UUK’s actuary’s investment forecasts eliminate the USS deficit…

…and reduce contributions needed for future pensions by 5%

Remember that modelling by our employers’ actuary which is meant to show how well we’ll do under their proposed shift to 100% DC? It turns out that if that actuary’s same rosy picture of investment returns is applied to the valuation of the DB pension scheme, there would be no need for this radical shift to DC in the first place!

UUK’s actuary Aon’s 20 year best estimates of returns on the Growth, Moderate Growth, and Cautious Growth DC default funds are 0.6% to 0.7% higher than USS’s own best estimates. This translates into a comparable 0.6% to 0.7% higher Aon best estimate of the 20 year returns on the DB reference portfolio, which is used to set the discount rate.

According to USS’s sensitivity data in Appendix D of the September consultation document, a 0.1% increase in investment returns for the discount rate decreases the deficit by £1.2 bn and future service contributions by 0.8%. It follows that substituting Aon’s best estimates for USS’s would reduce the deficit by £7.2 bn to £8.4 bn — i.e., reduce the deficit from £7.5 bn to about zero — and reduce the cost of future service contributions by 4.8% to 5.6%.

See the first tab of the linked spreadsheet for my derivation of Aon’s versus USS’s 20 year best estimates of returns on the default DC funds. These are derived from Aon’s modelling of UUK’s proposal and triangulated against USS’s best estimates of returns on the reference portfolio from the September consultation document.

Written by

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

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