Open letter – Covid-19 demands a rethink of Higher Education funding

End tuition fees and market competition

This open letter was launched 31 March 2020 for immediate publication. You can add your name on this Google Form.

Covid-19 is a wake-up call for the whole of society.

Higher Education faces an existential financial crisis just as university researchers bend every effort to defeat Covid-19.

The benefits of HE are not just limited to research. Mass education from secondary to university created a scientifically-literate population. They drove the shutdown, demanding Boris Johnson and his Government acted.

But Higher Education itself has been undermined by a combination of Government policy, high tuition fees and management greed.

In 2010, the ‘ConDem’ Government raised home student undergraduate tuition fees from £3,000 to £9,000 a year, and (mostly) abolished block grants. Within three years, mature and part-time student numbers had almost completely collapsed.

Undergraduate numbers were controlled until 2014 when (with the exception of Medicine) the Government removed limits on student recruitment.

This lit the touch paper on a conflagration. For a £9,000 fee, university managers could make easy money out of undergraduate teaching. With no limit on the number of students universities could recruit, many expanded rapidly and built new campuses. But others, mainly post-92 universities, found their student numbers squeezed by intense competition for places in so-called ‘top’ universities. Brand name, not teaching quality, dominated. Undergraduate expansion encouraged further recruitment of overseas students and taught postgraduate courses, where fees could be even higher. Scottish Universities, not permitted to charge high fees, pursued overseas student recruitment in particular.

Before Covid-19, this system was already teetering on the brink. Universities were reportedly indebted by over £10 billion, and the total UK student loan debt had reached £121 billion by March 2019. Undergraduate student numbers were falling and several universities were rumoured close to bankruptcy.

Covid-19 changes the economic equation. Universities in the UK can now expect a sharp fall in total student numbers in September. Many students will delay applications for a year or two rather than apply for online courses. Some universities are contemplating delaying the start of term until January. It may be several years before the overseas student market recovers.

Already there is talk about bringing back the ‘cap’ on student numbers, even temporarily. But more drastic action is required to save Higher Education. Unless the Government acts now, the UK will see mass redundancies of university staff.

We the undersigned believe now is the time for a new deal for UK HE.

It is time to end the disastrous market experiment.

It is currently unthinkable that the Tories will privatise the NHS. Schools and further education know that their funding for next year is guaranteed. But Higher Education is uniquely vulnerable to a short-term fall in student recruitment.

  • We need emergency measures to stop universities going bankrupt. If unemployment rises as a result of a downturn, universities have an essential role to play in re-skilling mature students.
  • We need to return to the principle that Higher Education should be available to all who can benefit.

We call on the Government to:

  1. Abolish the current tuition fee system and underwrite the sector. Bring back the block grant.
  2. Work with university managements to safely exit expensive building projects and long-term loans.
  3. Agree that in the meantime there should be no redundancies, and staff on fixed term or other casual contracts should be paid as normal and not dismissed.

Initial signatories include >> Add your name

Carlo Morelli, UCU Scotland President, University of Dundee
Sean Wallis, UCU Branch President, UCU NEC, University College London
Julie Hearn, UCU Branch President, UCU NEC, Lancaster University
Lesley Kane, UCU NEC, Open University
Deepa Govindarajan Driver, UCU Branch President, UCU NEC, University of Reading
Mark Abel, UCU Branch President, UCU NEC, University of Brighton
Marian Mayer, UCU Branch Co-chair, Chair South Region UCU, National Negotiator, Bournemouth University
Sue Abbott, UCU NEC, Chair Equality Committee and Women Members standing Committee, Newcastle University
Pura Ariza, UCU Branch Equality Officer and UCU NEC, Manchester Metropolitan University
Cecily Blyther, UCU NEC, Petroc
Steve Lui, UCU NEC, University of Huddersfield
Lesley McGorrigan, UCU NEC, University of Leeds
Margot Hill, UCU London Region Secretary and UCU NEC, Croydon College
Lauren Heyes-mullan, FE lecturer, The City of Liverpool College
David Whyte, UCU Branch Vice President, University of Liverpool
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A spiral of costs? Is the USS pension scheme doomed? – Sean Wallis

Introduction

The Universities Superannuation Scheme (USS) was set up in 1975, replacing a stocks-and-shares Defined Contribution scheme called FSSU.

For forty-four years, from 1975 to 2011, USS paid out a Final Salary pension based on a 1/80 accrual rate. This meant that if you paid in for forty years you would retire on half your annual salary. Far from being unaffordable, the scheme grew. Only in 2011 did we begin to see the introduction of ‘Career Average Revalued Earnings’ (CARE) replacing Final Salary. Contributions for employees until 1997 were 8%, on the basis of covering historic problems created by the FSSU, reduced to 6.35% from 1997. Employer contributions fluctuated over the time period (10% initially, rising to 18.55% in 1983, 14% from 1997, 16% from 2009).

But for over forty years the scheme was essentially very stable. As a ‘last man standing’ multi-employer scheme in a growing HE sector funded by government spending, the risk of default was considered to be very very low.

In 2011 we began to see the beginning of ‘reforms’ that have increased income to USS and, apparently paradoxically, led to ever increasing claims of deficits. These included closing Final Salary to new entrants (but increasing costs to 7.5%), dividing the workforce and increasing the retirement age from 60 to 65. At the time, these changes were justified on a number of grounds: the 2008 recession had hit pension assets, staff were living longer, etc. As we know, 2011 was not the end of the ‘reform’ programme but the start of the dismantling of USS Final Salary and now Defined Benefit.

Our first response to the alleged ‘crisis’ in USS funding has to be, why was it that USS was able to pay out a higher-value Final Salary pension scheme for 44 years? How can this be possible when we are told that a lower-value CARE scheme — with a higher 8% employee contribution — is now ‘unaffordable’ and destined for deficits?

What has changed?

First Actuarial’s analysis, Progressing the valuation of USS (Salt and Benstead 2017) projected forwards to show that the shared 8%/18% contribution rates were sufficient for the scheme to pay pensioners for the next thirty years without touching the assets (£60bn by that point). So in fact, in its own terms, USS should be in a steady-state, its assets growing through investments returning levels of 5-10% pa, well in excess of CPI inflation at around 3%. Not only is there no deficit, but the scheme has a healthy working balance — on most recent official figures, £67.5bn in 2019!

Made in Westminster

The central assumption underpinning the health of the pension scheme – the very low risk of default – has been undermined by Central Government. The chaotic expansion and competition of the tuition fee market ‘reforms’ launched in 2011 with the £9k undergraduate fee have been devastating for the sector. But it has also undermined USS. Continue reading

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This potential University funding crisis is due to unrepayable student loans, not Brexit – Sean Wallis

You have to admire their cheek.

Theresa May’s Conservative Government is leaking to the press a policy proposal from a review they commissioned which, if implemented as-is, is likely to prove catastrophic for universities in England, and in the rest of the UK by extension.

They are proposing to reverse the headline Higher Education policy decision of their ConDem forbears — the £9,000 (now £9,250) a year home undergraduate student fee in England, first introduced in 2012.

Raising fees from £6,500 to £9,000 was always socially regressive. It meant that poorer students would face a lifetime of student debt, whereas wealthy students could get a cheap loan for the duration of their study. The richest 10% avoid thousands of pounds in interest by paying upfront. Raising fees has put off a generation of mature students from re-entering education. The ‘heavy lifters of social mobility’, the post-92 universities, the Open University and Birkbeck College have been hardest hit by the Government policy changes.

But back in 2011, the universities were also supported by additional Government funding (so-called ‘block grants’). These were partially abolished at precisely the same time as the £9,000 fee was introduced: 100% abolished in Arts and Humanities, reduced in STEM subjects and not cut in Medicine. The abolition of the block grant was not accidental. It was intimately tied to the market idea of the student as consumer, so if students chose to move college or subject, money would flow accordingly. But this also means that if the Government resurrected the block grant, it would undermine its market policy.

Reducing the cost of education to students is a welcome move — like the staff union UCU, I believe in the principle that education should be free to all who can benefit — but the Government is floating the idea of cutting fees without replacing the additional financial support for the universities they cut in 2012.

This is going to hurt.

The detail of what is likely to be officially proposed seems to be being leaked to the press in order to gauge public reaction. It may change, as the proposals are ill-thought through, piecemeal and do little to address core issues of the tuition fee market. But if it is implemented as-is, this will be the most significant State intervention in Higher Education since 2011. This time the intervention will be extremely costly for the university sector.

So far, public comment appears to be directed against the allegedly poor value for money some university degrees offer. The Government appears to hope that they can rely on public anger against greedy vice chancellors, student dissatisfaction, or that favourite of the tabloid press, the Mickey Mouse Degree.

The boom before the bust

The Government is catching university senior managements on the hop.

The policy of fees-and-loans was welcomed by self-serving senior management groups who stood to benefit from higher fees. Many universities expanded aggressively on the premise that the golden goose would lay its eggs for ever.

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Turbulence and plane crashes are not the same: UUK’s muddled ‘risk appetite’ – Sean Wallis

The question of how to value a pension scheme as large and complex as USS has recently seen a number of converging arguments by a wide range of independent academic commentators following the publication of the September 2018 Joint Expert Panel report.

Notable among these has been Sam Marsh’s devastating critique of USS’ flawed approach to Test 1, ably summarised by Mike Otsuka. It is worth reading both of their accounts to make short shrift of an astonishing mathematical error which essentially renders Test 1 to be circular, and as Mike puts it, generates far too many false positives.

In response, USS trustees have told the FT that “they say they have to work within the risk appetite of the employers”.

The point of this brief contribution is to summarise just how confused UUK’s ‘risk appetite’ appears to be.

  • Aside: I have to think they must be confused, because if they had understood this point, the UUK would surely have rushed straight back to the September Technical Provisions after their revaluation in November 2017 had obtained an even worse projected deficit than September 2017. (Alternatively, we might think they had another agenda…)

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Is an employer commitment to ‘no detriment’ feasible in the USS dispute? – Sean Wallis

The idea of ‘no detriment’ is such a basic defensive principle of trade unionism that it is surprising sometimes to hear a trade union leader arguing for her members to accept a detriment! Yet in two emails promoting the latest offer from the Universities UK in the USS pension dispute, UCU General Secretary Sally Hunt argues against the idea of obtaining a ‘no detriment’ clause in an agreement on the basis that it is unrealistic and the employers will not agree to it. She even points to a contribution sharing ratio to argue that members will need to accept a detriment if a deficit figure is decided upon.

I just want to point out that au contraire, obtaining this commitment is both necessary and feasible. Let us be clear first of all what is meant by the phrase.

Obtaining a “no detriment” commitment simply means that the UUK agree in advance not to make cuts in USS pension benefits for employees in the current valuation round.

There are obvious reasons why UCU members are seeking a no detriment position to be accepted. We went on strike for 14 days, and we may need to strike again, to protect our pension. If it were accepted, the dispute would be over – for the next three years at least.

I would like to suggest that it is worth considering three questions here.

  1. the feasibility of a ‘no detriment’ commitment,
  2. the relationship between a ‘no detriment’ commitment as a floor for the work of the Independent Expert Panel, and
  3. the benefits to USS and the sector of reaching such a position.

The threat of voluntary ‘de-risking’

First I would suggest colleagues consider a curious fact about the recent USS valuations. Both valuations are modelled on the premise of ‘de-risking’ (selling high-yield stocks and shares and buying low-yield government gilts and bonds). I wrote about this in the Made in Westminster post, and a month or so later found myself criticised for suggesting that it was sector bankruptcy that would compel USS to de-risk.
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Petition for government to act as guarantor to USS – DFE responds

In March, a Government Petition created by members of the Convention for Higher Education was circulated widely and rapidly attracted some 12,000 signatures. The petition wording is below.

Accept a role as guarantor to the USS pension scheme

The USS pension deficit is due to a “self sufficiency in gilts” valuation method that models what would happen if the pre-92 universities went bankrupt. If Government believes this is possible, this would be a national tragedy! They should therefore indemnify USS, until the next valuation at least.

USS is a private pension scheme with 350 member employers. The university dispute rests on a valuation method in which the Government’s Pension Regulator has played a key role. But this method assumes “the employer” goes bankrupt, which in the case of USS means all (or a sizeable proportion of) pre-92 universities. This should be politically unthinkable. We therefore call on Government to indemnify USS and the Trustee Board against employer bankruptcy, for the current valuation cycle at least.

This petition is still open for signatures. Please add your name!

The Government Response

We have now received a response from the Department for Education. Continue reading

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There is no USS deficit – and here’s my working – Sean Wallis

Published as Mathematical operations with the Normal distribution, corp.ling.stats

In my Made in Westminster post I summarised a financial and political analysis of the USS pension deficit. I also run a blog for discussing statistics in corpus linguistics, and it is there that I have published my working (unlike UUK).

Case study: The declared ‘deficit’ in the USS pension scheme

At the time of writing nearly two hundred thousand university staff in the UK are active members of a pension scheme called USS. This scheme draws in income from these members and pays out to pensioners. Every three years the pension is valued, which is not a simple process. The valuation consists of two aspects, both uncertain:

  • to value the liabilities of the pension fund, which means the obligations to current pensioners and future pensioners (current active members), and
  • to estimate the future asset value of the pension fund when the scheme is obliged to pay out to pensioners.

What happened in 2017 (and happened in the last two valuations) is that the pension fund has declared itself to be in deficit, meaning that the liabilities are greater than the assets. However, in all cases this ‘deficit’ is a projection forwards in time. We do not know how long people will actually live, so we don’t know how much it will cost to pay them a pension. And we don’t know what the future values of assets held by the pension fund will be.

The September valuation

In September 2017, the USS pension fund published a table which included two figures using the method of accounting they employed at the time to value the scheme.

  • They said the best estimate of the outcome was a surplus of £8.3 billion.
  • But they said that the deficit allowing for uncertainty (‘prudence’) was –£5.1 billion.

Now, if a pension fund is in deficit, it matters a great deal! Someone has to pay to address the deficit. Either the rules of the pension fund must change (so cutting the liabilities) or the assets must be increased (so the employers and/or employees, who pay into the pension fund must pay more). The dispute about the deficit is now engulfing UK universities with strikes by many tens of thousands of staff, lectures cancelled, etc. But is there really a ‘deficit’, and if so, what does this tell us?

The first additional bit of information we need to know is how the ‘uncertainty’ is generated. In February 2018 I got a useful bit of information. The ‘deficit’ is the lower bound on a 33% confidence interval. This is an interval that divides the distribution into thirds by area. One third is below the lower bound, one third above the upper bound, and one third is in the middle. This gives us a picture that looks something like this:

Sketch of the probability distribution of the difference between USS assets and liabilities projected on September valuation assumptions (gradual ‘de-risking’).

Of course, experimental statisticians will never use such an error-prone confidence interval. We wouldn’t touch anything below 95%! To make things a bit more confusing, the actuaries talk about this having a ‘67% level of prudence’ meaning that two-thirds of the distribution is above the lower bound. All of this is fine, but it means we must proceed with care to decode the language and avoid making mistakes.

In any case, the distribution of this interval is approximately Normal. The detailed graphs I have seen of USS’s projections are a bit more shaky (which makes them appear a bit more ‘sciency’), but let’s face it, these are projections with a great deal of uncertainty. It is reasonable to employ a Normal approximation and use a ‘Wald’ interval in this case because the interval is pretty much unbounded – the outcome variable could eventually fall over a large range. (Note that we recommend Wilson intervals on probability ranges precisely because probability p is bounded by 0 and 1.)

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