What follows is an update to my 29 March blog post “UCU members need to know what UUK will choose if they accept the proposal”. I’ve written this in the light of further information plus reflection in response to questions and discussion on Facebook and Twitter. This Q&A assumes familiarity with that post, whose paragraphs I’ve now numbered. Unless I indicate otherwise below, I still affirm everything I said there.
Q1. Which option (i)-(iii) will UUK choose?
As I indicate in the PS, my 29 March post elicited some answers from UUK to questions posed by the FT’s pensions correspondent. As I read their answers, they include a strong signal that the 23 January JNC 100% IDC option (i) will be off the table if this offer is accepted. They will instead try to develop a version of option (iii) in talks with UCU, where that involves “a meaningful defined benefit” roughly along lines of, if not identical to, the 12 March ACAS agreement.
The restriction of their “meaningful defined benefit” commitment to “any new proposal” (my emphasis) indicates that the 23 January JNC proposal might remain on the table in the event that this offer is voted down. For all they’ve said, they might support the launching of the suspended consultation on 100% IDC if the current offer is turned down. (For reasons I mention below, however, I don’t think they’d end up supporting this.)
UUK has not explicitly ruled out option (ii) and perhaps never will. But it remains highly improbable that this would be the upshot of acceptance of the current offer. That option preserves the status quo (minus the 1% DC match), but at the cost of an overall 10.6% increase in contributions under Rule 76.4, starting in April 2019. Employers would try at 6.9%, even if not all, cost to avoid this, which is to say that they would be dead set against it. It’s not even clear that this option could be implemented. One of the many perversities of Test 1 is that it’s impossible to increase regular employer contributions by much without triggering de-risking that cancels any increase in benefits (see p. 31).
So we’re left with option (iii) as the upshot of acceptance of this offer: some level of “meaningful defined benefit” that is costed to the November valuation and therefore roughly along the lines of the 12 March ACAS proposal, even if not identical in all of its details.
Q2. Why can’t we move beyond the November valuation and push back to September?
All three of the above options presuppose imposition of the November valuation. Some have asked why we can’t push things back to September, especially in the light of the “new material evidence” that employers have developed a healthier appetite for risk. Oxford, Cambridge, and Bristol have all now changed their September consultation responses (see first comment) from ones calling for lower risk to acceptance of the level of risk that USS proposed in September.
But, in addition to the reasons I mention in paragraph 2 of my 29 March post, there is the following further reason why reversion to September isn’t a viable option. I was informed at a meeting with USS executives last week that they would agree to such reversion only if employers agreed to automatic triggers of higher contributions if the level of short-term risk becomes too large, or the pledging of assets, or some other security such as the posting of a bond against USS’s perceived exposure to the higher level of investment risk that a return to the September valuation would involve. Employers are right to resist such conditions on USS’s part as unreasonable (or else not possible to introduce within the time-frame of this valuation).
I’d like to add one slight note of optimism: perhaps if the offer of a joint expert panel is accepted, USS might be willing to delay the immediate start of the ‘de-risking’ shift of the portfolio towards bonds until after that panel has had a chance to weigh in. This move might be justified by the “new material evidence” of higher employer risk appetite. It would take us part of the way back to the September valuation, which delays the onset of de-risking for ten years.
In addition to the difference in investment de-risking, the November valuation also involves much higher deficit recovery contributions (DRCs) to retain the DB status quo than does the September valuation. These higher contributions actually make up most of the increase in cost of the November versus the September valuation:+3.9% DRCs, compared with the +1.3% increase in employer contributions resulting from the speeding up of de-risking. USS might accept some downward adjustment of DCRs, by accepting a lengthening of the recovery period or a raising of the assumption regarding outperformance of the discount rate. But the higher DRC’s would need to remain at least largely in place, given employer unwillingness to agree to automatic triggers or to pledge assets.
Q3. Could the joint expert panel (JEP) do anything more than try to influence and shape the 2020 valuation?
For my explanation for why I don’t think the joint expert panel (JEP) could influence the current 2017 valuation, see paragraph 3 of my 29 March post. Also click the links in that paragraph for further details. In those tweet threads, I explain why I thought the earliest valuation the JEP could properly influence would be one as of 31 March 2019. Since, however, that would fall only a year short of the next mandatory triennial valuation in 2020, I said I didn’t think there would be much point in holding a valuation then.
It has since been drawn to my attention that such a 31 March 2019 interim valuation could serve a useful purpose if it’s possible to delay, beyond April 2019, the implementation of benefit and contribution changes arising from the 2017 valuation. See these twitter exchanges with Amanda Williams regarding what she calls Plan B. (Amanda is a UCU JNC alternate. Dave Guppy, who also appears on the thread, is a UCU-appointed USS trustee. In neither case should their tweets be construed as other than personal views.)
It is also significant that Cambridge’s VC Stephen Toope has endorsed the following version of Plan B, combined with option (iii):
we have suggested the following points to UUK.
1. that the minimum position is the ACAS-conciliated agreement rather than the original January Defined Contribution proposal,
2. that the ACAS-conciliated agreement is subject to improvement on the recommendation of the expert panel, and
3. the USS Trustee should be asked to confirm that if there is a significant change that flows from the work of the panel and that cannot be implemented in time for the benefit change in April 2019, these changes can be introduced earlier than the next review in three years’ time following an interim valuation.
My best guess, but not based on much inside information, is that the odds are relatively high that the above — though perhaps with a modest, negotiated improvement of 1 within the next few weeks — is what scheme members will end up with if they vote to accept the offer that goes out to ballot next week. If this is what UUK might hope to do, it would be extremely useful for them to secure the confirmation from the USS Trustee listed in point 3 above and to let UCU members know this by the opening of the ballot.
Q4. Is the 12 March ACAS agreement an acceptable baseline on which to try to improve in the above manner?
This partially depends on whether one thinks it impossible to avoid the imposition of the November version of the 2017 valuation. For the reasons I point to in response to Q2 above, I think the answer is that it is now impossible to avoid such imposition, though I also mention that some modest mitigation of its effects might be possible. It may, however, be possible to prevent the benefit cuts and/or contribution increases this valuation implies from ever taking place, by means of short-circuiting through interim valuation in the manner of Plan B above.
Since I now think it impossible to avoid imposition of the November valuation for 2017, I think it makes sense to try to secure the best version of a “meaningful defined benefit” that remains within November costings.
If the current offer is accepted, UUK have indicated that the version of “meaningful defined benefit” that is proposed would be subject to talks with UCU.
Q5. Might it be possible to improve on the 12 March ACAS-mediated offer, while remaining within November costings?
What follows are some suggestions.
First, I think we can anticipate that employers would not agree to any significant increase in contributions in the absence of another round of strikes. So, if the offer is accepted, the maximum contribution level would be the overall +2% increase of the ACAS agreement, or perhaps something marginally higher.
Might it be possible, in cost-neutral fashion within the limits of such a contribution level, to improve on the combination of £42k salary threshold, 1/85 accrual, and 2.5% CPI cap on revaluation of accrual and pension in payment?
I know that many regard the CPI cap as the worst of these three components. That’s not my own view. I think some are unduly influenced by their memories of runaway inflation before the advent of central bank inflation targeting. Please click here for more on why I don’t think the 2.5% CPI cap is now such a great risk.
My first preference would be to retain inflation-capping but to improve the accrual rate to at least 1/80, by means of a lowering of the DB/DC salary threshold. This is because a higher accrual rate on lower salaries is better for lower earners.
My second preference would be to soften the inflation cap by introducing the possibility of revaluation above the 2.5% cap, up to a maximum of 5%, if investment returns are better than expected. Importantly, this would involve ‘catch up’ provisions so that people don’t necessarily suffer a permanent cut in their pension income from past years in which inflation exceeded 2.5%.
I believe that a lowering of the ACAS £42k salary threshold would be justified, in order to help fund either an improvement of the accrual rate or of inflation protection.
Q6. Given all the unresolved questions about the UUK offer, shouldn’t clarifications have been obtained before this was sent out to ballot?
No. My reason stems from the following time constraint that Sally Hunt reported in the meeting to branch representatives on Wednesday just before the Easter break (from these delegate notes, which are not verbatim):
USS board meets on 11 April. If we say we don’t want the deal with no detriment, will miss this window. Need it to go through USS board. But what SH thinks is we should launch another consultation now including what has been said, give members all the information. If we launch that next week, can get it done by next week. Keep action live on assessment and make it clear that we will intend to reballot if USS or TPR block the proposals down the line. If members decide this isn’t enough, go into next phase strong, but if don’t get chance to decide, increases divisions within the union.
See also this report of the meeting that “ Sally [Hunt] concluded by noting that the USS board meets on 11 April, and that if we want the proposed JEP [joint expert panel], it needs to be on the agenda for that meeting. She thus advocated an immediate ballot on the proposal…”
Q7. What happens if the offer is rejected?
Although the 23 January 100% IDC proposal is the default option if JNC does nothing, I believe that UUK now wants to avoid triggering consultation on that proposal. They requested a suspension of this consultation instead of opening it on the scheduled date of the 19th of March, since they anticipated that sending this out would provoke another round of strikes. I believe that they would instead try to arrange for JNC’s replacement of 100% IDC with the 12 March ACAS-mediated agreement, by chair’s casting vote, and send that out for consultation.
The UUK offer having been rejected, UCU would then call for another round of strikes. But what sort of improvement could members secure via 14–19 more days of strikes? By my lights, not much, given that it is now settled that the 2017 valuation will be within the constraints of November costings. All UUK could do, within these costings, is to increase contributions to improve on the ACAS-mediated offer. It won’t be possible for employers as a whole to improve much on ACAS, in this manner. First, a significant increase in regular ongoing contributions would be ruled out by Test 1 (see answer to Q1 above). Perhaps a temporary significant increase with a sunset clause would be possible, without giving rise to self-defeating Test 1 de-risking. But many employers haven’t got the budget for this. For them, 14–19 more days of strikes may be worth not having to raise contributions significantly for even a limited number of years. And, apart from raising contributions, there’s nothing else completely within the power of employers to deliver in order to improve our pensions at this valuation.
I don’t think the cost and disruption of another round of strikes would be worth the prospect of a small improvement in employer contributions. In the absence of a credible account of how a significant improvement in our USS pensions — let alone the blocking of any detrimental changes for this valuation — could be achieved through strikes during exam period, I hope members vote next week to accept the current offer. I hope those who oppose the offer provide such a credible account.