UUK can’t transform a sow’s ear into a silk purse

Unspinning Aon’s modelling of our employers’ proposal

Our employers have posted modelling from Aon of UUK’s proposed shift of our USS pensions to 100% DC for future accrual. Their spin: “Overall, Aon’s modelling suggests that under UUK’s proposals, and including standard state pension entitlements, current members should continue to receive retirement incomes which are equivalent to 80–90% of those received currently in terms of monetary value.”

As I explain below, however, on a fairer like-for-like comparison, expected future USS pension income under UUK’s proposal will be only 50–75% of what we would receive under a continuation of the status quo.

Here is how Aon tries to transform UUK’s sow’s ear into a silk purse:

  1. They assume that, rather than purchasing an annuity which is comparable to our DB pension for life with inflation protection, we will instead draw down our individual DC pension pot throughout our retirement by withdrawing chunks of our assets until our pot is empty. On account of the following risks it involves, the finance economist and Nobel laureate William Sharpe has described drawdown as the ‘Nastiest, Hardest Problem in Finance’: 1a. Drawdown exposes members to longevity risk. If we are among the more than half who will live longer than the life expectancy of a USS member, our pension pot will be depleted before we die if we draw down at Aon’s rate. 1b. Drawdown also exposes members to investment risk, especially since Aon assumes that, at retirement, we will re-risk our pension pot back to where we were roughly 5 years short of retirement on the 10 year default lifestyle de-risking path.
  2. They assume Aon’s estimates of returns on investment, which are higher than the estimates that USS uses. (If UUK prefers Aon’s assumptions to USS’s, consistency requires that they call on USS to replace their own assumptions regarding investment returns for the DB valuation with Aon’s higher best estimates.)
  3. They mask the impact of their proposal on future pension income by aggregating such future accrual with various other things that remain the same under both proposals, such as past USS pension accrual and the state pension we will also receive.

Once we…

(1) replace the annual income we can expect under drawdown, but only if we manage to predict the year of our death correctly, with the income we could secure via purchase of an annuity that replicates a USS pension for life,

(2) replace Aon’s investment returns assumption with USS’s, and

(3) compare the difference in future USS income rather than the difference in that plus our state pension income and past DB accruals,

…we will see that UUK’s proposal will decrease our future USS pension income to 50–75% of what we could expect under a continuation of the status quo.

Click here for a spreadsheet in which I spell out my calculations, all of which draw on figures that Aon provides in their own report regarding drawdown and annuity income, investment returns, and the like. There should therefore be no dispute with Aon over the accuracy of the figures I use. It all comes down to whether the figures I have chosen involve a fairer, more like-for-like, comparison than Aon’s.

Credit to Aon for their level of transparency in revealing their underlying assumptions and for providing figures for annuity income and USS returns on which I have drawn to construct what I take to be a fairer comparison than that which UUK highlights. This is a greater level of transparency than First Actuarial provided in its own analysis of UUK’s proposal for UCU.


Aon’s annuity calculations all involve single annuities rather than joint annuities with 50% spousal benefits, even though USS’s pension includes such a spousal benefit. Hence, Aon’s CPI-adjusted annuity income needs to be reduced by about 10% in order to provide a like-for-like comparison with a USS pension.

On the other hand, USS’s investment return assumptions (but not Aon’s) have been reduced by the annual 0.3% investment management charge for USS’s default funds (0.1% for their cash fund). This in spite of the fact that this charge is covered by an employer subsidy.

The above two factors partially cancel each other out in the figures on which I rely regarding the CPI adjusted annuities one can purchase from a pension pot that has grown at the USS rate.

[Click here for an article in FT Adviser that draws on the above.]