‘There must be something missing here’: Sam Marsh exposes new problems in the USS valuation

Number 59: #USSbriefs59

Oct 16, 2018 · 16 min read

Felicity Callard, Birkbeck, University of London
Jo Grady, University of Sheffield
Nick Hardy, University of Birmingham
Jaya John John, University of Oxford
Nicky Priaulx, Cardiff University
Ruth Stirton, University of Sussex

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This is a USSbrief that belongs to the OpenUPP (Open USS Pension Panel) series, and a collaboration with APJ (Academics for Pensions Justice). This brief interprets the findings and analysis of Test 1 conducted by Sam Marsh and summarised in #USSbriefs58 (‘A flawed valuation: the layperson’s guide to my findings on USS’s “Test 1”’).

Executive summary

If the Scheme maintains its current investment strategy and contribution rate, it is projected to have enough money to cover the benefit payments which members are expected to accrue in the future. New cashflow data released to Sam Marsh by USS confirms that this is true, even by USS’s own rigorous and arguably over-prudent standards for assessing risk in the Scheme. USS failed to recognise it because its controversial ‘Test 1’, a key part of its valuation, was based on incomplete calculations of asset performance and contributions into the Scheme. Most importantly, USS failed to allow for the possibility that keeping its current portfolio and contribution rate would result in a future surplus large enough to offset any risk incurred by holding on to higher-yield assets.

UCU members and branches should make this discovery the foundation of UCU’s national USS negotiating policy, and press their employers to recognise it in their responses to the current UUK consultation on the 2017 valuation. UCU members’ legal rights to have competent trustees that are acting in our interests should, furthermore, be the starting point for negotiations with our employers rather than something we have to fight for. Members’ decision to strike was already vindicated by the Joint Expert Panel’s (JEP’s) first report, but Marsh’s discovery proves even more conclusively that we were right to do so.

It is worth noting that since Marsh’s findings were widely publicised on 13 October 2018, both USS and UUK have responded. UUK, on 16 October 2018, asked the USS Trustee ‘to more fully address the concerns raised’ by Marsh about Test 1. USS meanwhile, in its three statements of 15 October 2018, has refused to engage with the substance of Marsh’s findings. USS’s rebarbative first statement, which maintained that ‘There is no error in the USS approach’, was later followed by an acknowledgement that ‘Dr Marsh’s analysis is not wrong in isolation’; but USS then moved to attempt another argument around ‘downside risk’ to justify why the Scheme requires changes to be made. Several of the claims made by USS in their statements have been critiqued by USS pensions expert Mike Otsuka either for being untrue or for rewriting history [2].

This brief summarises Marsh’s findings and their significance; addresses why no-one noticed this problem with USS’s Test 1 up till now; and outlines what individual employers, UCU members, and the JEP need to do next.

De-risking is not the solution to USS’s funding predicament: it is the cause of it

The same is true of liabilities. It is possible to project not only how much the Scheme will have in 20 years’ time, but also how much it will still owe in benefit payments. USS has chosen 20 years as the timeframe for these projections because it sees no guarantee that after that point the Scheme will be able to remain open for much longer. The assumption underpinning USS’s notorious Test 1 is that it must be possible to close USS to new contributions and new benefit accrual after 20 years — in other words that the Scheme must have enough assets to essentially mothball it for current members if necessary. USS therefore decides that from Year 21 onwards, the Scheme must have a portfolio of assets that will guarantee its ability to close by Year 40, with extra contributions from employers in Years 21–40. In order to be ready to do this, however, USS has assumed that it needs to spend Years 1–20 rebalancing its holdings from higher-risk, higher-return assets towards the lower-risk, lower-return ones it will need from Year 21.

This is where Test 1 goes awry, because the test is driven by — or rather, derailed by — a commitment to de-risking. For Years 1–20, USS does not calculate what would happen if its investment strategy continued as normal, without any shift towards lower-risk assets. It only calculates what will happen when it carries out that shift. Even more surprisingly, it does not ask what would happen if future contribution rates stayed as they currently are. Instead, its view of contribution rates is short-sighted and unduly influenced by its decision to de-risk. USS first identifies the contribution rate required in Year 1 only, based on the rate needed to cover its investment strategy and benefits accrued from future service (plus recovery payments for any past service deficit) [3]. That Year 1 contribution rate is then treated as the contribution rate for the remainder of the three-year valuation cycle. Contribution rates for Years 4–20 will be set in the same way, one valuation cycle at a time, with USS’s requirements varying depending on the projected cost of its planned shift to a lower-risk portfolio. In practice this is likely to involve higher contribution rates than the current one, in order to compensate for the lower returns generated by the lower-risk assets which USS will be purchasing.

In other words, USS has not tried to answer a series of crucial, linked questions:

What happens if there is no de-risking in Years 1–20? What if USS were to commit to its current investment strategy and the contribution rate that currently funds that strategy? How much money would it end up with in Year 20 if things stayed as they are?

It is now possible to answer that question, using raw cash-flow data recently released by USS to Marsh and analysed by him, along with other previously available information about the Scheme. The data confirm that under its current contribution rate and investment strategy, USS is not in deficit. At Year 20, the Scheme will be able to purchase a self-sufficiency portfolio with only minimal extra contributions from employers that fall well within the parameters they already agreed (i.e. prior to the current — September/October 2018 — UUK consultation on the JEP report). That is because the Scheme surplus will be so large as to cancel out the extra risk of holding on to a portfolio of relatively high-yield assets, and the extra ‘reliance’ which this risk places on potential emergency contribution increases from employers.

In short, the crucial error USS made was in failing to allow for, or communicate to employers, the probability that the current investment strategy and contribution rate would result in a sufficiently large Year 20 surplus. Instead, they went ahead and plotted a path to self-sufficiency that involved expensive de-risking, and a contribution rate that varied to make up the difference. It is only because of the de-risking plan imposed by Test 1 that a deficit emerges, and drastic contribution increases or benefit reforms appear to be needed. It is true that contribution rates may need to vary temporarily during Years 1–20, but USS failed to make clear just how short-lived that variation would be. Stakeholders were given the impression that the abnormally high future service contribution rate demanded by USS would be a long-term fixture.

The JEP correctly realised that ‘Test 1 has led to a valuation that is model-driven rather than model informed’ (p. 24). Now, thanks to Marsh, we can see even more clearly that de-risking is not the solution to USS’s funding predicament, but the cause of it.

Why has USS made this mistake?

The fact that USS did not even attempt to ask what would happen without de-risking suggests that they have pre-judged the future of the Scheme and the pre-92 sector in a way that does not match any available evidence. And such evidence includes the assessments of the covenant which USS itself commissioned from EY Parthenon and PwC, which showed that the covenant horizon was at least 30 years.

It is hard not to wonder whether key figures in USS, perhaps in conversation with Universities UK, wanted the Defined Benefit Scheme to be closed or reformed drastically, regardless of its long-term health and the best interests of its members, the beneficiaries (see #USSbriefs53). We should recall that as far back as 2014, UUK, USS, and the Employers Pensions Forum presented materials to senior university administrators referring to the possibility of taking ‘more radical action’ on pensions beyond that of moving to the current career revalued pension for all (see #USSbriefs1).

Why did nobody else identify the problem until now?

The JEP is a different matter. In any case, although the JEP’s first report heavily criticised Test 1 on various grounds and suggests that it should be scrapped or overhauled in future valuations, it did not recognise that Test 1 de-risking was the sole source of the deficit. Clearly, the next phase of the JEP must consider these findings and their profound implications for the valuation methodology.

Employers should be held partly responsible for USS’s lack of transparency, because they hold the balance of power in the Scheme’s governance, as the JEP report points out (p. 48). Neither employers nor the UUK-appointed Trustees have held the Scheme Executive to account. Again, it is hard not to wonder whether UUK, the employers’ representative organization, acquiesced in USS’s incomplete projections and counter-intuitive investment plan because the prospect of longer-term Scheme closure appealed to them. There are a number of indications — including the collusion between some Oxbridge bursars over the UUK September 2017 survey (see #USSbriefs13) — that certain employers were looking for a way to close the DB Scheme.

Whatever the explicit intentions of the actors involved, these findings about Test 1 raise profound questions about Scheme governance and about UUK consultations. A lone UCU member, working persistently and doggedly in his own time over the course of a year, and more recently buoyed by his formal role within UCU structures, and by this year’s industrial action, has managed, finally, to acquire data from USS that confirm his analysis. But why was this not done within the governance structures of USS itself? How, moreover, do the USS board members exert oversight over the USS Executive? Which materials, information and decisions are passed from the Executive to the Trustee; from the Trustee to the JNC; and from the JNC to the Trustee? There is ongoing obfuscation and a general lack of transparency on the part of USS. That USS ‘provided all of the information and analysis that was requested by the Joint Expert Panel’ does not mean that it provided all of the information to which the Joint Expert Panel should have had access in order properly to assess the Scheme. From ongoing instances such as these, we might infer a lack of good faith on USS’s part. It is difficult not to wonder whether decision-making that is still shrouded in mystery is always in the interests of beneficiaries.

Where does this leave us?

The 2017 USS valuation has relied on a kind of groupthink around de-risking that has taken hold in USS and amongst employers. This has has been aided by the current regulatory environment (#USSbriefs56). Such groupthink has resulted in the closure of many other DB schemes. Such closure further fuels the belief that DB schemes are a thing of the past: that their decline is inevitable. Perhaps it was this context that spurred UUK and USS to favour so heavily an outcome that envisioned closure of DB as the only future for USS. Perhaps it was something more sinister. What is clear is that without the concerted industrial action of thousands of UCU members, and the determination of key individuals like Marsh, we would not have uncovered the truth about USS.

Action points: What do we need to do now?

Individual Employers: It is time for you not only to accept all the JEP’s recommendations, but to go further than that. You should call for USS to cancel de-risking or, at least, to offset the pernicious effects of Test 1 by adopting the most optimistic version possible of the JEP’s recommendations regarding employer risk appetite: whereas the JEP proposed increasing ‘employer reliance’ from £10bn to £13bn, you should now endorse the £26bn reliance figure suggested by the JEP report (p. 55) as an upper limit. Marsh’s findings are not too late to be taken into account by your responses to the current UUK consultation on the JEP recommendations. Indeed, they must be taken into account if we are to see a good-faith resolution to the USS dispute.

UCU members: These findings give added weight to our union’s position of ‘No Detriment’ (see endnote 1). We must put pressure on our employers to acknowledge the significance of these discoveries and challenge — so as to overthrow — USS’s actuarially bankrupt methodology. How? The USS consultation on cost-sharing is still live until 2 November 2018. We need to capitalise on a unique opportunity to directly express our views on our scheme to both USS and our employers, drawing on this brief (and the materials in the resources below) to apply direct pressure to both. We can amplify this by encouraging non-UCU Scheme members to do so too. Secondly, UCU branches should find ways to embed these findings in UCU’s national USS negotiating policy to best represent the immediate and long-term interests of its members, the Union is well-positioned to explore stronger forms of redress, including the potential for legal action (see also #USSbriefs53). Such steps may be necessary in order to ensure a fuller inquiry in respect of the running of the Scheme, and to ensure that the Scheme and its sponsors face consequences for their mistakes and are deterred from making them again.

The Joint Expert Panel: The JEP’s first report delivered a devastating critique of USS’s valuation methodology and governance mechanisms, particularly as far as its communications with employers are concerned. It was clear enough from that report that a proper valuation process would find no deficit and no need for contribution increases or benefit cuts, although the short timeframe available to alter the 2017 valuation forced the JEP to restrict itself to relatively conservative adjustments. Even so, these adjustments are enough to bring the contribution rate down from 36.6% to 29.18%. But Marsh’s discoveries show even more definitively that USS is not in deficit, and there is no need for contribution increases above 26%. Although these findings were made too late for inclusion in the first report — though Marsh’s earlier, related analyses of Test 1 were submitted to the Panel (#USSbriefs32 and #USSbriefs51) — they need to be central to the second phase of the JEP. They also give added weight to the strong call, in the first JEP report (e.g. p. 48), to find a formal mechanism to involve Scheme members in the valuation process. This broader project of governance reform and member-led union empowerment is essential for the sustainability of the scheme, and the second phase of the Panel’s work will be incomplete without it.


  • Sam Marsh, Discussion Document for the University of Sheffield USS Working Group, 5 October 2018 (revised 12 October 2018): contains detailed analysis of projected asset growth without de-risking, questions for employers to put to USS in the current UUK consultation, and changes which they should agree to make for the 2017 valuation.
  • Mike Otsuka, ‘USS’s valuation rests on a large and demonstrable mistake’, 13 October 2018 (updated 14 October 2018): provides technical explanation and interpretation of Marsh’s discoveries and their significance.
  • Sam Marsh, Twitter thread, 10 October 2018: outlines some of USS’s excuses for their refusal to calculate asset growth without de-risking.
  • Sam Marsh, Submissions to the JEP on Test 1:
    #USSbriefs32: ‘Understanding “Test 1”: a submission to the USS Joint Expert Panel’
    #USSbriefs51: ‘Addendum to understanding Test 1: a submission to the USS Joint Expert Panel’
    #USSbriefs55: ‘Response to David Miles’ analysis of the role of Test 1 in the USS valuation’.
  • Sam Marsh, #USSbriefs45: ‘A talkthrough of a model of the USS valuation’: a short video discussing the USS valuation.
  • USS, Statement 1, Statement 2, and Statement 3 concerning Sam Marsh’s findings; given via Josephine Cumbo on Twitter, 15 October 2018 (also available in one document here).
  • USS, Claims of a ‘large and demonstrable error’ in the valuation [including ‘A technical response to commentary on asset projections’ by Guy Coughlan], 16 October 2018: counters the findings by Sam Marsh and interpretation by Mike Otsuka.
  • Sam Marsh and Mike Otsuka, Twitter commentary responding to USS’s statements, Monday 15 and Tuesday 16 October 2018.
  • Mike Otsuka, ‘A response to USS’s reply to my claim that their valuation rests on a mistake’, 15 October 2018: responds to USS’s statements of 15 October 2018 (see above).
  • Universities UK (UUK), Statement concerning Marsh’s findings; given via Josephine Cumbo on Twitter, 16 October 2018.
  • Josephine Cumbo, ‘University pension fund accused of exaggerating shortfall’, Financial Times, 16 October 2018: covers Sam Marsh’s findings and response to them by USS.


[2] As we went into production, USS published another response, which we include in the resources section, but have not considered here.

[3] The JEP has already recommended changing this to Years 1–6 (pp. 57–58).



This is a USSbrief that belongs to the OpenUPP (Open USS Pension Panel) series, and a collaboration with APJ (Academics for Pensions Justice). This brief interprets the findings and analysis of Test 1 conducted by Sam Marsh and summarised in #USSbriefs58 (‘A flawed valuation: the layperson’s guide to my findings on USS’s “Test 1”’).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 #USSbriefs59 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.


A set of papers written by 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 https://ussbriefs.com/


Written by


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 https://ussbriefs.com/

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