USS: an abuse of power
Tim Wilson, University of Dundee
This is a USSbrief, published on 16 July 2019, that belongs to the OpenUPP (Open USS Pension Panel) series. It has been submitted to the UCU-UUK JEP (Joint Expert Panel) by the author on 15 March 2019.
Good pensions are built by good employers. Despite the recent turmoil, we should not lose sight of the deep commitment by universities, over many decades, to ensure their staff have secure retirement incomes. The USS would not exist without their long-standing support. In the heat of a strike, it can be easy to forget your opponents may be well intentioned too.[1]
It is surely correct that USS was established and prospered over decades owing to the commitment of employers. It is surely also correct that over the last decade this commitment has waned significantly. With the at least tacit cooperation of the Trustee, employers degraded and then closed the defined benefits scheme in the face of vehement objection by exploiting governance structures developed during the years of shared commitment. Hence members who stood on the picket lines a year ago would surely view the final sentence of the above quote as laughably inappropriate.
In this submission to the Joint Expert Panel, I will make observations that I believe go beyond the subjects set out in the call for submissions. I make no apology for this for two reasons. Firstly, this call is not in accordance with the original ACAS agreement, where the examination of issues of governance were not the responsibility of the JEP but were to be discussed in parallel by UUK and UCU, and so I think this gives me licence to push the boundaries further.[2] Secondly, I believe the call for submissions overlooks a key problem with the 2017 valuation, which will have significant consequences going forward. That is, for their own reasons neither USS nor UUK was interested in compromise or collaboration. Their intransigent determination to achieve their objectives, irrespective of contrary evidence or the consequences to members, has been a significant factor in the lasting rancour between the parties. For the foreseeable future I see little or no prospect for a successful ‘collaborative approach’. Rather, the parties should accept governance structures that mandate good behaviour by all, in order to avoid ongoing distrust and disputation. I have focussed on the operation of the two bodies that exercise control over USS. Questions regarding the valuation process I leave to others.
The Joint Negotiating Committee (JNC)
Appoint the Chair of the JNC for a four-year term
The role of the Chair of the JNC has become highly contentious. UUK are undoubtedly happy with the incumbent’s performance and it would seem from their behaviour during 2017 that UUK were confident they would have the support of the Chair in closing the scheme. The Chair is appointed indefinitely and UCU cannot remove him because the rules require at least three UUK and three UCU members of the JNC to vote in favour of appointment or removal. This is a good example of rules that assumed collaboration being found to be inappropriate. It cannot be good practice for anybody to be appointed indefinitely. I believe the Chair should be appointed for a fixed term of no more than four years, and reappointment should require the support of both UUK and UCU. I would also argue that the remuneration of the Chair and any other members of the JNC should be subject to disclosure in the same manner as remuneration of the members of the trustee board.
Require a supermajority to approve significant resolutions
A simple majority of votes cast to pass JNC resolutions is clearly inadequate in terms of preventing a perception of injustice developing. This perception has certainly arisen with the Chair voting with UUK to the detriment of members for the last three valuations.[3] A supermajority should be required, at least for significant resolutions such as those that change the rules of the scheme, contribution rates or benefits. This might follow the 3+3 rule cited above for appointing and removing the Chair, or it might follow a different procedure. That is up to the JNC to decide. But I believe this reform is an essential part of restoring member trust.
Abolish 65/35 cost sharing
The 65/35 cost-sharing formula is also perceived as unjust and should be abolished, or its use limited. As a default arrangement it renders some JNC negotiations pointless. Why should either party agree to pay a higher proportion? The problem is that while the costs of change are distributed 65/35, the benefits are unlikely to be distributed in the same proportion. Thus, it is said that the present contribution increases arise from the employers’ desire to reduce risk. Leaving aside the validity or effectiveness of this, the benefit presumably accrues to employers in the form of more certainty in future budgets, yet one third of the costs are borne by members. Cost sharing may be seen as appropriate if all parties agreed that prudent funding required a higher contribution, but even here I think a default arrangement is unnecessary. I am confident that members would accept a proportionate share of the cost if First Actuarial reported that an increase were necessary.[4] Conversely, it should be possible to implement change that is desired by one party, although unnecessary, — but with the clear understanding that any costs fall on the party initiating the change. Employers would be free to choose whatever balance between investment risk and contribution rate they find appropriate, but this should not impact the contribution rate for members.
Require the JNC to endorse the valuation methodology
Another reform that I would advocate is for the JNC to have to endorse the valuation methodology. USS consulted employers on the 2017 valuation methodology early in 2017 and used the information in developing their September 2017 Technical Provisions (TP) consultation. If the rules required the JNC to endorse the proposed methodology before proceeding to a TP consultation, it would greatly increase the confidence of all parties in the result. Of course, such a reform would be pointless unless the voting system at the JNC were also reformed, so that both UUK and UCU have real influence.
The trustee board
Be honest and transparent in the face of intense scrutiny
One of the consequences of the industrial dispute is that the number of members that pay close attention to USS has greatly increased. The Trustee and executive are subject to what I suspect is a quite unprecedented level of scrutiny, ranging from the expert analyses of UCU’s and UUK’s actuarial advisers, through the partisan but relatively well-informed work of USSbriefs,[5] to the widely variable output of social media. Almost all of it is hostile, accusing USS of mistakes, misinformation, secrecy, deception and lies. Its validity matters little: it is the depth of the hostility and the complete lack of trust that is important. Add to this the work of the JEP and the prospect of legal action from Academics for Pensions Justice,[6] and the pressure on the Trustee and executive must be intense.
USS needs to accept that intense scrutiny will be ongoing and to meet it with honesty and transparency. Unfortunately, the evidence so far is that they have responded badly. For example, the 2018 Technical Provisions consultation asserts that short-term risks justify not implementing some of the recommendations of the JEP report. But USS do not explain how their metrics relate to the health of the scheme or why breaching a particular level requires action. Making a controversial decision in a climate of scepticism and doubt, USS need to make detailed, reasoned arguments for their proposed course of action. A ‘We’re the experts, trust us’ approach simply will not suffice.
Hold regular meetings with members
In their recent report for UCU, First Actuarial use the last two-and-a-half pages to launch a broadside at the trustees entitled, ‘Who is USS listening to?’[7] Its tone makes for entertaining reading, but it is most disturbing that they felt the question needed to be asked. And their answer — ‘Not the members nor the employers’ — seems well justified. I have been struck by just how invisible the trustees have been before, during and after the industrial dispute, and this can only reinforce the impression that the trustees are not acting in the best interest of members. Consulting members as part of the valuation process would be a step forward, however I wish to advocate for regular open meetings with ordinary members. Just as a company board holds AGMs open to all shareholders, I believe the trustees should hold annual meetings open to all members, during which members are given the opportunity to question the trustees directly. Additional meetings held during periods of consultation would also be a good idea. And in case it is not already clear, I mean meetings between members and trustees, not the executive. Indeed, if a meeting were organised tomorrow, it would be better if the executive were not even present.
Limit independent trustees to two terms of three years
I have grave reservations about the role the independent trustees have played in the USS crisis. They were all appointed within two years spanning 2012–14, they come mostly from similar backgrounds (two from JP Morgan appointed within months of each other), and they have a strong interest in Defined Contribution [DC] pensions. Independent trustees should bring a broad range of expertise to the board, but they should use that expertise to challenge the executive. I suspect these trustees have rubber-stamped the executive’s actions at each turn, challenging them only to be ever more prudent.
It concerns me that the governance committee that selects independent trustees is dominated by independent trustees. I was astonished to learn that the board reappoints independent trustees. This process seems designed to encourage the creation of a board that won’t rock the boat, that won’t challenge accepted wisdom or usual practice. I fear that the current board suffers from a shared view that Defined Benefit [DB] pensions are doomed and their task is to shepherd DB into oblivion. I don’t know what to do about this. Perhaps the advisory committee should have a role. But I am certain that the board should not be the sole judge of whether to reappoint trustees, and I think there is a strong argument for limiting the length of service for independent trustees. I suggest two terms of three years.
Limit external actuaries and auditors to two terms of three years
There has been considerable discussion in recent years about the role of auditors and whether they provide adequate scrutiny. In the context of pension schemes, I believe the same concerns can be raised with respect to actuaries. Coincidence or not, 2012–14 also saw USS acquire a new chief executive and a new actuary. After two contentious valuations, I believe a change is in order. I think it would be good practice to limit both external actuaries and auditors to two terms of three years.
Link remuneration to scheme performance
The finance industry is exceptional in requiring incentives and bonuses just for people to do their job. So be it. From a member’s point of view, the last decade presents a consistent level of failure at USS, marked by broken promises, increased contributions and decreased benefits. Perhaps most galling is how little concern is communicated to members over these developments. USS repeatedly reassures us that our existing pensions are safe (and I don’t doubt this) and that they are working in our best interests. I don’t agree. Ensuring pensions already earned can be paid as necessary is the minimum that can be expected of USS. Their statutory obligation may go no further,[8] but their obligation to members does. Members expect, quite reasonably, that USS can continue to offer as good a pension in the future as they have in the past. That is what I consider to be doing their job. They have consistently failed to achieve this standard and have demonstrated an astounding nonchalance towards their failure. So I propose that trustees, members of committees, the board of USS Investment Management Ltd (USSIM), and the executive all receive a remuneration package that has a base level payable under any circumstances and a second level payable only if the DB scheme can continue to offer unchanged benefits at the same or lower rates of contribution. Perhaps a 35/65 distribution between levels one and two would be appropriate. The decision to pay the second level would not rest with the board but with the JNC. The scheme rules already require the JNC to authorise payments to trustees and others, and so this reform could be seen as an extension of existing practice.
Conclusion
The proposals I have made in this submission range from simple changes that I consider to be good practice to much more radical proposals that shift power from USS to stakeholders and from employers to members. I have little doubt how they will be received, but I believe they are worth making nonetheless. I view what has happened at USS in the last decade as fundamentally an abuse of power, and I do not expect this to change voluntarily. The executive will remain enthralled to ‘de-risking’, and amongst some employers (at the very least) the desire for DC will remain strong. This is why I believe power has to shift within the governance structures of USS if the future of the DB scheme is to be secured. If the panel chooses to make such proposals, the response of the trustees and employers will be most instructive.
Notes
[1] Nick Hillman, After the storm: Where should the USS dispute go next?, HEPI blog, 7 February 2019.
[2] I am in favour of the JEP investigating issues of governance because I believe this approach is more likely to lead to productive reform, but the panel should not assume that extending the scope of their investigation on matters regarding the valuation and scheme design will be met with equanimity by UCU members.
[3] The antagonism within UCU towards the current Chair is so intense that it is surprising he finds it appropriate to continue in the role. This is especially as the criticisms of the 2017 valuation contained in the first JEP report are an implicit criticism of his judgement.
[4] First Actuarial’s clear and articulate advocacy that the scheme is prudently funded has gone a long way to convincing members that change is unnecessary. See for example Hilary Salt and Derek Benstead, Report for UCU: Progressing the Valuation of the USS, First Actuarial,15 September 2017.
[5] I am co-author, with Andrew Chitty, of USSbriefs68: Why ‘Test 1’ must be dropped: a critique of its design and implementation.
[6] I happily contributed to their fundraising.
[7] Hilary Salt and Derek Benstead, Report for University and College Union: Three Questions on the USS 2017 valuation, First Actuarial, 30 October 2018.
[8] This is certainly TPR’s view, which has scandalously impoverished many people’s retirement, but I believe it is open to question. I hope Academics for Pension Justice get the opportunity to explore the question in the courts.
This is a USSbrief, published on 16 July 2019, that belongs to the OpenUPP (Open USS Pension Panel) series. It has been submitted to the UCU-UUK JEP (Joint Expert Panel) by the author on 15 March 2019. 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 #USSbriefs72 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.
