and the next.
I. It’s hard to fault USS for rejecting JEP’s recommendation against trigger contributions
There is only one point in their report where JEP addresses the issue of trigger contributions:
JEP, however, offers no reasons in support of their conclusion that this issue should be kicked into the long grass. Given the fact that this is an undefended assertion, combined with the Pensions Regulator’s (tPR’s) strong and unambiguous steer towards trigger contributions, it is hard to fault USS for not heeding JEP’s advice here. Here is tPR guidance on trigger contributions:
In the face of such a clear steer from tPR, it’s hard to see how UCU and UUK might succeed in pressuring USS to approve contributions as low as 29.7% in the absence of triggers of higher contributions. Rather, it would be more constructive to focus efforts, as Aon has, on ensuring that the trigger conditions are reasonable: e.g., that USS not impose a reliance trigger based on the self-sufficiency deficit.
II. USS’s pathway to 29.7% fully conforms to JEP
USS’s 29.7% rate is, itself, in complete conformity with the following key passage in the JEP report:
In their FAQs on the valuation, USS makes explicit reference to the above passage:
In the aforementioned passage on p. 63, JEP writes that “the charts above simply demonstrate one approach” to reducing contributions to less than 30%. The “charts above” are a reference to Figure 11 of the JEP’s report, in which they model the following pathway down to 29.2%:
USS rejected two elements of this charted approach: “Sept.TP” and “Smooth contributions”. In so doing, USS rejected “one approach” which JEP recommended but which JEP itself described as but one of “a number of different paths that the Trustee could adopt to reduce the contribution rate to below 30%”. In this blue-highlighted portion of the passage from p. 63, JEP suggests “[a]nother approach” USS might take:
USS adopted this blue-highlighted approach, in order to reduce contributions to 29.7%, which is below 30%. USS’s choice of this JEP-suggested approach was guided by an attempt to conform to tPR’s letter of 11 December, in which the Regulator identified those JEP proposals that would, in their view, involve an increase in investment risk and hence a call to be backed up by the contingent support of triggers of higher contributions. It is, moreover, entirely reasonable of USS to have chosen the blue approach to <30%, rather than JEP’s charted path, given that the blue approach is one of lesser resistance to such tPR guidance of which JEP didn’t yet have sight, because it hadn’t yet been issued, when they charted their different suggested pathway.
III. Why full implementation of JEP does not imply a No Detriment valuation
In order to take “account of asset out-performance in 2018 more explicitly” (quoting from the blue-highlighted text on p. 63), USS issued a new valuation dated (‘as at’) 31 March 2018. It did so, rather than attempting, as JEP had proposed, to reflect such 2018 developments in a valuation which remained dated 31 March 2017.
It has been noted that, if all of the proposals in JEP’s charted Figure 11 path were incorporated into a valuation updated to 31 March 2018, then the minimum contribution rate would go down from 29.7% to c. 26%. This would qualify as a No Detriment valuation.
JEP did not, however, call for their charted Figure 11 proposals to be applied to a valuation as at 31 March 2018. Moreover, as noted above, JEP presented its Figure 11 charted proposal as merely one pathway among others to < 30%. Therefore, full implementation of JEP does not imply a No Detriment valuation that reduces contributions all the way down to c. 26% (and not just <30%).
In its choice of a blue pathway to 29.7% plus contingent support, USS would be on firm ground in maintaining that they have adopted an approach that takes into account the conflicting guidance of tPR and JEP.
IV. Lack of quantification of the risk of a No Detriment valuation
USS has written the following about the JEP recommendations, which is accurate:
The blue-highlighted sentence echoes a reasonable request of tPR, which they spell out in paragraph 37 of their December letter:
In the consultation document, USS quantifies these risk against gilts-based benchmarks. On the basis of such quantification, they maintain that it would be too risky to adopt the combination of JEP recommendations which would achieve a No Detriment valuation.
As I note in this thread, a gilts-benchmarked quantification of risk is flawed. In order to make the case for a No Detriment valuation, one must, however, do more than establish that USS employs a flawed measure of risk that fails to establish that a No Detriment valuation is too risky. One would need, more positively, to provide the quantification specified in paragraph 37 of tPR’s letter. Not only is this missing in the JEP report. But neither Aon nor First Actuarial has provided this. All we have, at present, is the testimony of JEP, Aon, and First Actuarial that they regard this level of risk as prudent.
One might insist that UUK, UCU, and their actuaries should now be pulling out all stops to provide the necessary quantification of the acceptable level of risk of a No Detriment valuation. For reasons I spell out in this blog post, however, this would be a futile misdirection of efforts away from the one significant, unresolved element of the valuation where the joint efforts of UUK and UCU might now make a tangible and positive difference: ensuring that the triggers of higher contributions associated with a minimum 29.7% contribution are reasonable.