Why can’t USS provide a pension as good as SAUL’s?

I used to believe the USS releases about how the troubles with the defined benefit (DB) scheme could not be traced to poor investment of the assets, which have performed wonderfully under the stewardship of Lifetime Investor Award winner Roger Gray and his well-paid investment management team. Rather, it was all about the cost of providing the promised pensions outstripping this asset growth.

I believed this up until lunchtime today, when I downloaded the most recent 31 March 2017 triennial actuarial valuation of SAUL. Having read this, I now see that USS’s pride regarding their investment performance amounts to hubris.

What, you ask, is SAUL? It is not some mythical, utopian pension scheme. Rather, it’s the Superannuation Arrangements of the University of London — a DB pension scheme for workers in the various colleges of the University of London (e.g., LSE, UCL, KCL, Birkbeck, Imperial) who are generally on lower salary bands than USS members. It also includes a number of members outside of the University of London, including the Universities of Kent and Essex, the British Academy, and, most intriguingly, the employers’ association Universities UK.

SAUL’s provision is entirely DB. Like USS, they once promised a 1/80th final salary pension. Like USS, they closed final salary to future accrual in 2016. The current DB promise for all members is 1/75 career average revalued, with a 3 times lump sum. The current DB promise is, in fact, identical to USS’s DB provision on salaries below the £57k threshold. [6 Sept 2018 UPDATE: See note at bottom for a respect in which SAUL is less good than USS, which is, however, probably more than fully offset by their lower contribution rate.] But SAUL member contributions are only 6% and their employer contributions only 16%, as compared with 8% for USS members and 18% for USS employers. If, moreover, USS’s contributions escalate to the levels proposed under the current consultation, this will give rise to the following yawning gap in comparison with SAUL: by April 2020, USS members earning below the £57k threshold are scheduled to pay 11.7% — nearly twice as much as the 6% SAUL member contribution for the exact same DB pension! Employers are scheduled to pay 24.9% as opposed to 16% for the exact same DB pension! [Again, see update below.]

I believe that, if one is now enrolled in SAUL, one can remain a member throughout one’s career, even if one gets promoted above the SAUL/USS salary threshold. So SAUL provides their members 1/75 career average revalued on their whole salary in exchange for a 6% contribution, no matter how high their salary rises, so long as they don’t transfer into USS. A suggestion: If you’re currently a member of SAUL, stay put! Do not transfer into USS! (I am not qualified to provide financial advice. Do not rely on what I have just said. Please pay a lot of money to a QFA to provide you with such advice.)

SAUL is on the same three-year valuation cycle as USS. Here is their summary of the financial health of the scheme at their 31 March 2017 valuation, which they managed to submit ahead of the statutory deadline:

— The deficit shown in 2014 has been eliminated and SAUL has a surplus of £56 million [= 102% funded],

— The shortfall between contributions paid in and the cost of benefits has grown, but

— There will be no changes to benefits or contributions.

This is SAUL’s rationale for No Detriment!:

Given that benefits were changed only in April 2016, and the importance of having stable contributions both for Employers and Members, no further benefit changes or contribution changes are proposed. SAUL has enough surplus to meet the contribution strain over the next few years.

The ‘contribution strain’ is the extent to which contributions fall short of the cost of future service. SAUL estimates that this strain is 6.7%. This is, incidentally, almost exactly the same as the contribution strain that USS reported in their September 2017 valuation. Unlike SAUL, however, USS is insisting that this (now higher, because of the botched employer consultation) strain must be remedied via escalating contributions.

Have things deteriorated for SAUL since 31 March 2017? No. They’ve remained pretty much unchanged. Here’s what the scheme actuary wrote two weeks ago:

My updated calculations show that at 31 March 2018 the surplus was £59 million, equivalent to a funding level of 102%

Lest you think SAUL must have obtained the services of an iconoclastic “red actuary” who provides aid and succour to the unions that look after the interests of workers, I can assure you that their actuary is from the same conventional, buttoned-down firm, Mercers’, that provides USS’s actuary.

How is SAUL able to provide DB pensions as good as [almost as good as — see update below] USS’s, at a much lower contribution rate? Not by conjuring up a surplus out of an over-optimistic discount rate. SAUL’s pre-retirement dual discount rate is a modest 1.57% above CPI and its post-retirement rate is 0.3-0.5% below CPI.

Rather, the answer is that they made much better investment decisions than USS between 2014 and 2017:

Investment returns: the increase in SAUL’s liabilities was, to a significant extent, mitigated by an increase in SAUL’s assets. During the inter-valuation period, the investment return on SAUL’s assets was approximately 18% per annum. This was significantly higher than expected, and was therefore, a source of surplus (£963m) over the period

A significant reason for the asset gain was the Trustee’s interest and inflation hedging strategy: SAUL’s interest rate and inflation hedge ratios were 82% and 90% respectively (on the technical provisions basis) at 31 March 2017 (and are higher at the time of signing this report) compared to c 52% and c 65% respectively at the previous valuation.

USS, by comparison, achieved a lesser 12.5% growth per annum during this period. USS also hedged interest rates and inflation much less successfully than SAUL during 2016–17:

The under performance versus the reference portfolio was more than fully accounted for by the large underweight in UK Index-linked gilts relative to the reference portfolio and additionally by the decision to underweight US equities. Both of these asset classes showed exceptionally strong performance, following the UK’s decision to leave the EU (Brexit) and President Trump’s election respectively.

USS’s unfavourable comparison to SAUL is much more damning than the unfavourable comparisons that have been draw to the Teachers Pension Scheme (TPS) or the Local Government Pension Scheme (LGPS). This is because, unlike TPS, SAUL is funded rather than pay as you go. LGPS is also funded, but its funding is backed by state sponsorship. SAUL has no such backing. In other words, SAUL operates within precisely the same hostile DB regulatory environment for private occupational pension schemes as USS, but it has managed to do so much more successfully in recent years.

In conclusion: please stop banging on, USS, about how wonderful your investment team is and how it all has to do with the liabilities rather than the assets. Please also find the Lothbury road from 60 Threadneedle Street to 1 King’s Arms Yard and convert to SAUL along the way. Below are the directions from your London investment headquarters to SAUL. It is only a three minute walk. Much shorter than the road from Damascus to Jerusalem.

See here for a follow up post: SAUL combined growth with de-risking.

[6 Sept 2018 UPDATE: I now see that there is one important respect in which SAUL’s DB is less good than USS’s: for DB accrual from 2016, there is a 2.5% CPI cap on pensions in payment, with increases above the cap at the discretion of the trustees. This is much less generous than USS’s CPI cap, which is half of CPI increases between 5% and 15% and no CPI increases above 15%. SAUL’s 2.5% cap does not apply to the revaluation of career average accrual before retirement. The more generous USS cap still applies there. So SAUL’s CPI revaluation remains much more generous than the March 2018 ACAS-mediated proposal for USS, which imposed a 2.5% cap before as well as after retirement. I believe, however, that an increase in SAUL contributions to the current level for USS (i.e., 8% rather than 6% for members and 18% rather than 16% for employers) would be more than sufficient to pay for a restoration of USS’s more generous CPI cap for pensions in payment. If that’s right, then, all things considered, including contributions, SAUL’s DB remains at least as good as USS’s.]

[7 Sept 2019 UPDATE: SAUL’s latest actuarial report reveals that they continue to outperform USS.]

[25 March 2021 UPDATE: SAUL will be recording a surplus for their 31 March 2020 triennial actuarial valuation.]




Professor of Philosophy, LSE & Rutgers. On UCU national negotiating team for USS pensions.

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Michael Otsuka

Michael Otsuka

Professor of Philosophy, LSE & Rutgers. On UCU national negotiating team for USS pensions.

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