UUK should now endorse the level of investment risk USS was prepared to accept in February 2017

Under the 2017 valuation that USS approved in November 2017, contributions will eventually need to rise by 10.6% from 26% of salary (18% employer, 8% member) to 36.6% in order to retain the status quo of 1/75 CRB up to £57,216.50 and DC above, minus the 1% DC match.

If, however, UUK employers had accepted the level of investment risk that USS proposed in their September consultation document, it would have been possible to retain the status quo (minus the 1% match) via a more modest 5.8% rise in contributions. In this blog post, I explain why a reversion from the November to the September valuation is justified.

Moreover, as I note in this blog post, had UUK employers accepted the maximum level of investment risk that USS was willing to propose in an earlier consultation that was launched in February 2017, this would have reduced the deficit of the September consultation valuation from £5.1 bn to about £2 bn, reduced deficit recovery contributions from 2.1% to about 0.5%, and reduced the cost of future accrual by about 2.25%. (See p. 23 of sec. 4.4.3.) When we also incorporate the more up-to-date mortality assumptions that USS adopted in November 2017, the upshot would have been this:

It would have been possible to retain the status quo (minus the match), by means of a 1% increase in the employer contribution from 18% to 19% and a 0.5% increase in the employee contribution from 8% to 8.5%.

Therefore, the difficulties we now face can be traced to a consultation in February-March 2017 (on which I comment here). Back then, UUK re-affirmed (see pp. 7–8 on ‘Adjusting Parameters’) a conservative assumption regarding the growth of the higher education sector. When applied to USS’s Test 1, this forces a ‘de-risking’ of the scheme towards a bond-weighted ‘self-sufficiency’ portfolio. Employers chose this even though USS suggested that they instead embrace a different, less restrictive assumption, on grounds that it was internally coherent with USS’s own assumptions regarding the growth of the sector. (See p. 22 of sec. 4.4.3.)

In other words, had employers not tethered the scheme to a restrictive interpretation of an already gratuitously conservative and self-defeating Test 1, it would have been possible to keep the current scheme afloat between this valuation and the next one, via a modest increase in contributions.

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

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