Financial Regulation Matters

Jul 29, 2017

5 min read

The USS Pension Deficit grows to Extreme Levels: A Case for Invasive Regulation?

Institutional Investors Under Pressure

Today’s post reacts to the news that the Universities Superannuation Scheme (USS) has the largest pensions deficit of any British pension fund, now measured at £17.5 billion. We have looked briefly at pension deficits before here in when we looked at the behaviour of Sir Philip Green throughout the BHS scandal, but in this post we will review some of the concerns connected to this large increase in the deficit of the largest pension fund in the U.K., whilst we will also look at some of the issues that branch out from this development. Ultimately, it is worth considering whether, as Peter Drucker once opined, pension funds are the saviour of capitalism, whether the function of pension fund investment powerhouses is beneficial but needs alteration, whether the current situation is a product of the financial crisis and something that does not need much attention, or whether the situation is representative of inherent systemic issues which are bound to cause massive failures.

The news that the USS has recorded liabilities of £77.5 billion, in relation to its assets of £60 billion, is bound to cause concern. With the £17.5 billion deficit representing almost double the second largest deficit in the U.K. (BTs deficit stands at £9 billion), there are fears that drastic action may be required to reduce the definition, based upon the belief that the straightforward options available to the USS are ‘unpalatable’: potential measures include pension holders i.e. Academics and University staff, contributing more to their retirement, pension holders having their future pension benefits diluted, or increased contributions from Universities, seemingly at the cost of teaching resources. An independent pension consultant, speaking to the , argued that ‘the danger that USS poses to the future financial health of UK universities is hugely underestimated’, whilst the Chief Executive of USS argued differently, stating that the fund’s decision to move its asset management team in-house had saved money and that the fund’s performance should be judged after years, adding that ‘our performance has been pretty good’ — yet, the massive increase in the deficit, the revelation that the investment team had underperformed its performance benchmark by 2% over the year, and that USS executive committee — which contains no women — was paid, on average, £488,000 each, makes for particularly uncomfortable reading.

The contrasting viewpoints with regards to the USS are stark. On the one hand, it has been suggested that the root cause of this massive deficit is that ‘the USS trustees [have been] going down to the casino and betting the money that they had been given by universities, betting it on [the stock market]’, whilst on the other hand the cause has been pinned on an unexpected rise in liabilities, with a USS spokesperson stating that ‘USS pensions are secure, backed by solid investment portfolio and the strength of sponsoring employers’, of which the spokesperson was relating to the ‘backing’ of Universities that have assets of more than £50 billion. The financial data has been used, however, to paint a rosier picture of the USS, with its assets under management increasing by 20.1% over the past year, and the financial environment surrounding institutional investors being cited as reasons for calm when viewing the stated deficit; studies discuss how affected pension funds can be to external factors. On both sides of the Atlantic, there are concerns that employees will be the ones who pay for the irresponsibility of fund managers’ earnings predictions, with it even being suggested that not only is it deemed appropriate that workers increase their contributions to fund the gaps, but that even workers who are not involved in pension schemes are having their pay increases restricted to pump resources into this incredible marketplace. Earlier this year, it was reported that the Pensions regulator was to take a tougher stance on companies that prioritise shareholder dividends over reducing pension deficits, but the regulator is not as bold when it comes to pressuring the large pension funds, with the penalty seemingly constrained to financial penalty notices in the event of a failure to comply with pension regulations.

The USS, unfortunately, has form. In 2011 academics went on strike over changes to their pension, with the changes being an increase in retirement age from 60 to 65, and an end to final salary pensions for new members. In 2014, academics again went on strike, in the form of refusing to mark students’ work, after the USS continued its strategy from 2011 anyway. Sally Hunt, the General Secretary of the University and College Union (UCU) wrote recently that ‘twice have members seen the value of their pensions reduced and been asked to pay more for the privilege’, something which she suggests is demonstrated by the system of having one pension scheme for academics rather than two — with the example being that, now, (after the reductions to USS benefits) an academic at a pre-1992 institution may be as worse of as £150,000 over the course of their retirement than an academic at a post-1992 institution. The obvious fear in relation to this is that recruitment and retention could be affected massively in the HE sector.

Ultimately, there is an underlying issue which is not really being discussed. Whilst there is merit to the viewpoint that external factors have contributed to this massive deficit and that, eventually, the deficit will naturally decrease once certain environmental factors correct themselves, the £17.5 billion deficit, in such a time of uncertainty, is just not acceptable for any pension fund. Whilst it is not entirely determinative of the USS’ ability, its partnering with institutions like Credit Suisse, who were recently fined billions of dollars for their involvement in the Financial Crisis, and the Macquarie Group, who have been fined recently for cartel-like behaviour will not ease tensions. Earlier it was mentioned that the options available to the USS to reduce the deficit will be unpalatable, and that is entirely correct. It is not right that members would have to contribute more to fund the gap, nor is it right that employers should divert funds away from their core focus of teaching students to fund this gap. What is required is for the Pensions Regulator to become much more involved in the running of these societally-centralised funds, because the gambling ethos must be reduced. Peter Drucker was right that pension funds are the saviour of capitalism in that they help transfer the money of employees into the system, but that proclamation has been attached to the notion that ‘what is good for capitalism is good for society’, which is not the case. It is more likely that those that hold pensions with USS will be on the picket line once more, and very soon — there is only one way that the system knows how to reduce deficits in this scenario, as many pension holders are all too aware.