What you should urge your employer to say in response to the JEP consultation

UUK should fully support the recommendations regarding the valuation

[This post is a sequel to a post entitled “UCU and UUK should endorse the JEP proposals in full”, which I would recommend as background reading. See also a companion post to this one, in which I address the question of whether UUK employers should call for a cut to benefits in order to keep contribution increases down.]

Now that Universities UK has opened their employer consultation, it’s vitally important for UCU union and other USS scheme members to urge your own employer to strongly and publicly support all four of the recommendations of the Joint Expert Panel (JEP) regarding the valuation. Here are arguments on behalf of such support:


#1(a) Reversion to the delay of the onset by 10 years of the ‘de-risking’ shift of the portfolio from growth assets to bonds, which USS had initially proposed in September 2017.

#1(b) An increase in the ‘reliance on the covenant’ from £10bn to £13bn, which is the extent to which scheme is permitted to invest in growth assets that are expected to outperform a bond-weighted (gilts+0.75%) ‘self-sufficiency’ portfolio.

For a defence of the #1(a) delay of de-risking, see this blog post entitled “Universities accept a small amount of increased risk”. This post makes clear that the case for such delay is very strong.

With respect to #1(b), and for reasons that I sketch below, employers should be urged to indicated that they would be inclined to support a HIGHER increase in reliance to £19bn, not just £13bn. This is justifiable both on the merits and as a means of ensuring that USS accept an increase to at least £13bn.

Further background information regarding #1(b): To make it possible to close the defined benefit (DB) scheme within 20 years from today, Test 1 mandates that the purchase of a bond-weighted self-sufficiency portfolio by then be affordable via supplementation of scheme assets through an increase of 7% — from the current 18% to the maximum affordable 25% of salaries — in employer contributions from years 20 to 40. The assets must reach a market value by year 20 that is sufficiently high that it is possible to get from there to a self-sufficiency portfolio via such a 7% increase.

Whether the ‘reliance on the covenant’ is set at £10bn, £13bn, or £19bn is entirely down to how much extra cash it is assumed would be generated via +7% contributions in years 20–40. This, in turn, depends on how much more it is assumed scheme members will be paid then versus now.

USS’s current £10bn reliance figure assumes that the average scheme member will be paid less in real CPI terms than today, even taking into account an increase in the age of active members and their promotions up the pay spine as well as negotiated pay increases. This, however, conflicts with USS’s own assumption that the average pay of scheme members will increase by CPI+2% each year. The JEP report maintains that £10bn is too low and suggests a move to CPI+2%:

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JEP report, p. 30

See also the following passage:

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JEP report, p. 37.

In their February 2017 consultation, USS expressed a willingness to adopt their own CPI+2% salary growth assumption for the purposes of setting Test 1 reliance. When CPI+2% is assumed, it follows that £19bn would be generated by +7% contributions over 20 years and hence very little ‘de-risking’ of assets over the next 20 years would be needed to satisfy Test 1.

Had employers accepted CPI+2% in the February 2017 consultation — and had employers also gone on to otherwise fully embrace the level of investment risk that USS proposed in the September 2017 consultation document— it would have been possible to retain the DB status quo via +1% employer and+0.5% member contributions. Those would have been more modest contribution increases than those of the JEP’s modelled solution.

Inexplicably and inexcusably, however, employers refused to endorse CPI+2% (=£19 bn reliance) in the February 2017 consultation and instead embraced CPI+0% (=£13 bn reliance). Out of an overabundance of prudence, USS ended up lowering this to CPI minus about 1% (=£10 bn reliance).

Given how much gratuitous trouble Test 1 is causing the scheme, employers have overwhelming reason to unshackle themselves from it by endorsing the least restrictive CPI+2% parameter. See these two excerpt from the JEP report in which they spell out how misguided and rigid they regard USS’s application of Test 1 to be:

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JEP report, p. 24
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JEP report, p. 8

See also this thread by Sam Marsh, who is one of the UCU-appointed JNC negotiators, regarding the employers’ missed opportunity to avert industrial action and the current crisis by failing to adopt USS’s proposed CPI+2% in February 2017.

JEP’s recommended relaxation of Test 1's shackles is a no-brainer unless employers would like to persist in making the case that DB is too expensive and must close, and everyone should be shifted over to 100% individual DC pension pots.


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UUK consultation document, p. 10

Why is USS now insisting on such a large increase in DRCs from 2.1% to 6%? Not because the March 2017 deficit has grown, relative to March 2014 deficit. The 2017 deficit is the same size as the 2014 deficit, when properly measured against the value of the assets (=89% of liabilities in 2014 and 2017). Rather, DRCs went up by nearly threefold on account of USS’s unwarranted fixation on the “short-term deficit” relative to self-sufficiency. The UUK consultation document refers to this here:

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UUK consultation document, p. 10

For an explanation of the unreasonableness of USS’s concern regarding this “short-term deficit”, please see this blog post entitled “Why should it matter that we can’t afford to do what we have no reason to do?


Not only does USS’s failure to account for their forecast decrease in the cost of future serve build an extra layer of prudence into what they’re charging employers and members to accrue further DB benefits in the future.

As this blog post explains, it also adds an extra layer of prudence to Test 1, thereby forcing more de-risking of the assets by year 20 than would otherwise be necessary. The extra layer of prudence built into Test 1 enhances the case for the previously discussed JEP recommendation #1(b), regarding increase of reliance on the covenant from £10 bn to £13 bn.

Note that these two extra layers of prudence are in addition to all these that JEP lists here:

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JEP report, p. 37

As I explain here, USS’s refusal, in the Sept 2017 consultation, to confirm First Actuarial’s analysis regarding the falling cost of future service until after the consultation was over, despite employer query during consultation, was among the many things that undermined confidence in that employer consultation.

As indicated here, USS is once again refusing to provide an answer to a query of vital importance during an employer consultation. Employers should urge Universities UK to join UCU in making clear to USS that these two stakeholders expect more timely answers to their queries and a greater level of transparency from USS. It is simply indefensible, and beggars belief, that USS has refused to publicly release their cashflow forecasts in response to a request by a JNC member.


Written by

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

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