Q. How close has USS come to implementing JEP’s report in full?

A. Within a fraction of one percentage point

1. The 2018 valuation that USS issued on 9 May contains a new ‘Option 3’, which sustains the current level of pensions benefits by means of a rise in the current contribution rate of 28.3% (8.8% member; 19.5% employer) to 30.7% in October (9.6% member; 21.1% employer). Contributions would remain at that level for two years — until October 2021 — at which point this rate would be superseded by whatever contribution rate a full actuarial valuation as at March 2020 requires.

2. This 30.7% contribution rate is USS’s means of coming very close — within eight tenths of one percentage point — to the level of <30% that JEP called for in their September report:

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JEP September 2018 report, p. 63

3. USS makes explicit reference to the above passage in their 9 May document:

Although it did not quantify the risks associated with its proposals, the JEP report did recognise that there were a number of different paths the Trustee could adopt which would to lead to a required contribution rate of below 30% of salary. (p. 11)

USS also refers to this passage in previous statements on the valuation, such as the following:

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USS FAQs on the valuation

4. 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%:

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JEP September 2018 report, p. 63

5. USS rejected two elements of this charted approach: “Sept.TP” and “Smooth contributions”. [Update 31 August 2019: USS subsequently also rejected “13bn reliance” and “share outperformance”.] 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:

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JEP September 2018 report, p. 63

6. USS has adopted this blue-highlighted approach to arrive at their 30.7% rate under Option 3. 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, 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.

7. USS’s 2018 valuation involves a methodology that is continuous with their 2017 valuation. Their controversial Test 1 remains in place, for example. In these respects, the valuation is in full conformity with JEP’s Phase 1 September report:

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JEP September 2018 report, p. 53

8. This more fundamental assessment of the valuation methodology would have to await Phase 2, which JEP had anticipated would involve an assessment of the March 2020 valuation:

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JEP September 2018 report , p. 65

9. In the paragraph immediately above this one, JEP says the following:

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JEP September 2018 report, p. 65

10. USS’s Option 3 does just that: it brings “some short-term stability to the Scheme whilst creating space for the Trustee and JNC to consider what, if any, longer-term changes to the Scheme are necessary.”

[Update 14 May: See this thread on Aon’s analysis of Option 3.]

Written by

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

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