The 2018 USS valuation: a wholesale rejection of the Joint Expert Panel’s report
Sam Marsh, University of Sheffield
This is a USSbrief, published on 25 August 2019, that belongs to the OpenUPP (Open USS Pension Panel) series. The author is a USS scheme member, a member of the University of Sheffield USS Working Group, a UCU-elected JNC member (June 2018-present), and is writing in a personal capacity.
The imminent ballot of UCU members for strike action in relation to USS is a direct result of substandard decision-making by those in positions of power. A solution to the dispute, which was handed to us by the Joint Expert Panel (JEP), was cast aside by USS, and a wrong-turn has been propped up by Universities UK despite persistent early warnings from UCU that it would create conflict. When the ballot opens on 9 September 2019, UCU members should have in the forefront of our minds what has taken place — and who bears responsibility for it — since we stood down from industrial action in 2018.
In the spring of 2018, the deadlock in the bitter dispute over the future of the USS pension scheme was broken when UCU members voted for a Joint Expert Panel to make an assessment of the 2017 valuation. The panel would focus in particular on reviewing the basis of the scheme valuation, assumptions and associated tests. A long-term resolution to the dispute would depend on whether the panel’s findings could provide enough common ground to meet the competing priorities of the parties involved.
The JEP’s first report
The JEP’s first report arrived in September 2018, and its conclusions were clear: there was significant scope within the regulatory framework for the current benefits to be maintained at an affordable level without exposing the scheme to unmanageable risk. The report was warmly received by both sides, with UCU endorsing the JEP report and its recommendations as a basis for negotiations, and Universities UK expressing hope that it would create the space to find common ground to conclude the 2017 valuation. A negotiated solution to the dispute appeared to be in sight.
The panel’s analysis itself ‘highlighted a number of issues arising out of the methodology and assumptions which we believe should be addressed’, recommending that ‘the Joint Negotiating Committee and Trustee come together to work at speed to agree a process that will enable any changes resulting from our recommendations to be implemented in early 2019’ and emphasising the importance that ‘all parties work in a coordinated fashion’ to achieve this (pp. 4–5). They also observed that the valuation process ‘does need to be managed more effectively in terms of interaction with, and gaining the support and confidence of, employers and members’ (p. 9).
In order to complete the valuation, the panel concluded, ‘certain principles and consequent changes should be adopted’ (p. 41). These principles included a fuller consideration of the employers’ ability and willingness to bear risk, a greater consistency of approach between valuations, intergenerational fairness and equality between scheme members, using the latest available evidence and information, and taking into account the uniqueness of the scheme and HE sector (pp. 52–53). The principles translated into six specific recommendations (p. 55):
- to (i) delay by 10 years and (ii) reduce the amount of de-risking (the latter referred to under the heading ‘increase value of covenant’);
- to (iii) allow for more optimistic assumptions when calculating deficit recovery payments;
- to (iv) smooth (i.e. average) the contribution rate over the first six years, to adjust for an expected fall over time;
- to update (v) mortality data and (vi) expected investment returns.
Applying all of these recommendations to the 2017 valuation would mean a total contribution rate of 29.2%, just 3.2% more than that paid before the dispute and way below that calculated by USS.
USS’s response to the JEP’s first report
What happened next demonstrated the inability of those at the top of USS to work constructively and collaboratively towards a common solution. The panel’s recommendations were steadily dismissed, side-lined and ultimately rejected. The suggested speedy implementation of the proposals was switched by USS Chief Executive Bill Galvin for a two-step approach: the 2017 valuation would be filed unchanged but followed by another as at March 2018, and any adjustments to the valuation would be incorporated in the latter. The Joint Negotiating Committee was shown how the panel’s recommendations would affect the 2018 valuation: with all six applied, the required contribution rate would fall back below that which preceded the dispute and the deficit would vanish.
Yet Bill Galvin and his team were already preparing a paper to the Trustee Board advising that all but the most routine changes be rejected. The Board, which delegates the majority of thinking on valuation matters to the USS Executive, followed the advice, which saw delayed de-risking and the smoothing of contribution rates rejected. Updated data would be used and deficit recovery contributions would be considered in due course. A reduction of the amount of de-risking wouldn’t be ruled out, but would be tied to the provision of ‘contingent contributions’ by employers, without which USS would not allow a contribution rate lower than 33.7%.
Over the next five months the USS executive team and employers debated contingent contribution mechanisms which might prove acceptable to both sides, but drew a blank. The speedy resolution recommended by the JEP had been replaced by a drawn-out tussle over metrics to measure the scheme’s health and potential responses to short-term turbulence. All the while, the effects of the 2017 valuation were being felt, with an initial step-up of rates in April 2019 (to 8.8% for members), and much larger rises looming in October 2019 (to 10.4% for members) and again in April 2020 (11.4% for members).
In May 2019, as it became clear that there was no hope of reaching agreement over contingent contributions, USS proposed a new outcome for the valuation, referred to as Option 3. They would allow a rate of 30.7% by permitting a temporary underpayment (as it turned out, on Deficit Recovery Contributions), but only for two years, after which they would demand 34.7%. The underlying valuation would be based on their old methodology, and the first four of the six recommendations from the JEP report would be rejected. The next valuation of the scheme would be brought forward to 2020, potentially early enough to intercept the higher rate, but only if it finds the scheme in better health than predicted by the current one.
Both USS and employers, to divert from how far USS’s response has been from that recommended by the JEP, have attempted to reduce the 65-page report to just two sentences, neither of which appears in the executive summary. These sentences acknowledge that ‘there are a number of different paths that the Trustee could adopt to reduce the rate to below 30%’ and that ‘another approach might take into account of changes to future investment expectations or taking account of asset out-performance in 2018 more explicitly’. While conducting a 2018 valuation does conform with the latter, Option 3 has failed to bring the rate below 30% even in the deficit recovery holiday of the first two years, and spectacularly so once the full rate bites. Paying 30.7% in the first two years, instead of the 29.2% in the JEP report, will cost the sector an extra £100 million per year; paying 34.7%, closer to £0.5 billion.
In Option 3 we are left with a valuation based on a wholesale rejection of the Joint Expert Panel’s report. Not only have USS resisted the recommended adjustments to methodology, they have failed to work on developing the shared sense of ownership of the valuation which the panel saw as important for avoiding future damaging industrial disputes (p. 48). The Joint Expert Panel’s report received near unanimous approval, yet Option 3 does not have the support of UCU nor that of some of the scheme’s biggest employers (see the University of Sheffield’s comments on Option 3, for example). UUK acknowledges that employers regard it as the ‘least worst’ option.
The JEP panel members devoted much of their 2018 summer to producing a report that would allow a smooth resolution of the 2017 valuation. USS has, in response, remained intransigent. UUK, despite continuing to maintain how much it has done in an attempt to implement the JEP, has stood by. The sector deserves so much better from those paid handsomely to steward its interests. It is clear where blame for the turmoil that threatens higher education lies.
This is a USSbrief, published on 25 August 2019, that belongs to the OpenUPP (Open USS Pension Panel) series. The author is a USS scheme member, a member of the University of Sheffield USS Working Group, a UCU-elected JNC member (June 2018-present), and is writing in a personal capacity. 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 #USSbriefs79 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.
