Acknowledging and learning from failures in USS governance
Number 69: #USSbriefs69
Felicity Callard, Birkbeck, University of London
Nick Hardy, University of Birmingham
This is a USSbrief, published on 22 March 2019, that belongs to the OpenUPP (Open USS Pension Panel) series. It has been submitted to the UCU-UUK JEP (Joint Expert Panel) by the authors on 15 March 2019.
This USSbrief draws on the events of the ongoing USS dispute to recommend specific ways in which both the formal governance structures and the wider context of deliberation and discussion over the USS valuation might be improved. We argue that previous governance failures or insufficiencies need to be acknowledged formally by both USS and Universities UK (UUK) so that trust in USS and its governance might, at some point in the future, be repaired.
In the first part, we offer some prescriptive recommendations; in the second, we call on the Joint Expert Panel (JEP) to urge USS, UUK and sponsoring employers to acknowledge specific governance failures over which they have presided.
1. How to improve governance
1.1 Composition of USS Trustee Board
We call on USS and UUK to ensure that the Board of the one of the largest occupational pensions schemes in the United Kingdom comprises members who are committed to the viability and sustainability of this open Defined Benefit scheme.
The vibrant and public debates over USS’s methods have fatally undermined USS’s 2017 valuation, but the USS Trustee has seemed unwilling or unable to engage with those debates. The introduction of new Defined Contribution ‘Master Trust’ legislation and an associated TPR code of practice means that USS is now required to appoint more trustees with expertise in DC pension provision. Across the board as a whole, however, USS should ensure that trustees with DC expertise are outnumbered by trustees with a track record of commitment to DB pensions.
USS must also diversify its startlingly uniform group of ‘independent’ trustees, as Martin O’Neill has argued. As it stands, USS’s five ‘independent’ trustees outnumber both its four employer-appointed trustees and its three UCU-appointed trustees. Of the current five, four are representatives of the financial services industry, and the fifth spent almost all of his career working for Rio Tinto, a mining company whose well-documented record of despoiling the environment has already led another, more responsible pension fund to divest from the company entirely. Some of these lifelong representatives of finance capitalism should be replaced by figures with experience of pension schemes whose employers, like USS, have no obligations to corporate shareholders: for example, one of the Church of England’s DB schemes, or a funded state pension scheme of a foreign country. One way to do this, as the University of Bristol has already suggested in its own submission to this phase of the JEP, is to give members input into the appointment of one or more independent trustees; alternatively, the number of member-appointed places on the board could simply be increased, in order to dilute the influence of employer-appointed and ‘independent’ members.
1.2 Relationship between USS Trustee Board, Executive, and Actuary
We call for a Board of Trustees which is able to discharge its responsibilities by robustly challenging and testing the approach and proposals of the USS Executive.
We note in the USS Corporate Governance Framework Policy (updated December 2018) that Directors are expected ‘To constructively challenge, debate intelligently and test recommendations from committees, the Group Executive and USSIM [USS Investment Management Limited] and to challenge advisers to ensure sound decisions are made’ (p.55). There is no strong evidence to indicate that this is currently the case. Likewise, it is unclear whether there are robust procedures by which the Executive is mandated to respond to individual directors’ questions and critiques. The extent to which some of the most fundamental aspects of USS governance are being adequately carried out is in serious doubt.
We call on the Board of Trustees to make clear whether they are in possession of all data and other materials that they might require to undertake their fiduciary duties.
We note the arguments made by Sally Bridgeland (member of the JEP) and co-author Amin Rajan: ‘For trustees, the challenge is how to delegate authority to investment professionals without losing control’ (Bridgeland and Rajan, ‘Governance practices: Bridging the gap between rhetoric and reality’). There have been indications over the last year that the USS Board has not been ‘in control’, as Hilary Salt and Derek Benstead suggest in a First Actuarial report. (In the course of the 2017 valuation, First Actuarial reported, for example, that they saw no documents signed either by the Trustee or by the Scheme Actuary.)
Nor is it clear exactly how the relationship between the JNC, the Executive and the Trustee Board functions. It appears that JNC meetings are generally attended by the USS Executive, but not by the Trustee Chair or a significant number of Board members. If this is true, how are JNC deliberations and points of contention conveyed to the Trustee Board? How does the Trustee Board gain insight into the deliberations of the JNC and the employer consultation process more generally?
We call on the USS Board of Trustees to publish all Board papers unless there are specific, justifiable reasons to redact particular agenda items.
In order for member- and employer-appointed bodies like the JEP to exercise meaningful oversight over the activities of the Board and its interactions with the Executive, more transparency is needed with respect to USS’s internal deliberations.
This is essential both in relation to transparency and in order for trust to be repaired. In this regard, we encourage the JEP to strengthen the resolve it showed in its first report, where it suggested that ‘the Trustee may wish to consider how to share more of the information currently deemed confidential, e.g. on a redacted basis or in a summarised form’ (p.50). The default ought to be publication of all Board papers.
We call on USS to commit to the employment of staff with a record of commitment to the sustainability and viability of DB provision.
It is far from clear whether the USS Executive is committed to the viability of DB pensions. Governance of a large, open DB scheme is inevitably made more difficult if the Executive is pulling in another direction. We ask the USS Trustee Board to establish the extent to which the Group Chief Executive Officer (GCEO) and other members of the Executive are committed to the sustainability of DB pensions.
We call on the USS Board of Trustees to revisit the appointment and role of the Scheme Actuary and the Actuary’s role in the USS valuation.
The Trustee Board delegates powers to the GCEO — and it remains unclear how appropriate the current assignation of duties and responsibilities is between those of the the GCEO and the Scheme Actuary. Is the Trustee Board exerting appropriate oversight and deliberation over the appointment of the Actuary? Are there robust procedures for the Trustee Board to elicit advice and recommendations from the appointed Actuary independently of the GCEO? As the very least, USS should, as already recommended by the University of Bristol, remove the current Scheme Actuary, Ali Tayyebi. It should also insist on public declarations of the Scheme Actuary’s potential conflicts of interest: for example, if the Actuary were in a position to gain financially from successfully advising the UK’s largest private pension scheme to embark on an immediate de-risking plan, this information should be made clear to all Scheme stakeholders.
We call on the USS Board of Trustees to demand that they are provided with valuation modelling conducted using a variety of methods.
We argue that if the Trustee Board is to fulfil its duties to ‘constructively challenge, debate intelligently and test recommendations from committees…, the Group Executive and USSIM and to challenge advisers to ensure sound decisions are made’, the Board needs to be provided with modelling done using a variety of methods. We note that Dennis Leech (in #USSbriefs28) emphasised that ‘The JEP should ask the USS executive to provide valuations based on multiple economic methods’. Such heterogeneity of modelling — including, crucially, of risk — ought additionally to be provided to USS employers. Adequate contextual information ought to be provided so that employers are better able to adjudicate the kinds of risks they are willing to take, as well as how the probability of risks has been determined. In particular, the USS Executive’s refusal to provide employers, and perhaps even the Trustee, with meaningful information about the risks of maintaining its current investment strategy and contribution rate, has seriously undermined confidence in the 2017 and 2018 valuations (see, for example, the recent response to the 2018 consultation by the University of Sheffield).
1.3 Relationship between USS and The Pensions Regulator (TPR)
We call on the USS Board of Trustees to claim and explicitly acknowledge their power and legal prerogatives in relation to the valuation process.
On a number of occasions since the 2018 USS dispute began, communications from USS serve to defer to TPR, as though it were TPR who were regulating the Scheme. In current law, a Scheme’s funding plan is required to be prudent, but it is the directors who make the determination of prudence, and not TPR. Likewise, it is the Trustees who determine the funding and investment strategy. The apparent unwillingness of the USS Trustees to acknowledge or claim their own power in relation to TPR has deleterious consequences for governance. This is especially true when TPR continues to seek to pre-empt the valuation process with early and often poorly informed interventions, as it did in September 2017.
1.4 UUK’s consultations with USS employers
We call on UUK to improve how it employs social science methods to elicit views and materials from employers.
We call on the JEP to consider the possibility that the JNC, rather than UUK, might design — or at least have oversight over — surveys and consultations used in the course of USS valuations.
The events of 2017 and 2018 make clear that the wording and structure of USS and UUK’s surveys and surrounding materials have often been tendentious (see also #USSbriefs1) — such that employers have been steered towards particular responses without necessarily understanding the full context under which they are being requested to make decisions. It is unclear whether those currently designing surveys and consultations are adequately trained in robust methods that attempt appropriately to elicit rather than heavy-handedly steer the views and attitudes of employers.
We call on USS and UUK to ensure adequate time for employers to respond to consultations.
Rushed consultation timetables harm the governance of the Scheme since they quash robust deliberation — and potentially dissent — in relation to the directions of travel proposed by USS and UUK. Despite the criticisms made in the JEP’s first report (see in particular pp.45–46), USS has not departed from its preference for rushed consultation timetables that serve to steer employers in certain directions.
The current consultation on the 2018 valuation is a case in point. USS first announced the need for a separate 2018 valuation, rather than a revision of the 2017 valuation using 2018 market data. Then it delayed the release of its Technical Provisions (TP) document, from the week before Christmas to early January. Then, having initially promised to formulate a detailed proposal for contingent contributions, USS did a U-turn and invited employers to formulate the proposal instead. Although the window for employer consultation responses was extended, the result was that UUK and its advisers Aon had to formulate a proposal to put to employers and eventually to USS. This clearly constrained employers. Once UUK’s relatively unambitious proposal had been released, even those institutions that preferred a more critical negotiating stance, such as the universities of Sheffield and Oxford, felt obliged grudgingly to accept UUK’s plan. Again, as with the September 2017 consultation, UUK will have ended up having a disproportionate influence over the whole process. If employers had been given time to consolidate their objections to the valuation and make concerted representations to UUK, UUK’s own proposal to USS might have been quite different.
We recommend that universities are encouraged to set up working groups, not least to draw on the extensive knowledge about the USS valuation now held by Scheme members from a number of disciplines and with various forms of expertise.
A number of universities have already developed USS Valuation Working Groups which appear to have significantly improved the level of deliberation over and knowledge about various aspects of the USS valuation. Sheffield University, the University of Warwick, Oxford University, and the University of Bristol provide good models to follow. It is no coincidence that the diversity of views and range of expertise represented in such groups has resulted in some of the more critical and penetrating responses to USS consultations (for instance, the most recent responses by Sheffield and Oxford). Terms of Reference for such Working Groups should ensure an adequate number of staff representatives, as selected by the trade union.
1.5 Recognising members’ expertise and interests
We call on USS and UUK to ensure that the complex schedule for the triennial USS valuation allows enough time for wider deliberation around the valuation, so as to draw on the expertise of Scheme members as well as employers.
We urge that the JEP recommends the establishment of a mechanism that would replicate the function of the JEP in facilitating the involvement of Scheme members in future USS valuations.
One of the unanticipated side-effects of the proposal to convert USS to a wholly DC scheme has been the multiple high-quality contributions that Scheme members and other stakeholders have made to debates over how USS, as an open DB scheme, might be both valued and governed.
This is only appropriate for a scheme of USS’s size and complexity. The establishment of the JEP has been central to this. We note, additionally, the establishment of the OpenUPP (Open USS Pension Panel) by USSbriefs (a collective to which both authors of this brief belong), which has the explicit aim to democratise deliberations over the USS valuation by demanding that debates, data and evidence are shared and discussed in public. We strongly recommend that mechanisms are developed to ensure that Scheme members and allies can have a real voice in deliberating over the future of the Scheme — in addition to the mechanism of institutional working groups discussed above. This would, moreover, take place on top of any formal mechanisms put in place to consult members as well as employers on their risk appetite, which the JEP has promised to consider in its second phase.
We further note that subsequent to the JEP’s criticisms of the communication strategies employed by both USS and UUK, UUK established USSEmployers. USSEmployers sees its role as ‘support[ing] employers in their communications with staff on the 2017 USS valuation’. It remains the case that both USS and UUK are resolutely committed to one-way communication channels to university staff: they remain resistant to any real engagement with — let alone challenge by — Scheme members. We strongly encourage JEP to reflect on how best to ensure that there are appropriate mechanisms for vigorous debate and deliberation. For many years, Public Engagement with Science (an interdisciplinary field of research) has stringently critiqued the so-called ‘information deficit model’, whereby stakeholders’ scepticism or hostility to a proposed scientific path is interpreted as simply owing to their lack of knowledge and information (see for example the research of Brian Wynne). The events of 2018 demolished any sense that critique of the USS valuation could be reduced to lack of knowledge and information. Rather there has been a profound epistemological contest over the assumptions and methods being used to value USS. Both USS and UUK need to grasp that reality and make use of the extraordinary levels of expertise they have at their disposal across the broad USS community.
1.6 Transparency in relation to the governance of USS — both present and past
We call on both UUK and its member institutions to make all documents relating to deliberations over USS publicly available, unless there are clear, justifiable reasons for redacting particular information.
For USS employers to publish all documentation, consultation materials and consultation responses by default would offer one significant mechanism through which trust might gradually be repaired. USS Scheme members and other stakeholders had to resort to multiple Freedom of Information requests to ascertain how exactly key elements of the 2017 valuation had been conducted (see for example #USSbriefs63). That the anonymously run website Academic Freedom Watch also emerged during the dispute as a locus for the release of materials relating to USS further underlines the loss of trust in the governance of the Scheme by both USS and UUK.
In the course of the ongoing dispute, some universities decided to be more transparent with their staff: the University of Leeds, for example, established a USS Pensions Updates page available to all staff. All USS employers should take heed.
We call on UUK to make clear how it establishes the collective view of employers and to ensure that its governance procedures are robust in giving value to dissenting views.
A UUK briefing document on USS from September 2018 noted that in establishing the collective position of the employers, not only is formal consultation used but also ‘informal engagement and other exchanges’. Such a statement raises numerous governance concerns, since it leaves open the possibility that favoured interlocutors, and favoured positions in relation to USS, are given more weight than others. We urge the JEP to attend to how UUK might better consult with employers to ensure that dissenting views are heard and given weight.
We call on USS, UUK and the Employers Pensions Forum (EPF) to ensure that they properly archive current and historic materials.
We know — from extensive searches for documents that we and others made during and subsequent to the period of industrial action, that USS, UUK and EPF archives are incomplete. We came across documents that were not available (or which had apparently been removed at some point from websites); weblinks to materials that were broken; and lists of membership of particular committees that were at times unavailable or out of date. Transparency and comprehensiveness of archiving is required in relation to the governance of the Scheme both present and past.
We call for the entirety of the Annual USS Institutions meeting — including the Q&A sessions — to be video recorded and to be made publicly available.
We call for that meeting to be open to all USS members, given that it is a key mechanism for engagement with Scheme members. On a number of occasions, only some of the formal presentations — and none of the Q&A sessions — appear to have been made available (e.g. materials on the 2017 valuation; cf. USS Annual Institutions’ Meeting 2016, which included material from the Q&As).
2. Previous governance failures
UUK has noted the importance of building trust. We argue that this is possible only if there is an acknowledgement of previous governance failures or insufficiencies on the part of USS and its sponsoring employers, as well as a willingness to reform the way Scheme governance works in the future. We outline some of the most egregious instances below.
2.1 September 2017 consultation
Many members were disappointed to find that the JEP’s first report did not — perhaps in a spirit of diplomacy, perhaps because of time constraints — provide a fuller analysis of the mistakes made in the September 2017 employer consultation and its aftermath. We have noted this omission elsewhere (#USSbriefs52), and we hope that the JEP’s consideration of governance reform in its second phase will fully document and analyse what went wrong: in particular, the question of how much the Executive and the Trustee knew about UUK’s misrepresentations of the employer responses when it decided to make sweeping changes to its TP assumptions and methods on the basis of them. At the time of writing, members are about to face the full consequences of those changes, in the form of escalating and ultimately very severe contribution increases, significantly larger than those that would have been applied if the September TPs had remained in place.
2.2 Cover-up over Test 1
We understand that Sam Marsh is making a separate submission concerning USS’s failures to respond to requests for data (see also Marsh’s long-standing campaign to request that USS shows its workings). We will therefore not rehearse in full USS’s well-known, year-long series of delays in providing the cash-flow information which Marsh used to show that USS’s Test 1 would be satisfied without any de-risking (see #USSbriefs58 and #USSbriefs59). However, we would like to call attention to one particularly significant detail. At one point during Marsh’s attempt to obtain the data, the USS Executive claimed that it needed to make a formal request to the Trustee Board to release it. However, member-appointed trustee Dave Guppy indicated that Marsh’s request had, in fact, never been presented to the Board. It appears that the Executive is pre-emptively screening reasonable requests for data from employers and member representatives which it is ultimately the Trustee’s right to hear and either grant or deny. Why is the Executive usurping the Trustee’s authority in this way?
2.3 Unsubstantiated claims about TPR gilts benchmarking
USS’s TPs document for the 2018 valuation purports to quantify the risk of implementing all of the first JEP report’s proposals using a benchmarking system which it implies is used by, and would meet with the approval of, TPR (see sections 5.4.2 and 6.2). This benchmark involves comparing the TP discount rate with the current yield on gilts. However, in its publicly available correspondence with USS regarding the 2017 and 2018 valuations, TPR itself does not refer to any such benchmark. Moreover, TPR’s recently published 2019 annual funding statement explicitly declares (p.6) that TPR does ‘not assess the appropriateness of schemes’ TPs or discount rates based on predetermined relationships to gilt yields or other indices’. This removes one of the pillars of USS’s argument for refusing to apply all of the JEP proposals to the 2018 valuation, but it also illustrates the extent to which USS has been able to mislead employers during the consultation process, especially regarding the position of TPR. A crucial but unevidenced claim, challenged by Scheme members as soon as the valuation document was released, has been allowed to steer employer valuation responses, apparently without any challenge by the Trustee, UUK, or individual employers. Publication of Board and JNC papers that are not confidential for business reasons, including full records of interactions with TPR (see our recommendations in the first section of this brief, above), would go some way towards preventing USS from making more false claims of this nature.
2.4 JNC Chair bias
The current ‘independent’ Chair of the JNC, who normally holds a casting vote in negotiations over contributions and benefits, is Sir Andrew Cubie. Throughout the negotiations and disputes over the 2017 valuation, Cubie was unwavering in his support for UUK’s radical and demonstrably unnecessary proposal to replace the DB section of USS with DC provision, until the strikes forced UUK to withdraw it. Cubie cast his vote to end guaranteed pensions for USS members in the face of criticisms and plausible alternative proposals put forward by UCU negotiators. Most importantly, he was aware of and had an opportunity to question UUK and USS’s decision to side with the preference of a minority of employers — as it turned out, an insignificant minority (see #USSbriefs60) — to alter the assumptions and methods underpinning the 2017 valuation. Since members’ criticisms have been substantiated by the JEP, it follows that Cubie should, absent a public apology for his errors of judgement, resign as Chair.
This is a USSbrief, published on 22 March 2019, that belongs to the OpenUPP (Open USS Pension Panel) series. It has been submitted to the UCU-UUK JEP (Joint Expert Panel) by the authors on 15 March 2019. This paper represents the views of the authors only. The authors believe all information to be reliable and accurate; if any errors are found please contact us so that we can correct them. We welcome discussion of the points raised and suggest that discussants use Twitter with the hashtags #USSbriefs69 and #OpenUPP2018; the authors will try to respond as appropriate. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
