The myths, misconceptions & misunderstandings of Sir Christopher’s defence of pure DC for USS

Southampton has come out in favour of closing USS’s defined benefit (DB) pension to future accrual and moving to a purely defined contribution (DC) scheme. Their VC, Sir Christopher Snowden, has issued a statement in defence of this decision. As a recent past President of Universities UK, Sir Christopher is a leader among senior managers in the higher education sector. Given his prominence in UUK, it is alarming that his statement harbours so many myths, misconceptions, and misunderstandings (to borrow a phrase from UUK’s Employers Pensions Forum).

Sir Christopher (i) refers to “the growing deficit”, (ii) claims that the “current USS scheme is heavily in deficit”, and (iii) speaks of an “increase in deficit payments”.

(i) The scheme’s deficit is not growing. It is lower in absolute terms than the deficit recorded at the last valuation — £5.1 bn for March 2017 versus £5.3 bn for March 2014. More significantly, when one places these billions pounds shortfalls in the proper context of the enormous size of the scheme and looks at the funding level of assets as a percentage of prudently valued liabilities, we see that the funding level of the scheme has improved from 89% in March 2014 to 92% in March 2017.

(ii) A scheme that is 92% funded is not “heavily in deficit”. (That level of funding on a prudent basis is high enough that the scheme is £8.3 bn in surplus — for a 114% level of funding — on a best estimate basis.)

(iii) There is no proposed increase in deficit recovery contributions. The proposal is for DRC to remain unchanged at 2.1%.

Speaking of deficit recovery payments, there is the following error in Sir Christopher’s statement:

“the University along with all other institutions who participate in this scheme are making substantial payments to address the huge deficit in addition to the pension contributions, currently of 18% of salary, together with 8% from employees in the scheme.” (emphasis in original)

The 2.1% deficit recovery contributions are not in addition to the 18% employer pension contributions. These are, rather, included as a part of the 18% contributions.

I save the biggest misconception and misunderstanding for last:

“…after careful consideration [Southampton] has supported the proposal for a defined contribution (DC) scheme for future benefits because it would provide greater certainty in terms of benefits…”

It is precisely the opposite of the truth to claim that DC gives greater certainty in terms of benefits. Unlike DB, which provides a great deal of certainty in terms of the pension benefits one will receive in retirement for one’s contributions, DC provides no such certainty whatsoever. It all depends on investment returns during one’s working life and annuity rates at retirement. That’s why it’s called ‘defined contribution’ rather than ‘defined benefit’.

[Please also read my open letter to Alistair Jarvis (CEO of Universities UK) and USS employers.]