Defending pensions: a fight for all our futures

Number 37: #USSbriefs37

Jul 25, 2018 · 17 min read

Megan Povey, University of Leeds

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This is a USSbrief, published on 25 July 2018, that belongs to the OpenUPP (Open USS Pension Panel) series. It was originally written in late November 2017, and was submitted to the UCU-UUK JEP (Joint Expert Panel) on 18 June 2018 by the author.


Following a series of pension scheme collapses due to company failures, the Pensions Regulator (tPR) was established by Parliament in 2004, together with a fund (the Pension Protection Fund, PPF) to which every pension scheme contributes, designed to bail out failed pension schemes. One duty of tPR is to reduce the risk of situations arising that may lead to claims for compensation from the PPF.

Our pensions are being placed at risk by a process of dishonesty and theft. This was conducted by a poisonous combination of hard-nosed employers, a zombie government bent on making Margaret Thatcher’s infamous statement that “there is no such thing as society” a reality, together with City financiers, tPR and pension scheme managers who are looking for new opportunities in a ‘liberalised’ pensions market.

The threat can only be understood as part of the neoliberal (market economics and privatisation) discourse which has dominated UK politics since Thatcher and until Jeremy Corbyn became leader of the Labour Party. The success of Corbyn in the 2017 election has destroyed the Tory government’s ability to drive through their privatisation agenda. Corbyn’s popularity is built upon a widespread belief that austerity has gone too far together with a desire to revert privatised public sectors for the benefit of their users, not for those who make a profit from them.

The above may seem like strong words but they describe what is happening to our pensions and explain why taking industrial action to defend all our pension schemes is so important. Our pension scheme in Higher Education — the Universities Superannuation Scheme (USS) can safely provide a decent pension for all. However, what is at stake is not only what remains of our Defined Benefit (DB) scheme but the viability of the scheme in total.

USS is one of the biggest pension schemes in Europe. Twice in the last 6 years USS members have seen the value of our pensions cut while we pay more. It doesn’t have to be like this: our colleagues in post-92 universities are doing much better.

Things have been made worse by the new breed of university managers viewing ‘their’ institution as a business on the road to privatisation; where any potential pension liability on the balance sheet could deter private investors. The collective point of view of our employers is given by Universities UK (UUK).

The most determined industrial action will be necessary to defend our pension. We are not on our own. The Communications Workers Union (CWU) is running a brilliant campaign to defend their pension and there are many other DB and similar schemes under threat. If we build the maximum unity with other trade unions, with our students and with parents; together with a campaign which engages all our members, we can win.

We will need to campaign at several levels, with industrial action and a spirited defence of DB pensions in the form of a political campaign seeking to turn the tide back, including winning a future Labour government to the defence of the collective provision of pensions. How to do this is the subject of this pamphlet.

What is the Universities Superannuation Scheme (USS)?

Pension theft

The employers’ proposals: cut the pension

In addition, the employers intend to cap their contribution to the scheme, transfer all ‘de-risking’ costs to members and cut employer contributions from 18% to 12% for future pensions. This will rob us of our pensions in future when everyone is being told they need to save more for pensions — our employers are doing the opposite. Since employers are the final resort to funding the deficit, their short-term aim of capping contribution costs will generate a high cost of a realised deficit payment.

Moving everyone to DC will destroy the link between past and future staff, break the important link that ensures the scheme continues to grow with positive cash flows, risks destroying future pensions and undermines past pension accrual by creating the very deficit they seek to avoid.

It gets worse — USS seeks to benefit from employers’ desire to remove pension risk from their balance sheets by stealing the surpluses in the scheme which should go to the members as pensions, retaining them for their own advantage. Why have a managed fund and pay expensive investment managers, when USS intend to move to a passive fund investing mainly in bonds which are the worst performing investments needing no investment management at all?

We face a perfect storm of privatising interests, circling our scheme like vultures.

It is not for nothing that the UCU calls the employers’ proposals an existential risk to our pensions.

The scheme has consistently been in surplus over the years after paying out pensions and costs of running the scheme.

Ending DB pensions may lead to the destruction of the pension scheme

In addition, while employers would bear the majority of these additional payments the risk-sharing arrangements imposed on members since 2014 would mean that they too would incur higher contributions. Employers and employees share risk on a 2:1 basis. A major concern is that USS is at the limits of its affordability for members and an increase in contributions with no increase in benefits may lead to a rapid fall in the number of members who retain their membership of the scheme. The DC scheme itself could then be undermined by reductions in numbers in the scheme.

The outcome of self-sufficiency and Test 1 increases the chances of transforming USS from a pension scheme with healthy real surpluses and a notional deficit into a scheme with a real deficit and a notional self-sufficiency based upon delivering inadequate future pensions.

Future benefits

USS needs to remain an open, DB based pension scheme in which collective provision of pensions are at the centre of its approach. Indeed, we believe returning to a Final Salary scheme is the most stable scheme providing long-term protection for members’ pensions. We need to return to the social democratic ideal of pay-as-you go social security. As mentioned before, university managers only look at immediate profits not long-term role of universities. We demand the return of universities to the control and accountability of the public sector.

De-risking: how to destroy a pension scheme

If new entrants are only getting 12% contributions from employers and 6% is going into a scheme they receive nothing from, with ‘pension freedom’ they may opt out of the scheme all together. This could produce a spiralling deficit leading to the end of the scheme. Employers would love that as they could save 12% of pay but the DB fund would collapse if that occurred.

Does this mean an end to retirement altogether?

Employers are building discrimination into pensions — intergenerational solidarity

DC pensions betray this pledge — however, since it is a legal obligation on them, the employer’s proposals imply a transfer of active member savings to subsidise the old DB promise.

The Final Salary DB was much more egalitarian than Career Average DB introduced in 2014 which itself is much more egalitarian than DC. We call for the return to DB and even better to Final Salary pensions. This will require a long term political campaign in the labour movement, for a return to the previous social democratic consensus and an end to the neoliberal establishment view previously shared by almost all political parties.

Under-represented groups in HE, including women and BAME staff, whose career tracks usually mean lower salaries will suffer the most from this subsidy of the old DB promise. Therefore, it is essential that we fight for the defence of a DB scheme and eventually the abolition of the DC scheme altogether — it is the only way to a fair pension scheme.

UCU needs members to act

At the same time employers are seeking to place a maximum upon their contributions and abandon any responsibility for a deficit that their and USS’s decision may create.

We believe that by voting for industrial action we can begin to halt the onslaught on our pensions. By linking our defence of pensions with the students’ campaign to end student debt, we can together begin to halt the marketisation and individualisation of higher education. This should be part of a longer term political strategy to restore social democratic politics — we need to argue that Labour under Corbyn adopts a position of collective provision of DB pensions, the public university and academic freedom. Unity with other trade unions in the defence of pensions will help with this. A trade union conference in 2018 on pensions can help with this. We need a members’ campaign of writing to Labour MPs.

We can win. The government is weak and university leaders are under attack for their profligacy. In UCU’s September 2017 consultative ballot over changes to USS, 86.6% of members who voted said they would be prepared to take industrial action to defend USS pension benefits [ed. note: in UCU’s January 2018 USS ballot, the turnout averaged more than 58% , with 88% voting for strike action and 93% for action short of a strike].

Appendix: technical details

USS is a very healthy pension scheme

Figure 1: Over the past year, fund assets have grown by over £10bn while contributions exceed benefits paid. Source: USS Annual Report and Accounts 2017 and Dennis Leech, University of Warwick.

The scheme continues to grow with contributions from existing members exceeding those of outgoings from current pension payments. In 2016 this amounted to £284m (USS Annual Report 2017, p.64). The picture of a positive cash flow is expected to be the case under the current scheme for the foreseeable future.

Figure 2: Even if we assume that there is no income from assets, the fund is predicted to continue grow very significantly. Source: First Actuarial Report for UCU, Progressing the Valuation of the USS, 15 September 2017

When asset growth is factored in, fund growth is even more impressive since the performance of the investments in stocks and shares has been consistently stronger than gilts over the long run. USS states that ‘over the last five years the scheme assets have returned 12.0% per year, and outperforming gilts liability proxy by 2% per year’ (USS Annual Report 2017, p.44).

Figure 3: A prudent assessment of fund asset growth suggests a growth rate well above that of inflation. Note the depressing effect of gilts where returns are negative when inflation is accounted for. tPR’s insistence on a de-risking strategy of increasing the proportion of gilts is damaging to the fund.

UCU’s independent actuarial advisors First Actuarial statement on the scheme’s viability concludes that:

We conclude from the cash flow analysis later in this report, that the current contribution rate from the 2014 valuation remains a prudent contribution rate, given the current benefit design of the USS. In a scenario of “best estimate” pay rises, the benefits of the USS can very nearly be paid from contributions, without reliance on the assets. There is no need to change either the contribution rate or the benefits to have a prudent funding plan. The strong likelihood is that the USS can be invested to outperform the return required to safely deliver the benefits. Given time, the outperformance will increase the funding level to any desired target. Any formulation of the sign off of the valuation which maintains the current contribution rate and the current benefits is acceptable.

The changes being proposed would see the theft of these surpluses and earnings from our investments in members’ pensions to USS itself and our employers. To justify this theft requires a level of dishonesty in the reporting on the scheme.

What is de-risking? Pension dishonesty and Gilts+

The aim of destroying collective pension provision has been a goal of government for many years. The reason for this is that it moves the risk involved in long-term investment away from employers and government collectively and onto individuals without power to influence the outcome. This has the support of some sections of the financial establishment who see an opportunity to charge large annual fees for managing individual pension accounts, in effect, privatising pensions provision. Accountancy regulation FRS102 has imposed a requirement to value pension income on a conservative basis but in the case of USS a still more conservative estimation of the future costs have been arbitrarily adopted by USS. Instead of making use of the real returns of its investments and reducing these returns to allow for a level of prudence to achieve a ‘best estimate’ of expected returns USS uses a damaging ‘Gilts+’ estimate. Gilts+ assumes the cost of future pensions based upon the notional investment required if all investment were made in government bonds. Government bonds are assumed to be the safest of assets to purchase as governments are not supposed to default on their debt. However, they provide much lower returns than assets such as stocks and shares. USS has over two thirds of its investments in stocks and shares.

How to turn a surplus of £10bn into a deficit of £18bn

UCU has been challenging the Gilts+ methodology for valuing the pension scheme since it was introduced as the justification for ending the Final Salary scheme in 2014. USS claims to have amended it by using a partial best estimate for future income. However, it is still embedded within the valuation methodology through its use of one of its key tests of the schemes management, Test 1.

Test 1

USS treats the scheme as if it were a collection of individuals rather than a collective scheme in which reducing risk is a key advantage of collective provision. The reason we make individual contributions to a savings scheme is to be able to withdraw those savings at a future date. Therefore, we invest them now, to gain a higher return when we do not need them, only to draw on them later when we want a secure income but lower return. To make those safer investments immediately necessitates we must make much higher levels of savings for the same pensions later in our lives. A Gilts+ approach to self-sufficiency at a time when returns on government gilts are negative, as they are currently due to quantitative easing, is equivalent to putting your money under the mattress for each individual (see Derek Benstead’s comment and Mike Otsuka’s discussion).

In a collective scheme such as USS, we can pool the risk incurred in holding onto assets, getting higher returns for longer than an individual could. This also significantly reduces management costs. Collective schemes reduce our individual risk by ensuring that the pensions we receive when we decide to take our pensions is not dependent upon the returns we get when our savings are moved into lower risk assets at a specific point in time, when an individual is approaching retirement and desires a secure income from the pension fund. Indeed, government was forced to recognise this when it abolished the legislation imposing the requirement that those with individual pensions were forced to take out an annuity upon retirement.

Collective schemes with positive cash flows as USS was shown above, do not need to move their assets into low yielding gilts at the expense of higher yielding investments. Instead they can continue holding onto higher yielding assets for as long as needed unless the contributions into the scheme are lower than the pension expenditure out of the scheme. Therefore, retaining the positive cash flow and the open nature of the scheme are crucial for its continued success and the reduction of risk.


This is a USSbrief, published on 25 July 2018, that belongs to the OpenUPP (Open USS Pension Panel) series. It was originally written in late November 2017, and was submitted to the UCU-UUK JEP (Joint Expert Panel) on 18 June 2018 by the author. This USSbrief represents the views of the author only. The author believes 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 #USSbriefs37 and #OpenUPP2018; the author will try to respond as appropriate. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.


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A set of papers written by University Staff and Students, on University Staff and Students, for University Staff and Students. We are also on


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A set of papers written by University Staff and Students, on University Staff and Students, for University Staff and Students.


A set of papers written by University Staff and Students, on University Staff and Students, for University Staff and Students. We are also on

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