Response to David Miles’ analysis of the role of Test 1 in USS valuation

Number 55: #USSbriefs55

Sam Marsh, University of Sheffield

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This is a USSbrief, published on 14 October 2018, that belongs to the OpenUPP (Open USS Pension Panel) series, and has been submitted to the UCU-UUK JEP (Joint Expert Panel) on 1 August 2018. It originally appeared as a comment made by Sam Marsh responding to David Miles’s submission to the JEP (published as #USSbriefs36). This submission is one of three made by Sam Marsh to the JEP; see also #USSbriefs32 and #USSbriefs51.


There are a number of points I’d take issue with here.

Firstly, in the 5% chance that the self-sufficiency portfolio doesn’t deliver the planned returns, this will not lead to pensions not being paid, as Mike Otsuka has written about in detail. It is scaremongering to make it sound like a 1 in 20 chance of not receiving a pension, when it is nothing of the kind.

Secondly, Test 1 does not rely upon an estimate of ‘Technical Provisions’: instead, Test 1 sets the Technical Provisions at Year 20 (see my first Joint Expert Panel submission, #USSbriefs32). This is a side issue though, as the substantive criticism is about the expected future returns.

Thirdly, David Miles criticises USS for taking a view on long-term bond prices instead of reading them from the market, which must be correct as it’s based on all the participants taking a view on long-term bond prices. This is self-evidently problematic, especially as USS are trading in large quantities of these assets; in other words, their views, according to the theory, should be shaping the market not passively following it.

Fourthly, I’m not convinced that the calculations relating to under-performance are directly relevant, but I’d be happy to be convinced otherwise. One point is that the best estimate position stated by USS is the median rather than the mean. Another is that the prudent/67th percentile return estimates are, I believe, based on stochastic modelling over a relevant time period. In other words, the prudently adjusted forecasts stated by USS do lead to a 67% chance of success (on their assumptions) at the end of the timeframe used for the modelling.


This is a USSbrief, published on 14 October 2018, that belongs to the OpenUPP (Open USS Pension Panel) series, and has been submitted to the UCU-UUK JEP (Joint Expert Panel) on 1 August 2018. It originally appeared as a comment made by Sam Marsh responding to David Miles’s submission to the JEP (published as #USSbriefs36). This paper 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 #USSbriefs55 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.