The Joint Expert Panel’s report offers some strong criticisms of USS’s application of Test 1:
Sam Marsh, who is a union-appointed member of USS’s Joint Negotiating Committee, appears to have uncovered a further serious problem with Test 1. He submitted his findings to the Joint Expert Panel on 1 September. This was apparently too late to be incorporated into the Panel’s report, which, according to p. 16 of the report, had already been drafted by 29 August.
In a nutshell, Marsh’s findings give rise to the following dilemma for USS:
First horn of the dilemma: USS maintains that
(i) the technical provisions liability in twenty years time (2037)
is identical to
(ii) the value of the assets in the scheme in 2037 if, between now and then, these assets grow at precisely the technical provisions discount rate which USS maintains the assets have a 67% of achieving, when contributions are set as high as USS claims they must be (i.e., 36.6% of salary), in order to preserve DB benefits at their current level for the next 20 years in a manner that satisfies Test 1.
If USS maintains such an identity, and if Marsh’s calculations are correct, then USS has got its sums seriously wrong, since Marsh’s calculations imply that (ii) is significantly higher than (i).
Second horn of the dilemma: USS denies the above identity between (i) and (ii).
If, however, (i) and (ii) are not identical, the logic of Test 1 requires that USS appeal to (ii) rather than (i) in order to determine whether the test is satisfied.
If, in fact, the asset level in 2037 would be as high as Marsh’s calculations indicate, then Test 1 is already satisfied without the need for anything but an extremely modest increase in contributions on the assumptions of USS’s current valuation. Moreover, nothing more than the reversion to September de-risking that the Joint Expert Panel has recommended would make it possible, while conforming to Test 1, to preserve the current level of benefits without any increase whatsoever in employer or member contributions.
If Marsh’s findings withstand scrutiny, then Test 1 is in much worse shape than even the JEP report in the passage I quote at the outset of this post indicates. Especially given his role as a member of USS’s JNC, USS owes both Marsh and scheme members more generally an answer to his challenge. They cannot try to push ahead with their current valuation until they have addressed this challenge.
Please see here for a link to further discussion of Marsh’s Addendum.
And see this blog post for an earlier discussion of another implication of Marsh’s findings: “USS failed to make clear the high level of prudence of the September valuation”.