An open letter to Alistair Jarvis (CEO of Universities UK) and USS employers

I am the UCU pensions representative for the LSE and have also closely followed developments at the national level. But here I write in a personal capacity, in the closing days of the consultation on the valuation, to ask that you do one thing before you endorse any cuts to our defined benefit pensions:

Please explain to us why you deem the expense of purchasing a self-sufficiency portfolio (gilts +0.75%) a sound measure of the reliance that the scheme places on employers and the consequent risks that you bear.

The case for cuts to our DB pensions rests on the soundness of this measure. If, therefore, you are unable to provide such an explanation, you will not have made this case.

Much has been made, in recent weeks, of the fact that, as of 31 March, it would cost £23 bn to transform USS’s current portfolio, which is weighted towards growth assets, into a self-sufficiency in gilts portfolio.

But under what realistic circumstances might it make sense, either now or in the near future, for the scheme to move to a self-sufficiency portfolio? If, as many believe, there is no such credible scenario, why raise the alarm over the current c. £23 bn gap? Why should it matter that you cannot afford to do what you have no reason to do?

The following further, and related, question arises: under what realistic circumstances might it be necessary and sensible for the scheme to move to a self-sufficiency in gilts portfolio in 20 years’ time, and how likely are these circumstances? Answering this question is crucial, since the expensive ‘Test 1’ rebalancing of the portfolio from 35% to 55% bonds is based on the premise that it must be affordable to move to a self-sufficiency portfolio in 20 years’ time. Given, however, the open, ongoing, nature of the scheme — grounded in an enduring multi-employer sector of well-established universities whose covenant has independently been verified as “uniquely robust” and strong over at least a 30 year horizon — there will be no need to move to a self-sufficiency portfolio in 20 years’ time, just as there is no need to move to such a portfolio today.

First Actuarial and others have challenged USS’s focus on a self-sufficiency in gilts portfolio on multiple occasions. Neither USS nor employers have responded, in anything more than cursory fashion, to these challenges. Many of us believe that there is a simple reason for this lack of engagement: you have no good response, since Test 1 is an ill-conceived theoretical construct that cannot withstand sustained scrutiny.

We are a community of researchers and scholars. Since you regard yourselves as a part of our community, I trust that you will engage with and respond to these challenges before you propose another round of cuts to our pensions.

Yours sincerely,

Michael Otsuka

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