The pointlessness of a push for 26% NOW

Much of the dispute over the valuation of USS is purely theoretical: it’s over which model is the right one to tell us whether the £72 bn assets in the scheme are sufficient to pay the DB promises made to date. There is a related dispute over which forecasts of expected returns on different types of assets, future inflation, or longevity trends are the most accurate. Neither of these, however, makes a difference to the reality of whether this £72 bn plus whatever returns they actually achieve will be sufficient to cover the pensions that will actually come due, given how long scheme members will actually live plus the actual inflation revaluation of their promised pensions.

There is also a dispute over how the pension fund should be invested in the future: to how great an extent, if any, the portfolio should be ‘de-risked’ from its current c. 67% equity/property, c. 33% bonds mix to one that is more weighted towards bonds during the next 20 years. These investment decisions will make a difference to how much money will actually be available to pay the actual pensions that come due. But most of these investment decisions won’t be settled or determined by the current valuation. They will be revisited and probably revised at the next and subsequent valuations. The current valuation settles investment decisions for only the next two or so years.

The only things that will be settled by this valuation, which will make a real difference, are the amount of the pensions contributions due between now and Oct 2021 and the manner in which these contributions are invested.

The difference between USS’s required contribution rate of 30.7%, and the union’s preferred rate of 26%, is £370 mn per year. An extra £370 mn in contributions is equivalent to about a +0.50% annual return on USS’s £72 bn assets. +0.50% per annum is well in excess of the anticipated -0.09% annual loss in returns over the next two years as the result of the ‘de-risking’ of the portfolio that both the Joint Expert Panel and the union recommend against.

So the reality is that if USS’s 30.7% rate is applied, rather than
the union’s preferred 26% rate, then it’s extremely likely that we’ll have several hundred million more pounds in the fund than otherwise to pay DB pensions in October 2021. Moreover, this will be money in the bank that will reduce the amount of contributions needed in future years. For this reason it is rather pointless to insist that USS adopt a 26% rate now even if you’re sure that 26% will be sufficient to fully cover the accrued pensions liabilities over the next two years.

This pointlessness that I have identified in this post is above and beyond the pointlessness of such insistence on account of the fact that the regulator has made clear their strong resistance to a rate even as low as 30.7% over the next two years.

Written by

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

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