UCU and UUK should endorse the JEP proposals in full
The strong support of individual members and employers is both necessary and warranted
The report of the Joint Expert Panel (JEP) is extraordinarily good news for the 200,000 UK university employees who are members of the Universities Superannuation Scheme (USS). It is also good news for their employers. It is a highly accurate and professional document, which makes a compelling case that it is possible to sustain DB pensions at their current level via a modest +2.1% increase in employer and +1.1% increase in member contributions. In its command of the details and complexity of the USS valuation, the report at least equals the high level of expertise and professionalism evident in USS’s own technical documents plus those of Aon and First Actuarial, the actuaries for employers (UUK) and the union (UCU). I do not think any demonstrable errors of significance will be uncovered.
In addition to these substantive merits, the report’s power and credibility is enhanced by the process by which it arose: it is the unanimous verdict of an expert panel, half chosen by the union and half by employers, who volunteered generously of their time rather than being paid either by UUK or UCU to advance one party’s view. It is highly significant that, in addition to the unanimity of the panel members, “Aon and First Actuarial concur on the results presented in this report” (p. 54). The authority of the report is enhanced by the independent work, advice, and agreement of UUK’s and UCU’s actuaries.
This unity can be explained by the fact that JEP have managed to get beyond a framing of this dispute as an antagonistic, zero-sum conflict between employers and the union. Rather, they have offered a set of proposals that would be to the mutual advantage of employers and scheme members if they are accepted and implemented. The panel’s modelled solution is better for both UCU and UUK than the proposals that each of them had individually tabled in 2017–18.
In February 2018 UCU tabled a reduction in DB accrual from 1/75th to 1/80th on salaries up to the existing £55k (now £57k) threshold, to be funded by an increase in employer contributions by +2.7% and in member contributions by +1.4%. This was based on a reversion from USS’s November 2017 valuation to the original September valuation that they had sent out for consultation. It was the best for members that UCU deemed possible at the time, given the resistance of employers, USS, and the Regulator.
JEP’s modelled solution is an improvement on this UCU proposal, both in its DB accrual and its contribution rate. The modelled solution would preserve DB accrual at its current 1/75 rate. This superior rate of accrual would be funded by lesser increases in employer contributions of+2.1% (from 18% to 20.1%) and member contributions of+1.1% (from 8% to 9.1%). This superior DB accrual at lower cost would be made possible by going beyond a reversion to the September valuation.
Needless to say, JEP’s modelled solution is an even greater improvement on the March 2018 ACAS agreement between UCU and UUK, which would have lowered the salary threshold to £42k and the accrual rate to 1/85 and stripped accrual and pensions in payment of protection against inflation beyond 2.5%. (March ACAS would have been funded by a more modest increase in contributions than the JEP proposals: +1.3 for employers and +0.7% for members.) The March ACAS agreement is so ungenerous in comparison with JEP because it operated within the cost constraints of the November valuation on which USS was insisting at the time.
JEP’s modelled solution is also better for employers than UUK’s best offer, in January, of 13.25% employer contributions and 8% member contributions into individual defined contribution (IDC) pension pots on all salaries, to be funded by 18% employer and 8% member contributions.
JEP is better for employers because it would make it possible for them to provide a far more attractive pension for their employees than IDC could reliably produce, at the modest cost of a 2.1% rise in employer contributions. Such value for money is possible because the JEP proposals reap the advantages of risk-sharing and risk-pooling of an ongoing, DB scheme. As JEP elegantly puts it:
A collective and employer-backed DB scheme, such as USS Retirement Income Builder, offers a better balance of stability and risk than an individual DC scheme. This is partly achieved by risk-sharing among members, whereby members can obtain collectively the long-term expected investment returns without experiencing individually the short-term volatility of those returns. Similarly, members in the Retirement Income Builder benefit from longevity risk-pooling. (p. 21)
USS correctly notes that the JEP’s “proposed solutions … would require employers to take on higher levels of risk — and to pay higher contributions — than has been expressed to us to date, through the valuation process.”
JEP makes the case that their proposals are not, however, too risky for employers. They explain that USS’s application of Test 1 and its self-sufficiency benchmark has been rigid and mechanical, in a manner that gives rise to excessively risk-averse requirements of high contributions for investment in low-return assets. They note that such an approach is ill-suited to an ongoing, cashflow positive scheme such as USS and offer a robust challenge to the Regulator’s negative assessment of the strength and long horizon of the employer covenant. On p. 37, the panel also enumerates various further points where prudence is built into the valuation, beyond USS’s acknowledged prudent adjustment of the discount rate and the longevity assumption.
It is an encouraging sign that the JEP report indicates that they have received soundings from employers and that they believe that employer risk appetite is now significantly higher than it was previously represented to be.
For the reasons mentioned above, JEP’s modelled solution is to the mutual advantage of union and employers, in comparison with what each had previously tabled. It is not, however, a unique mutually advantageous point. There are other mutually advantageous points, some of which are marginally better for employers, and some of which are marginally better for the union. Employers, for example, might regard it as a marginal improvement over the modelled solution if the increase in their contribution were brought down by eight tenths of a percentage to the March ACAS level of 19.3%, even at the cost of a modest cut in DB benefits, such as a reduction in accrual from 1/75 to 1/80. Some union members are calling for an improvement which shifts all of the 3.2% contribution increase to employers, rather than splitting it 2.1%-1.1% employer-members in conformity with the current 65%-35% cost-sharing formula.
For a number of reasons, it would be highly counterproductive if matters descend into such quarrels over relatively minor differences between employer and union.
For union members, the main reason why this would be counterproductive is that the JEP’s modelled solution is already highly advantageous for them. Given the 50–50% UUK-UCU appointment of the panel, the report is surprisingly favourable towards views the union and their actuary have been pushing for years. I do not know of anyone who believed that such a jointly-appointed panel would ever unanimously agree to something so favourable to the interests of scheme members in retaining a generous and affordable DB pension. I therefore suspect that it would strike nearly all of the 64% who cast their union ballot in favour of the UUK proposal to set up a JEP in April, as well as many who voted against it, as perverse if UCU decides to reject the modelled solution in order to hold out for a marginal improvement for them at the expense of employers.
A rejection of any part of JEP’s modelled solution by UCU would simply give employers necessary cover to do some cherry-picking of their own in order to try to water down proposals that are so favourable to the union as a whole. Bear in mind that the JEP was UUK’s own proposal, which union members accepted in good faith in April in exchange for calling off further strikes. It would be widely regarded as unreasonable and antagonistic if employers now reject the modelled solution of the panel they had pushed to establish, on grounds that it is too favourable to the union. That would be regarded as beyond the pale, a casus belli, unless the union performs an own goal of giving employers cover for rejection by themselves refusing to embrace the modelled solution in full.
There is the following further powerful reason for union and employer to strongly unite around JEP’s modelled solution as soon as possible:
It will take an enormous joint effort on the part of UCU and UUK to overcome the inevitable resistance that the JEP proposals will encounter from USS (including their actuary) and the Regulator. The JEP has recommended a significant shift in their approach to the valuation, which is beyond the limits of what each has previously deemed acceptable. JEP provides a sound case for moving beyond these limits. But acceptance of their case might be seen to imply that USS and the Regulator have misjudged some matters, which they will be loath to admit.
Recall that back in 2014 UUK and its actuary Aon came out strongly against various aspects of USS’s valuation, which they characterised as ‘needlessly layer[ing] prudence upon prudence’. USS refused, however, to make more than trivial adjustments to their valuation even in the face of multiple and substantial criticisms, from UUK/Aon as well as UCU/First Actuarial. It will require an enormous and united effort on the part of UCU and UUK to persuade USS to shift to a much greater extent than they were willing to in 2014, especially given that this time the Regulator has been pressuring USS in a conservative direction. The JEP report will be instrumental to overcoming the resistance of USS and the Regulator, but only if both union and employer strongly and swiftly unite behind all of its proposals and a defence of their merits.
The following is therefore the most obvious and compelling position for UCU to take:
Conditional on UUK doing the same, UCU accepts the Joint Expert Panel’s modelled solution involving future DB accrual and DC contributions (apart from the 1% match) at existing levels, via a 2.1% increase in employer and a 1.1% increase in member contributions for this valuation, and commits to joining forces with UUK in making the case to USS and the Regulator in the strongest possible terms for their acceptance of JEP’s proposed adjustments to the 2017 valuation that will make this possible.
I hope, therefore, that scheme members now strongly urge both their union and their employer to embrace the JEP report in full. UUK has announced the opening, this week, of an employer consultation on the JEP proposals. UCU branches will be sending delegates to a Special Higher Education Sector Conference in early November to determine the union’s position. Let both your employers and your branch delegates know how strongly you stand behind their joint JEP report.
Please see this new blog post in this topic, entitled ‘Why pushing for No Detriment is now self-defeating’.
Please also see this new tweet thread in which I describe a further serious difficulty with the union’s trying to reject the 35%-65% cost-sharing of a 1.1% member and 2.1% employer increase that the JEP report spells out as a means of preserving 1/75 DB: that will simply licence an employer attempt to water down DB accrual from 1/75 to 1/80.