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.

I showed in that post that de-risking increases the probability of default and increases the size of the projected deficit. The September valuation models the effect of gradual de-risking over ten years and obtains a projected deficit of £5.1bn. The November valuation models immediate de-risking and obtains a projected deficit of £7.5bn. Both employ a level of ‘prudence’ of 67%. See Made in Westminster for an explanation of these two models.

So it is a Bad Thing for USS to do. It is not something that USS would choose to do voluntarily.

True, it might be necessary to temporarily shift assets as a safe haven in a stock market storm, but the problem of de-risking is one of long-term placement of investments in low-yield asset classes like gilts. Then inflation eats the pension pot.

But if the reasons for modelling ‘de-risking’ is not sector bankruptcy, what would cause an open, thriving scheme like USS to choose to de-risk?

Note that de-risking would also be an abrupt change from the current investment strategy that saw USS’s assets increase by an average 12% pa over a five-year period to £60bn.

The employers’ aim: reducing their exposure

What is going on?

The employers have increasingly made it clear they want to actively ‘de-risk’ USS by reducing their liability to USS – currently 7% of the salary bill per institution, to be available “in extremis” (this is not specified, but essentially, it covers circumstances where the scheme was in cash flow difficulty, most likely during stock market falls).

Crucially, the level of this “in extremis” support the employers are prepared to give to USS determines the level of stock market risk investment fund managers are permitted to accept.

This brings us to the Independent Expert Panel and the current valuation.

A pension scheme valuation is not an observation but a mathematical extrapolation. It is estimated by a complex function with several parameters, including two distinct types of risk parameter:

• a stock-market risk-exposure parameter that determines the investment portfolio balance and investment strategy that fund managers can follow, and
• the level of ‘prudence’ (or, conversely, the conventionally accepted risk of default) used to account for the uncertainty of the projection. This is set at 67% currently.

Other parameters include assumptions, both extrinsic to USS (like CPI or asset-value projections) and intrinsic (such as constants in Test 1 or its variants), all of which might be questioned.

This understanding must logically affect our attitude to the Independent Expert Panel. A key decision that will increase the chance of default will be made not by the Panel but by the employers. The key point is this:

If the employers were obliged to accept a “no detriment” clause, it would most likely cause them to maintain their level of exposure for the current valuation cycle.

The employers do not want to agree to “no detriment”, not because it would cost them more, but because it would mean abandoning their strategic aim of reducing their level of exposure to USS. Their primary reason for their stance is the intensification of sector competition discussed in Made in Westminster. They wish to improve their cash flow and invest more in estate projects.

Can the employers address a projected deficit without paying more?

In fact, there are at least four ways that the employers could address a projected deficit in USS if they planned to do so. Only one of these would confer an immediate financial cost on the employers.

• Pay more into the scheme.
• Agree with the Trustees to accept a temporary higher level of putative risk (lower ‘prudence’). Example: accept 60% level of prudence, using the September valuation, and obtain a zero deficit.
• Maintain or increase the employers’ risk exposure, plan not to de-risk, and the deficit disappears, or at the very least reduces to a level where current deficit recovery contributions will suffice.
• Seek a guarantee from the government to back up the employers’ support to USS (a ‘crown guarantee‘).

What are the benefits to the sector of a ‘no detriment’ commitment?

Were UUK to agree a ‘no detriment’ commitment there would be three immediate outcomes.

1. The dispute would be resolved, so employers, staff and students would immediately know that – for the duration of the current valuation round at least – there could be no resumption of industrial action. The current offer cannot achieve this.
2. There would be support for minimising the projected deficit estimate from all parties to the Panel, JNC and negotiations. This would reduce pressure on USS to take urgent and damaging action.
3. The Independent Expert Panel would be decoupled from the immediate crisis of USS. It would be freed up to do its work genuinely independently and could look at a variety of solutions in due course. The stated ambition of the Independent Expert Panel is currently circumscribed by the immediate task of addressing the current valuation, and the limited time available before it will be required to report.

Others have argued, rightly, that it is possible to disagree with the current UUK proposal without insisting the employers make an upfront ‘no detriment’ commitment. Moreover, there are some modest steps that the employers could take that fall short of a no detriment commitment.

However this is approaching the question as if it were an incremental negotiation. My point is that an upfront commitment to ‘no detriment’ is a game-changer for resolving the dispute and ensuring the long-term survival of USS as a Defined Benefit scheme.

The devaluation of USS

It is worth remembering that for over thirty years USS maintained the same benefit structure (Final Salary at 1/80 accrual rate) and charged the same contribution level (7%) to its members.

It is only in the 2011 and 2014 valuation rounds that the benefit structure was changed to the detriment of members. On both occasions we were told that by accepting cuts the scheme would be protected for the future. Both times this turned out to be untrue. In fact accepting cuts inevitably led to future damaging cuts.

From the perspective of employees, the relevant comparison between two pension schemes is the value for money comparison. How much is an employee required to pay, and what do they receive in pensionable benefits?

• In 2014, members of the USS CARE scheme had their pension value for money reduced by 13.33% (increasing employee contributions from 6.5 to 8%, while increasing the accrual rate from 1/80 to 1/75), at the same time as members of the Final Salary scheme were pushed into this new, lower-valued CARE scheme.
• By comparison, the March 12 proposal would have reduced the value-for-money of the CARE scheme by a minimum of 18.86% (before we even consider the impact of the lowered Defined Contribution threshold and CPI cap). This value-for-money figure is calculated from increasing employee contributions from 8 to 8.7% (0.7/8) and decreasing the accrual rate from 1/75 to 1/85 (a 12% cut alone). At the same time, the employers proposed to increase their contributions from 18 to 19.3%, an increase of 1.3/18 or 7.22%.

These are devastating compound cuts.

In this context it is misleading to assert that the employers have agreed a 65:35 split in changes to contributions. The employers have refused to address the projected deficit by increasing their contributions more than marginally. Instead they have proposed wholesale cuts in benefits. For example, in the March 12 offer, what we might call the ‘detriment ratio’ was subdivided at a minimum as 7.22:18.86, or 28:72 in favour of the employers.

We are in the third round of a series of severe USS devaluations.

This leads to the fourth sound reason for accepting a ‘no detriment’ position. Accepting ‘no detriment’ means saying ‘thus far, and no further’, and arresting the managed destruction of USS. 

We have to break the cycle.