Dennis Leech
5 comments By Dennis Leech
CEO Bill Galvin says that says that 'on its best estimate – based on its approach to risk and the associated investment strategy – there would indeed be a surplus. But he adds, “by definition, this only has a 50/50 chance of our funding assumptions being right (or better).'
In fact what he does not say here is that the USS estimate the surplus would be £8.3 billion!
So the question is: if there is a 50:50 chance of a surplus exceeding £8.3 billion, what is the probability of it being less than zero - that is, a deficit?
Why are we not being told? The USS must know the answer.
Only when we know that can we talk about applying a suitable degree of prudence in the valuation.The last sentence is very misleading in that it gives the impression that the USS is losing money.
The deficit figure of £7.2bn does not relate to the financial year but is a mark-to-market snapshot of assets/liabilities at a point in time. In fact in the financial year to March 2014 the USS made a surplus of income over expenditure of just over £1.0bn and increased in value (including capital gains) by over £3.0bn.
The deficit referred to (not a deficit in the true sense but the difference between assets and liabilities) is based on a hypothetical valuation of liabilities that - as with many pension schemes - is inflated by current low interest rates.Thank you.
The consequence is a major ongoing crisis in which millions of people are losing their defined benefit pensions on grounds of deficits presented to them as fact with frightening certitude.There is a need for pensions policy discussions that centre on the bigger picture of which of these two principles leads to pensions which are cheaper for society as a whole. Most of the discussion has followed the line that DB pensions are expensive because the employers don't like bearing the risk. But all the evidence is that individualistic DC pensions are far more expensive because they reject risk sharing. If a pension is a secure income for life then we know from many studies that the cheapest way of doing that is by schemes based on the sharing of investment risk, sharing of longevity risk through annuitisation and pooled investment charges. The Labour Party should be saying that DB schemes are socially beneficial because they are based on collective principles and DC schemes for many people unaffordable because they are based on neoliberal individualism.
The funding level all depends on how you do the calculations.
It is highly misleading to write: "The majority of UK companies and organisations in the UK have been forced to ditch their ‘gold-plated’ final scheme over the last few years to help tackle costs associated with people living longer and poor market performance."
The effect of people living longer is a significant factor but relatively small in fact.
And it is very misleading to say that the deficits are due to poor market performance. They are mainly due to the way pension liabilities are calculated - which have absolutely nothing to do with market performance. Liabilities are calculated using discount rates - so called risk-free rates which are in fact nothing of the sort and are highly variable - based on gilts. As we all know gilt rates currently are very low indeed as a matter of Bank of England policy. That sends the calculated liabilities through the roof. That is not poor market performance.
In fact the USS investment portfolio has performed very well last year.
And remember that the actual liabilities are defined by the scheme rules and do not depend on markets.
The problems of many pension schemes including the USS stem from the practice of actuaries and accountants - many of whom seem to be in a frenzy of neoliberalism - in insisting on using the FRS17 accounting rules which are based on unreal assumptions that are far too prudent to be practical.
And there is nothing wrong with the cash-in-cash-out principle as part of a practical DB pension scheme. The objection to it seems to be purely ideological.
Commented on: 26 September 2018
How we run our money: USS