170307 Professor G Q Max Lu UCU Pensions Representative’s response to USS consultation document

UCU Pensions Representative’s response to USS consultation document

Andrew Mason UCU Pensions Representative
Surrey University
Professor G Q Max Lu
President and Vice-Chancellor

Dear Professor Lu,

I am writing to you as the Pensions Representative for UCU at Surrey University. I know that you were not in the U.K. at the time of the 2014 USS pensions’ revaluation and subsequent downgrading of employee benefits when the scheme moved from a long-established Final Salary Defined Benefit Scheme to the current hybrid scheme which comprises the old final salary scheme, a CRB defined benefit scheme and a defined contribution scheme. In addition to the complexities of having three pension schemes where there once was one there was universal agreement amongst employees who are members of the USS scheme that our benefits and our conditions of employment had been downgraded.

Part of the problem with the last valuation was the methodology, the so-called ‘gilts-plus’ methodology which suggested that the scheme was in a substantial deficit and required extra contributions from the universities and members. This methodology was criticised in many quarters and may not be the most appropriate method of valuing the scheme, particularly at a time of unprecedentedly low interest rates in the wake of massive quantitative easing. It also may not be the most appropriate scheme for a fund which has strong cash flow and a substantial exposure to other asset classes, including the very large exposure to equities. As a former senior investment manager who worked for USS I was astonished at the outcome of the valuation and still find it difficult to believe.
I would however like to reflect the views of the Surrey Branch of UCU, fellow pension representatives at other UK universities and those of UCU and their actuary First Actuarial as an input to the upcoming employer consultation “USS Consultation Document on Methodology and Inputs for the 2017 Valuation” that closes on the 17th of March.

As employees of the university and members of the scheme we are deeply concerned that this flawed methodology is being employed again by the USS Actuaries and also that there may be an underlying shift towards defined contributions even though the current defined contributions component of the scheme has not bedded in. Nor does it provide sufficient information on the underlying investments for scheme members to make an informed choice. The USS pension scheme has been seen as an attractive part of a University remuneration package where salaries have been stagnant and administrative burdens have increased. We all fear another demoralising and unnecessary drive to reduce pension benefits which in the longer term may prove to be detrimental to the recruitment and retention of university staff.

To the best of my understanding there is a wish by the employers association (UUK) to ensure that over the time horizon of the Employers Covenant the contingent reliance on the employers does not increase in inflation adjusted terms.

This reliance on the employers covenant is a residual figure based on an estimate of future liabilities and future assets (and other factors such as demographics of the workforce which are not relevant
UCU Pensions Representative’s response to USS consultation document to this discussion). The size of this shortfall or residual is totally driven by the underlying assumptions primarily the discount rate which is used to discount assets and liabilities and the assumed rate of return. When interest rates (discount rates) are so low, a very small change in the assumed discount rate or rate of return will have   large effect on the final outcome. There also may be a move to derisking – a shift from equities (risk & return bearing assets) into bonds (assumed to be a lower risk lower return asset). The timing of such derisking could have a significant impact on the fund as we have experienced an unprecedented period of very low interest rates (very high bond prices) and it would be disingenuous to assume that a major correction in this asset class may not occur over the timescale of the employers’ covenant. Thus a prudent strategy, which is not necessary for a cash flow positive fund, may hold significant implementation risk.

I apologise for the technical nature of the rest of the letter which is based on discussions of the proposals which have taken place at other forums but which outline some key issues in the current
debate. I have attached First Actuarial’s (UCU’s actuary) document released in Dec 2016 given which argues that given how expensive it now is to generate income from gilts that a significantly greater
weighting of a self-sufficiency portfolio toward equity than gilts plus 0.5% would be a more efficient means of delivering self-sufficiency. We also believe that USS’s best estimate of returns on equity
must be assuming very modest real dividend growth, much lower it is than First Actuarial’s best estimate, which assumes 1% real growth over RPI. I would also like to draw your attention to the updated cash flow projection chart from First Actuarial, (PDF attached) which suggests that, as a result of the recent cuts to employees DB pensions, the scheme will remain in positive cash flow for the next 60 years. For reasons which are mentioned below in numbered excerpts from First Actuarial’s submission to the 2014 valuation, such positive cash flow greatly diminishes the risk of remaining invested in return-seeking assets such as equity.
I have also attached Aon Hewitt’s UUK’s submission for the 2014 valuation, as a means of avoiding needlessly layering prudence upon prudence. Such flexibility still involves a commitment to a substantial level of prudence which is inherent in USS’s Test 1 which relates to the technical provisions the reliance on the employers’ covenant.

The following points have been made by UCU, their actuaries and Pension representatives from various universities:
i. While the net cash flow is positive, there is no need to sell any assets and therefore no disinvestment risk to the USS. Low market prices are beneficial during this {…} period of positive net cash flow [because assets are being purchased more cheaply], so a measure of risk which suggests a market fall is a problem would be giving a wrong message.
ii. While there is no requirement to sell assets, volatility from market value fluctuations is not a concern for the USS: the main concern is the volatility in asset income. Measures of risk and funding level which are market value sensitive, as opposed to asset income sensitive, are likely to be inappropriate in this context and should be given little attention.
i. In the >99% likely scenario of USS continuing as an open scheme sponsored by employers
with a robust covenant, the issue of very high relevance is the rate of growth of asset
income. Income uncertainty, not market value volatility, is the key issue for the scheme.
UCU Pensions Representative’s response to USS consultation document

As we can see, moreover, from graphs such as the following, dividend income from equity is much more predictable and less volatile than the asset price:
So long, therefore, as the scheme is valued in a manner that is sensitive to these more modest fluctuations in investment income rather than the greater volatility of asset prices, it seems unlikely that an in extremis scenario would emerge in which a funding shortfall becomes so great that employer contributions would need to rise to the level of 25%. First Actuarial has proposed an Internal Rate of Return (IRR) method of valuing the scheme that tracks changes in income rather than prices. See p. 7 of the attached document prepared by First Actuarial for some modelling of this approach, as applied to USS.

During communications with other Pensions Representatives it seems that not all employers/Universities accept the USS view of the world and the potential impact for employers and employees contributions. We urge you to get further clarification and supporting evidence from USS with regard to the level of risk and some explanation for their adherence to a possibly flawed valuation methodology. We feel that the case outlined above, maintaining contributions and benefits at least until 2020, provides a sensible and prudent means of sustaining our current defined benefit scheme and should not be rejected on the grounds that it may, under extreme circumstances, expose employers to further risk.

I look forward to hearing from you

Yours Faithfully
Andrew Mason

Ps This is an open letter which will be distributed to all members of the UCU Surrey Branch and I trust you will not object to your response being distributed to members
Attachments:
Aon Hewitt UUK 2 Dec 2014 response to AV consultation
uss_firstactuarial_2017valuationinput_reportforucu
First Actuarial’s USS 2017.03.01 cash flows
UCU Pensions Representative’s response to USS consultation document

On Friday 10 February, Professor Nigel Gilbert, founder and director of Surrey’s Centre for Research in Social Simulation, received a CBE (Commander of the Order of the British Empire) for services to engineering and the social sciences.

The distinguished academic, who is an expert in computational social science, social simulation and sociological methods of research and statistics, joined Surrey as a Lecturer in 1976, before becoming a professor in the Department of Sociology in 1991.

Professor Gilbert pioneered the development of computer programs to help people work out their entitlement to benefits, as now routinely used by advice services. He was also one of the first, with Surrey’s Professor Sara Arber, to use computer files of survey data collected by the Office of Population Censuses and Surveys, a data source that has now become commonplace in sociology.

Speaking about his CBE, Nigel said: “It is a tremendous honour to receive this prestigious award.  I feel very fortunate to be involved in work that I feel so passionate about, and am truly grateful to all my friends and colleagues for supporting me.”

Dear Members,

We have now finalised the details of the upcoming UCU AGM.

Date: Wednesday 2^nd November

Time: 12:00 – 14:00

Location: Room LTM

If anyone would like to step forward and discuss the roles available on the UCU Committee then please get in touch to discuss. Nomination forms for Committee roles are also available by emailing [email protected]

We hope to see you all at the AGM to discuss the challenges and successes that UCU has experienced over the last academic year. The Committee will also be keen to gain feedback from members as to the future priorities and focus of the Branch. Your opinion is important and will be considered.

Please do not hesitate to get in contact with any questions.

Surrey UCU Branch Administrator [email protected]

We are delighted to welcome Colette Maxfield as Surrey UCU Branch Administrator.  She can be contacted at <[email protected]> or in person in the union office, 38AZ04.  Her office hours are Friday from 10:00 to 17:00.

Colette will act as an initial point of contact for enquiries and requests for help from members, arrange Branch meetings, maintain a list of UCU members, and help with the Surrey UCU website.

UCU is calling on members across the country to resign from external examiner posts, and refuse to accept new positions, as part of the current dispute over pay and casualisation. The following letter was published in the Guardian, explaining the action:

We write as external examiners whose role is to assure the quality of higher education courses at universities and colleges across the UK, but who have decided to resign in order to support the campaign for fair pay in our sector. We have resigned because, while as senior academics we believe our role in underpinning the quality of education provided to students is vital, we are all too aware of the unfairness of the current pay policies of our universities and their impact on staff and their students.

We have watched with sadness the pay of academic and professional staff fall in real terms by 14.5% since 2009; we have seen the numbers of casual staff proliferate; and seen universities do little or nothing to reduce the shocking gender pay gap despite having a collective surplus of £1.85bn. Yet the final straw for many of us is the contention by our employers that the latest final pay offer of 1.1% is “at the limits of what can be afforded” when at the same time we discover that university leaders have themselves received an average pay increase of 6.1%. The blatant hypocrisy of this position is breathtaking.

We love our work as external examiners not least because it brings us into contact with academics from around the country. The high-quality work we see confirms to us that staff deserve better from institution heads. We have therefore resigned from our external examiner posts and will not be taking up new posts in order to demonstrate that there will be no “business as usual” until we have a commitment from our universities to fair pay in higher education.

We recognise that this is a significant step for any professional to take but urge other external examiners to follow our lead.
Professor Richard Taffler Warwick Business School, University of Warwick
Professor Cathy Urquhart Manchester Metropolitan University
Professor Tony Evans Royal Holloway, University of London
Professor Florence Myles University of Essex
Professor Heiko Balzter University of Leicester
Professor Daniel Katz University of Warwick
Professor Robert Miller Queen’s University Belfast
Professor Christian De Cock University of Essex
Professor Glen Jeffery UCL, Institute of Ophthalmology
Professor Thomas Munck University of Glasgow
Professor Jeremy Guggenheim Cardiff University
Professor Cam Donaldson Glasgow Caledonian University
Professor Deborah Mabbett Birkbeck College, University of London
Professor Emma Clery University of Southampton
Professor Willy Maley University of Glasgow
Professor Jim Newell University of Salford
Professor Mark Humphries Swansea University
Professor George Kernohan University of Ulster
Professor Martin Conboy University of Sheffield
Professor Ingunn Holen University of Sheffield
Professor Laurie Stras University of Southampton
Professor Laura Lewis University of Southampton
Professor Raymond Bush University of Leeds
Professor David Clarke Newcastle University
Professor Keith Attenborough The Open University
Professor Tess Ridge University of Bath
Professor Melanie Simms University of Leicester
Professor Andrew Samuels University of Essex
Professor Adam Rutland Goldsmiths, University of London
Professor Malcolm Povey University of Leeds
Professor Rolland Munro University of Leicester
Professor Stephen Salter University of Edinburgh
Professor Paul Johnson University of York
Professor Harriet Bradley UWE Bristol
Professor Susan Page University of Leicester
Professor Dominique Laurence University of Manchester
Professor Dominic Wring Loughborough University
Professor Richard Saundry Plymouth University
Professor Eleanor Spaventa Durham University
Professor Victor Van Daal Edge Hill University
Professor Frederic Fol Leymarie Goldsmiths, University of London
Professor Raphael Salkie University of Brighton
Professor Özlem Onaran University of Greenwich
Professor Claire Squires University of Stirling
Professor John Holford University of Nottingham
Professor Patrick Ainley University of Greenwich
Professor Martin Parker University of Leicester
Professor Richard Worden University of Liverpool
Professor Jenny Pickerill University of Sheffield

Join the debate – email [email protected]

Dear colleague,

I am sure like me you choked on your cornflakes this morning when you read about the latest round of pay increases for vice-chancellors (VCs) and principals.

The comprehensive survey by Times Higher Education magazine shows a latest annual increase in pay and benefits (excluding pensions) of 6.1% for those at the top.  One in five universities gave their leaders a rise of 10% or more. The Times Higher Education compares that to an average increase of 1.3% for staff over the same period.

Yet while university leaders have received pay increases many times higher than inflation, the final pay offer to staff of 1.1% is described by the employers as the “very best offer” possible.  This simply cannot stand.

The union’s higher education committee (HEC) has agreed a comprehensive programme of industrial action aimed not just at improving this final offer but also persuading the employers to address the gender pay gap and the growth of casual contracts.  Please give the union your support starting with the two days of strike action on Wednesday 25 and Thursday 26 May.

Finally for today, I have been inundated with messages about the union’s appeal to external examiners to resign their posts and not take up new ones for the duration of the dispute.  Many of you ask what notice you should give. UCU is not asking you to break your contract by giving incorrect notice. You must always give the requisite notice stipulated in your external examiners’ contract or accompanying handbook. Where no expressed ie. written notice period is given you must give a reasonable period of notice which will depend on the circumstances. If you require more detailed advice please contact Matt Waddup at [email protected]

You can read about the Times Higher Education VC pay survey here.

You can read UCU’s response here.

You can read about our programme of industrial action here.

Thank you for your support.

Sally Hunt UCU general secretary