The role of consultancies in the USS dispute
Number 5: #USSbriefs5
Gail Davies, University of Exeter
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Consultants have played a key long-term role in the USS (Universities Superannuation Scheme) dispute, although they are rarely discussed openly in the communications which we receive from USS and UUK (Universities UK). In many cases, they have worked hard with employers and trustees to move pension schemes from DB (Defined Benefit) to DC (Defined Contribution) models. This is partly on the grounds that the latter are perceived to be less risky for employers and partly because they create new opportunities to sell consultancy advice around an increasingly complex financial product. These consultants’ influence is compounded by the fact that there has been an ongoing exchange of both expertise and experts between consultancies and pension schemes, excluding alternative financial approaches and the voices of employees themselves.
1. Why are people interested in the role of consultants in the USS dispute?
Management consultancies play an increasingly important role in both shaping understandings of the risks facing organisations and delivering advice and solutions to manage these risks. The reach of consultancies into the heart of the USS dispute results from three shifts.
The first is an approach to financial risk management emerging in the wake of the 2008 financial crisis. Regulators now require organisations to minimise the risks accompanying insolvency, such as not being able to pay out to creditors, including pensioners. These regulations generally seek to protect the public from the risks associated with the actions of private companies. Meeting these regulatory requirements is complex, in part because financial instruments and company structures are increasingly complex. Specialist consultancies are thus used to ensure organisations are compliant with regulations, including managing pension schemes through investment, actuarial and scheme administration services (see e.g. Willis Towers Watson).
The second is the growth of consultancy advice in areas where risk was previously managed through public-sector policy rather than management consultancy. As UK higher education moves towards an increasingly global and financialized model, it opens markets for the sale of consultancy advice (see e.g. Price Waterhouse Coopers). The risks in the ‘business of higher education’ are slightly different, including those of being left behind, so the emphasis is on making savings, managing reputations, developing new revenue streams, and advising on risks around capital borrowing.
The third is the increasing use of consultants for bench-marking, monitoring performance, tracking accountability, and managing human resources (see e.g. Aon Hewitt). Consultants now run many of the consultations we encounter in relation to work, from staff engagement surveys to recording our satisfaction with pension schemes.
2. What is the specific involvement of consultancies in the USS dispute?
Several consultancies are playing a significant role in framing the issues of pension risk and providing advice to both university employers and scheme members in the USS dispute. Aon Hewitt was commissioned by UUK to develop the December 2017 model providing initial information to USS members about the potential outcomes for their personal pensions of the earlier proposed 100% DC scheme. The Aon Hewitt assumptions were challenged from the outset: the model was analysed by Mike Otsuka in a blog in December 2017, linking to his own more pessimistic account of the impact on retirement incomes. Aon’s own 2017 Local Government Newsletter predicted ‘any further changes to [USS] benefits may lead to an exodus’, including to local government schemes, if the option was available to individuals.
As the dispute went on, the role of Aon Hewitt in providing advice to university employers around the future of the USS scheme has become clearer. One individual, John Coulthard, was listed on the December 2017 Aon Hewitt modeller and on a powerpoint presentation of advice to the Universities and Colleges Employers Association (UCEA) at a 2015 event entitled ‘Pensions in 2015 and beyond — a shifting landscape’. This publicly accessible presentation was removed from the web on March 7th 2018 after Twitter drew attention to the way it explicitly sought to challenge the ‘DB good, DC bad’ viewpoint and explain how to promote the value of a DC scheme to employees by emphasizing an unwanted ‘freedom’ rather than a secure future (see also this blog). This presentation has been archived as part of the resources in the USS dispute.
The significance of this event is highlighted by the history, excavated by Felicity Callard, of how consultants Hewitts (prior to its purchase by Aon) had been advising on the management of university pension risk since 2007. This history shows how an earlier orientation to providing defined benefits by university employers was replaced by a strong commitment to introducing a Defined Contribution scheme around 2014–5. USSbriefs1 indicates how Aon worked with UUK through town hall events and the hosting and design of a web survey, which allows the shift from a preference for DB to DC in the USS pension scheme to be traced.
Moving from DB to DC pensions opens up further opportunities for consultancy advice, and many companies have expanded their staff in this area. Steven Leigh, the lead author of the USS modeller in 2017, was recruited in September 2016 as part of Aon Hewitt’s DC expansion. Staff are also moving between advisory roles. The USS Group Executive includes Kevin Smith, who previously worked for Aon.The complexity in managing pension risks after the financial crisis means certain financial logics have come to dominate the way these consultancies understand and offer pension advice, focusing on asset-liability modelling and de-risking pensions. Dennis Leech has talked about this as part of an ‘epic ontological conversion from having a worldview based on macroeconomics to one based on financial economics’.
Aon Hewitt is not the only consultancy retailing advice around the USS dispute. Ali Tayyebi, the scheme actuary, is from Mercers. Many universities organised local briefing workshops from Mercers to provide information to members on the proposed changes to pensions (see e.g. at Nottingham). At Southampton, the use of experts from Mercer has led to calls about perceived conflicts of interest. Work by @etymologic revealed how Xafinity (which bought its pensions advisory service from PWC in 2010) played a key role in the survey of colleges in Cambridge University’s return to the UUK consultation on risk in September 2017.
3. What are the implications of the involvement of consultancies in the USS dispute?
Consultants are thus playing three roles in this dispute: offering advice on managing pension schemes, providing consultancy to higher education, and managing consultations. Tracing these links, often publicly on Twitter, has been collaborative, but also subject to pushback. Those working in pensions stress the independence of actuarial advisors, of protection by Chinese walls, and of individuals operating subject to strict oversight from the Financial Conduct Authority. However, the multiple roles of consultants in the USS dispute raises critical questions.
The first is the obvious issue of COIs (conflicts of interest). Many of above concerns are not technical COIs as they involve consultants in different roles. But even perceived COIs can undermine trust, make resolution more difficult, and open USS to the charge that they have been inattentive to the range of interests involved. There are, moreover, ongoing investigations of direct COIs in this area. The Financial Times reported in 2017 that the ‘financial watchdog launched a full-blown competition probe into an opaque industry that advises on more than £1.6tn of pension and insurance assets’. This ongoing review focuses on competition in the market for advice and specific COIs around consultancies both offering pensions advice and managing investments.
USS currently manages its own investments, but the point about competition relates to a second critical issue, which is the narrowing of advice and expertise around a particular version of risk. Describing uncertainty is a key part of the role of actuarial and investment experts, but consultancies are often obscuring these by prioritising certain logics and using similar languages across their communications. The convergence of interest between regulators, consultants, and USS can be understood as financial prudence in the public interest, but it also crowds out alternative approaches to managing the complex conjuncture of risks that universities now face. Arguments about the constitution of the joint expert panel, the role of the regulator in framing risk, and the background of the USS trustees relate directly to this point.
A final point is that the actions of these consultants are not transparent or accountable, even whilst they have become an important means through which organisations seek to manage their accountability and regulatory compliance. Employees and members exist as only attitudes to be measured and modelled. A culture of confidentiality permeates the financial sector, whilst increasingly reaching into the working and personal lives of academics, who might rightly expect more democratically accountable mechanisms for strategy and oversight. Specifically, there are no means for keeping people updated more regularly around the USS scheme, so these proposed changes erupted as an epistemological and ontological shock, revealing the webs of consultancy that make up higher education today.
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 hashtag #USSbriefs5; the author will try to respond as appropriate. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
