‘An holistic view’ of risk? Universities UK’s leaked response to USS’s September 2017 employer consultation
This is a USSbrief that belongs to the OpenUPP (Open USS Pension Panel) series.
Of all the problems associated with the 2017 USS valuation, the assessment and use of employers’ ‘risk appetite’ remains one of the greatest. The leak of UUK’s October response to USS’s September 2017 Technical Provisions consultation allows us to fill in one more piece of the puzzle. This UUK document purports to summarise employers’ responses to this consultation, alongside other consultations and events extending back to September 2016. It argues that USS’s proposals lie ‘at the very top end (in terms of risk) of what would be acceptable’, and that while a ‘small majority’ of employers (53%) accept that level of risk, a ‘significant minority’ (42%) want to take less risk. This argument informed the changes which USS subsequently made to its valuation assumptions, driving up the deficit and cost of contributions, and giving UUK a pretext for arguing that the Defined Benefit (DB) element of USS should be closed. In short, this document was pivotal in causing the current crisis in USS.
This document’s high-level statements concerning employer risk appetite have in fact been known for some time. UUK, in their attempt in March 2018 to respond to the multiple critiques of how it had gathered evidence to inform the USS valuation, quoted directly from this document when explaining the importance of the ‘significant minority’ that wanted less risk. But in March, UUK unsurprisingly did not mention a particularly fascinating footnote buried deep within the October document. There, with the benefit of hindsight, we can read what appears to be the earliest written documentation we have of UUK’s desire to push through 100% Defined Contribution (DC) for future benefits in the 2017 valuation process. This USSbrief analyses the October document, along with that footnote, as one among countless instances in which UUK use vaguely operationalised conceptions of risk appetite to shore up particular political manoeuvres.
We do not want simply to fill out the historical record here. The problem of assessing employers’ views on risk is still very much live. For as Sam Marsh, elected member of the UCU Joint Negotiating Committee (JNC), has argued, ‘USS have never given any useful information around the risk involved in different investment profiles to employers’. As such, employers have been unable to grasp the full effects of making any particular decision around risk. The current UUK Joint Expert Panel (JEP) consultation at least addresses risk directly — finally acknowledging, subsequent to the JEP’s extensive criticisms of how risk appetite has been assessed, that risk is both subjective and multi-faceted. UUK in that consultation admit that they ‘believe it would be very difficult for many employers to provide a clear answer to the isolated question: “What level of pension risk do you believe will be acceptable in 20 years’ time?”’ (p. 18). This sentence in fact demonstrates the profound inadequacy of the methods which they and USS have used to capture employer risk appetite throughout the 2017 valuation. Employer consultations around risk and risk appetite have been, and still are, fatally flawed exercises. That has to change.
The September 2017 employer consultation
It is already well known that UUK’s September 2017 survey was deeply problematic (see #USSbriefs63). It is still unclear whether UUK, in their statements about a ‘significant minority’ (42%) of employers wanting ‘less risk’, gave the same weight to responses from Oxbridge colleges and other tiny institutions as it gave to the largest employers in USS. In addition, a consultant from a company whose portfolio includes transitioning clients from DB to DC schemes provided a template response that was used by a number of Cambridge bursars (see #USSbriefs13). While the JEP, in its September 2018 report, acknowledged neither of these major problems, it did stress that ‘the framing and context of the questions asked of employers have … produced misleading results’ (p. 9).
UUK are deeply committed in the October document to pushing the ‘significant minority’ as hard as they can. They further exaggerate its importance by noting what they call ‘the asymmetry of responses’ — in other words, that the ‘net “take less risk” position’ (which they define as ‘the number of employers wanting less risk minus those wanting more’) is ‘as high as 37%’ (since while 42% wanted less risk, only 5% wanted more). This is an invidious statement: it is very unlikely that a substantial number of employers would have selected (even) more risk than had been proposed in a valuation process that was already preoccupied by the fear that risk levels were too high.
UUK’s model of risk appetite is vague and tendentious. UUK specifically note in the October document that it ‘sought an holistic view from employers’ [our italics] about the ‘overall level of risk proposed’ in the September survey, because the consultation was ‘extremely technical’. One might well replace holistic with the adjectives vague, ill-defined, misleading — or near meaningless.
The October document, in addition to presenting results of the September 2017 survey, draws on a second, also problematic, consultation which UUK undertook in October 2016. This was subsequent to the town hall meetings which they organised, and which featured UUK’s actuarial advisers Aon. The briefing paper for these town hall meetings show clearly how UUK were priming employers to consider ‘more fundamental benefit reform of USS pension provision’ (see #USSbriefs1). Several universities’ responses to this survey have now been made available via Freedom of Information requests. The vagueness of the term ‘risk’ is particularly evident in a response option for question 16: ‘My institution is concerned about the possibility of a less prudent approach being taken and any potential increase in risk being underwritten by our institution’. It is far from clear what exactly such a ‘potential increase in risk’ constitutes and how someone selecting that option would have interpreted such an ill-defined survey question. As methodological tools for eliciting robust data on employers’ views on risk, both the October 2016 and September 2017 consultations are highly unsatisfactory. Yet, the results of both have been used by UUK to shore up a particular vision of what ‘risk’ entails.
The footnote that betrays UUK’s desire to move to Defined Contribution pensions
The October document is keen to emphasise that ‘[p]ension risk is not an obscure actuarial construction’. In other words, UUK are keen to point out the material consequences of actuarial modelling. It comes as no surprise that UUK lay out those consequences as they are experienced by employers. Indeed, UUK tell USS that pension risk is ‘a real and tangible concern’ for employers — it affects, we are told, their very sustainability. But UUK also want to point to the risks that are borne by current and future Scheme members. And it is here that we find the footnote:
For example, under the proposed assumptions and initial thinking on the recovery plan, the employers could (subject to a decision of the JNC and consultation with affected employees) put in place a DC benefit for future service that is towards the top end of market practice; but if more risk were taken and an adverse scenario were to occur, then future benefits may be closer to minimum automatic enrolment levels. (p. 3)
The phrasing is admittedly ambiguous: ‘the employers could … put in place a DC benefit for future service’. But it seems, particularly when read in hindsight, to be a shorthand for UUK’s plan to get rid of DB entirely. A similar phrase — ‘move to DC for future benefits, to reduce risk’ — is in fact used in UUK’s October 2016 consultation . And what is the implication of this footnote? UUK are telling USS that such DC benefits would not be as good as they might be for employees if institutions end up lumbering themselves with too high a level of risk, since this would cause problems if there were an an adverse scenario. Whereas employers might have been able to implement something close to top-of-the-range DC market practice, they would, instead, have to to resort to something ‘closer to minimum automatic enrolment levels’ for future DC benefits.
The UUK document, in other words, bolsters its argument for taking a conservative approach to risk by threatening that to do otherwise might well mean that employees would end up with bottom-of-the-range DC options. We want to take less risk, UUK tell USS, so that we can provide future luxury DC benefits! Such a narrative of course rides roughshod over the profound and unequally distributed risks that employees would bear in the shift from DB to DC (see #USSbriefs4). This document was, readers should note, written prior to USS’s move to the 10 November Technical Provisions and UUK’s own, suspiciously rapid response on 17 November that it proposed to move to 100% DC provision. While the phrasing of this footnote is perhaps deliberately ambiguous, we read it as further evidence of UUK’s desire to do away with DB however the consultation over the September Technical Provisions played out.
We need better assessments of risk
UUK and USS have not persuaded commentators, including the JEP, that they have appropriately assessed employers’ risk appetite. There has never been adequate contextual information provided through which employers could weigh certain risks up against one another. And we should recall just how influential that final averaging of employer risk appetite has been. It is, after all, one figure — which has been pulled out of UUK’s and USS’s skewed and inadequate explanations and assessments of risk — that is used as an input variable for USS’s Test 1. This provides even more evidence that Test 1 is completely unfit for purpose (see #USSbriefs59).
Sam Marsh’s recent demolition of Test 1 (see #USSbriefs58) makes it even more urgent that USS and UUK deploy better concepts and methods, as well as commit to greater transparency, when they ask stakeholders to assess heterogeneous forms of risk. Different kinds of risk (see #USSbriefs57) unevenly affect employees, employers, society and, indeed, the environment. (USS has been criticised for its limp efforts to address climate change.) It is crucial that future valuations involve a broader range of stakeholders in gathering assessments of risk (see #USSbriefs44). The JEP, for example, suggested that Scheme members should be involved in the assessment of risk appetite (p. 10).
At the moment, we are stuck with a system whereby USS and UUK disproportionately focus on, and use deficient means of assessing, the risks that employers are willing to carry. This approach inadequately adjudicates risks to employees; ignores implications for inequalities; has been forced to acknowledge risks to higher education only through the strike; and seems oblivious to risks to the environment.
 Question 9 of the October 2016 consultation asks: ‘Which of these statement best describes your institution’s views on benefit reform if action is required to reduce the USS benefit?’ — and one fixed response option is: ‘Move to DC for future benefits, to reduce risk and to make future benefit changes less likely to be needed’.
We thank Michael Otsuka for confirming a couple of the details used in this brief. Solely the authors are responsible for the interpretation offered here.
This is a USSbrief that belongs to the OpenUPP (Open USS Pension Panel) series. 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 #USSbriefs60 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.