How should employers respond to the USS valuation?
[UPDATE: Please also see this blog entitled ‘On the significance of USS’s misrepresentation of tPR’, which employers should take into account in forming their response to the consultation.]
Below are two recommended employer responses to the current consultation on the USS 2018 valuation, along with links to threads in which I elaborate on my reasons for offering these recommendations.
Please first read, as background, the following brief thread in which I describe the constraints under which we’re now operating on account of the pronouncements of the Pensions Regulator (tPR) and the stance of the USS executives:
(References to ‘Sam’ in the above thread are to Sam Marsh, a UCU-appointed JNC negotiator. References to ‘Derek’ are to Derek Benstead of First Actuarial, who is one of UCU’s actuarial advisors.)
Recommendation 1:
Employers should offer their strong and concerted endorsement of Aon’s recommendation to reduce deficit recovery contributions (DRCs) from 5% to 3.5%:
As I explain in the thread immediately above, a lowering of ‘upper bookend’ DRCs from 5% to 3.5% plays a prominent role in Aon’s contingent contribution proposal, as it lowers the three stepped contribution increases from 1.5% each to 1% each.
This is the most significant adjustment to USS’s 2018 valuation that Aon is calling for. As I note in the thread, downward adjustment to DRCs for the 2018 valuation follows, as a matter of consistency, from USS’s recent downward adjustment of DRCs for the 2017 valuation in response to strong employer challenge. A reduction in DRCs is, I think, among the marginal improvements to the valuation that might be achievable as the result of this consultation, but only if employers push hard for it.
Recommendation 2:
Employers should also offer their strong endorsement of Aon’s contingent contribution proposal more generally, including a 30% likely trigger based on the technical provisions rather than the self-sufficiency deficit:
In this thread, I made the case for the superiority of an ‘all yields plus’ technical provisions trigger to a ‘gilts plus’ trigger:
On account, however, of resistance on the part of USS to anything more sensible, Aon’s proposal involves a ‘gilts plus’ trigger — albeit annually updated to reflect USS’s most recent best estimates of returns on various asset classes. Whatever its flaws, such a gilts plus technical provisions trigger is an improvement over the ‘reliance’ (aka self-sufficiency deficit) trigger that USS had previously suggested. See this blog post for what’s wrong with a reliance trigger: