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.

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.

‘No deficit’ letter to Guardian

University pension ‘deficit’ should be addressed by Government guarantee

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The University strikes over the future of the USS pension scheme reach a pivotal point this week. The employers’ federation, Universities UK, is deeply divided, with some, like Imperial College, calling for an “evidence-based” valuation of the scheme, while others blame the Pension Regulator for the current valuation method.

The evidence shows there is no deficit, and there is no need for either party to pay into the scheme to “solve” a non-existent problem. But there seems to be a political blockage which must be promptly addressed.

The trigger for the current dispute is a valuation of the pension fund related to the assumption – common in pension valuations – that the scheme should be evaluated by a method related to the very particular circumstances of employer bankruptcy.

It is further assumed that, in such circumstances, the pension fund would divest from the stock market and buy government bonds and gilts. Only by employing both assumptions does the valuation obtain a possible negative outcome.

However, the first assumption is a political impossibility, or it should be for any sitting government. The “employer” in the case of USS is in fact 350 employers, including some 68 large pre-92 universities. Since USS’s inception, no member university has ever gone bankrupt. If the current government is contemplating the closure of its pre-92 university sector, we think they have an obligation to tell the students, their parents and indeed the whole country!

Made in Westminster – Sean Wallis

Made in Westminster:

The source of the USS ‘crisis’ – and the solution

In our letter to the Guardian we wrote that

[The USS ‘crisis’] is the result of the misrepresentation of the finances of the USS, and the desire of a new breed of university managements to cut their pension liabilities and thereby ease the financing of new buildings and campuses.

Successive Pension Acts have encouraged managers of private sector schemes to exaggerate the risks of default. Combined with Quantitative Easing, this has led to a headlong abandonment of Final Salary Defined Benefit to “Defined Contribution” schemes, where employees rather than employers bear investment risk.

Higher Education today is shaped by frantic competition for students and huge building projects. Universities can recruit unlimited UK undergraduates paying an annual £9,000 plus, backed by taxpayer loans. The Higher Education and Research Act 2017 even allows universities to go bankrupt.

Much of this argument will be familiar to colleagues. The debate about the University Superannuation Scheme (USS) deficit has been an active subject of discussion on campuses since last summer when the press first announced that the pension scheme was at risk. Initial press claims were of a deficit of £17.5bn, while at exactly the same time USS themselves reassured pensioners that the scheme was in surplus.

But it is worth considering the source of this deficit in more detail than the Guardian letter’s pages will permit.

Is the deficit real, as the employers and USS themselves have asserted, or is it an accounting artefact, as the UCU trade union has claimed?

This is a key question, of course. Most important of all, until we know the source of the deficit we cannot begin to propose solutions.

Letter to Guardian

University pension ‘crisis’ triggered by HE market madness

Published in the Guardian as University staff are right to be striking (30 January 2018) 

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The university employers have provoked the largest vote for industrial action ever seen in the Higher Education sector. They have done this by overseeing what they present as a financial crisis for the University Superannuation Scheme (USS), and by threatening enormous cuts to the pensions of hundreds of thousands of university staff.

Yet none of this is necessary. It is the result of the misrepresentation of the finances of the USS, and the desire of a new breed of university managements to cut their pension liabilities and thereby ease the financing of new buildings and campuses.

Successive Pension Acts have encouraged managers of private sector schemes to exaggerate the risks of default. Combined with Quantitative Easing, this has led to a headlong abandonment of Final Salary Defined Benefit to “Defined Contribution” schemes, where employees rather than employers bear investment risk.

The higher education stand-off of 2017: an assessment – Prof David Midgley

There was much rejoicing back in January when the government was defeated over the first amendment to the Higher Education and Research Bill to be put to the vote in the House of Lords. That amendment introduced a definition of the functions of UK universities into the text of the bill which included their freedom “to act as critics of government and the conscience of society”. Its effects were dispersed and diffused in subsequent re-wordings, but it was the first of several major amendments to command support in the Lords.

At the end of April, however, in the “wash-up” before parliament was dissolved on May 3rd, the bill became law, and much of the effect of those amendments was lost. What should we note about that process, and where does it leave us?

It is worth recalling that the bill was always intended as a consolidation on the new system for funding university teaching, based primarily on tuition fees and loans, that was introduced in 2012. It was widely recognised during the parliamentary debates that some adjustment to the regulation of the higher education sector was needed in the light of that, and that students who were being required to invest financially in the courses they took needed access to adequate information about those courses and an appropriate regime of consumer protection. But the bill that had been brooded over in the Department for Business, Innovation and Skills (BIS) for five years before it was presented to parliament in May 2016 was much more ambitious than that. It sought to make it easier to establish new institutions that would provide training in particular specialised skills considered necessary to drive the economy forward, and it included measures to incorporate the research councils into a new overarching funding body, along with the agency that acts as a facilitator for the practical application of research outcomes, Innovate UK.

Where next after the HE Bill? – Sean Wallis and Lee Jones

For a week or so it appeared as if the Conservatives had pulled the plug on the Higher Education and Research Bill (HE Bill) by calling a Brexit General Election on June 8th. Only negotiations with the Labour front bench could allow the Bill to become an Act in time for the enforced closure of Parliament.

The earlier ‘debate’ in the Commons had been lamentable. No notable amendments were accepted in the Committee stages in the Commons. The Conservatives simply kept to the party whip and refused any amendment.

Then the Lords set to work. Through a series of 240 amendments, voted on and accepted in the House of Lords, their Lordships took apart key elements of the legislation.

The position taken by the Conservatives in the Commons differed sharply from the position taken by a variety of Lords – Liberal, Labour, Conservative and cross-bencher.

The official Tory position on the Bill was expressed in the infamous Green and White Papers. Higher Education ‘reform’ was required to permit private providers to ‘access’ undergraduate students and full fees in competition with universities of long-standing. The UK Government should allow Group 4 or Pearson to compete with Cambridge or Liverpool. The market is king. Private companies must be allowed to enter this market, charge £9,000+ a year, and reap the rewards. As a result ‘standards’ would, miraculously, be raised.

To create ‘a level playing field’, the existing regulatory framework, including the Quality Assurance Agency and other bodies, must be disbanded. The standard of academic environment and the inspection regime required by the QAA were too onerous for precious new private providers. Hence the TEF. University teaching was to be evaluated not in terms of whether students were challenged and their minds expanded to the frontiers of human knowledge, but whether the experience of attending university was personally satisfying.

The ideas were so poorly constructed that most staff and students who actually read these Papers were perplexed at how little knowledge of education was on display. Absent from the Papers were any notion that education might be about teaching students difficult and challenging ideas, or encouraging them to develop their own ideas. At most, the implied conceptualisation was instrumentalist: spoon-feeding and teaching-to-the-test.

Indeed, what is striking about the so-called ‘debate’ about the HE Bill, is that – beyond the ideologues of the DfE and the direct beneficiaries of the Bill busy lobbying them behind the scenes and a few self-interested, renegade Vice Chancellors – the proposals gained no public support.

Letter

An act that Labour must repeal to save higher education

(published in The Guardian 12 May)

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We commend the Labour Party for calling for the end of the current £9,000 student tuition fee-and-loans regime – for HE and FE.

High tuition fees have been catastrophic for social mobility. They triggered a collapse in part-time study and cut late returners to Higher Education. It is nonsense to claim that the fee regime is ‘progressive’.

They are also, paradoxically, more expensive than the previous £3,000 fee. In 2014 the Guardian reported the Treasury admitting that the rate of student debt write-off was predicted to ultimately be over 45%.

The high fee was designed for one purpose: to make HE privatisation profitable. David Willets introduced the fee as part of a package of measures: the partial abolition of the ‘block grant’, removal of caps on student numbers, and now – with the appalling Higher Education and Research Act (HE Act) and Teaching Excellence Framework (TEF) – the effective deregulation of the sector. The Conservative aim, outlined in their own Green and White Papers, is to allow companies with little or no track record in education to set up private universities, paid for by the taxpayer through fees and loans, offer ‘degrees’ without oversight, and – if it all goes wrong – shut up shop abandoning students to their fate.

We commend Labour for demanding an end to the tuition fee regime, but we call on them to go further. If the Party is serious about rescuing HE in the UK it must commit to repealing the HE Act, and support the reintroduction of rigorous academic standards in the sector.

Yours sincerely,

Sean Wallis, University College London, UCL UCU VP, UCU National Executive Committee (NEC) member, and joint editor of the Alternative White Paper for Higher Education (AWP)
Prof John Holmwood, University of Nottingham, Campaign for the Public University (CPU), AWP joint editor
Rachel Cohen, City, University of London, UCU NEC, AWP joint editor
Tom Hickey, University of Brighton, Council for the Defence of British Universities (CDBU), AWP joint editor
Lee Jones, Queen Mary University of London, CPU
Prof Des Freedman, Goldsmiths University of London, UCU Branch Secretary
Malia Bouattia, NUS President 2016-17
Bruce Heil, Open University, UCU NEC
Patricia McManus, University of Brighton, UCU NEC
Chris Jones, Neath Port Talbot Group, UCU NEC, vice chair UCU Wales
Xanthe Whittaker, University of Leeds, UCU NEC
Sue Abbott, University of Newcastle, UCU NEC
Julia Charlton, Northumbria University, UCU NEC, Senior Lecturer, UCU NEC member and Branch Chair
Julie Hearn, Lancaster University, UCU NEC
Elizabeth Lawrence, Immediate Past President, UCU
David Muritu, Sandwell College, UCU NEC
Paul Errington, Teesside University, UCU NEC
Jo McNeill, University of Liverpool, President, University of Liverpool UCU, and UCU NEC
Marion Hersh, University of Glasgow, UCU NEC
Carlo Morelli, Dundee University, Senior Lecturer, UCU NEC
Lesley McGorrigan, University of Leeds, UCU NEC
Mandy Brown, Lambeth College,  UCU London Regional Secretary, UCU NEC
Sean Vernell, City and Islington College, UCU NEC
John Murphy, Blackburn College, UCU branch vice chair, UCU NEC
Margot Hill, Croydon Gollege, UCU NEC
Christina Paine, London Metropolitan University, UCU Coordinating Committee, UCU NEC elect
Lesley Kane, Open University, UCU NEC elect
Richard McEwan, Tower Hamlets College, UCU FE national negotiator
Nita Sanghera, Bournville College, UCU NEC elect
Rhiannon Lockley, Halesowen College, UCU West Midlands Chair, UCU NEC elect

Emergency Lobby of Parliament over HE Bill – 12 noon 26.4.17 – Parliament Sq

URGENT – FOR IMMEDIATE RELEASE AND CIRCULATION

Lobby of Parliament

Government ‘concessions’ not nearly enough, say academics and UCU

London Region UCU has called a lobby of Parliament today (26 April) at 12 noon. The lobby is supported by UCU and the Campaign for the Public University.

What is at stake

The Government has made some concessions to attempt to get the Higher Education and Research Bill onto the statute books before the General Election. The Bill faced nearly 250 amendments proposed by the House of Lords. They need votes in both Houses of Parliament to get approval.

The House of Commons will take a decision on the future of the Bill later today. London Region UCU has called a protest and lobby in Parliament Square from 12 noon. Union members are being urged to write to MPs.

Analysis by UCU, the Council for the Defence of British Universities (CDBU) and the HE Convention is that these “concessions” do not go far enough.

Yesterday UCU General Secretary Sally Hunt wrote to all members. She writes that

Amendments which are NOW AT RISK include:

1. blocking plans for a crude rating of teaching quality
2. removing the link between teaching excellence and tuition fees
3. ensuring any organisation awarding degrees meet improved quality standards
4. removing international students from net migration targets
5. protecting overseas staff

Prof David Midgley, a leading member of the CDBU, notes that the Government has provided little detail in its response to many of the Lords Amendments, and some amendments are not addressed at all.

His analysis, published today by the HE Convention, observes that the Government has potentially made minor concessions on points 1 and 3 above, but has refused to remove the link between the TEF and fees, and has made no improvements to protect international students and staff.

Republished from UCU London Region.

Analysis of Government responses to Lords amendments – David Midgley (CDBU)

Higher Education and Research Bill

A summary of the Government’s responses to the Lords amendments, as published on 25 April 2017.

Amendment 1 (definition of a university):

Struck down in favour of guidance to be issued by the Secretary of State following consultation with interested parties (to be inserted in clauses 51 and 52: Use of university title, etc.).

Amendments 12 (prohibiting ranking), 209 and 210 (Schedule 2, i.e. fee
limit, subjecting the prescription of by the Secretary of State to
affirmative procedure):

Struck down. The effect of the various insertions proposed instead is difficult to decipher, but the insertion at p. 67, l. 12 appears to exempt the power of the Secretary of State to award above-inflation rises in the fee limit at the top end from the strong form of parliamentary control (i.e. by affirmative procedure).

Amendment 15 (registration of students on the electoral roll):

Struck down in favour of “such steps as the OfS considers appropriate for facilitating cooperation between the provider and one or more electoral registration officers”, etc.

Amendment 23 (quality assurance subject to independent evaluation):

Struck down in favour of deleting sub-sections 5 and 6 in Clause 25 (referring to “standards”) and inserting a new clause (at p. 16, l. 23) requiring the Secretary of State to appoint a person independent of the OfS, and with suitable experience, who would “command the confidence of registered higher education providers”, and who would produce a thorough report on the assessment and rating procedures (i.e. the TEF), including the descriptors used for rating purposes and the impact of the process on the “providers” concerned, “after the initial period” (i.e. the first year after section 25 becomes operative); and that the report be laid before Parliament.

Amendment 71 (conditions of registration):

Struck down, removing the requirement that a new provider demonstrate satisfactory validation arrangements for 4 years before authorisation. Some re-drafting is also proposed in this area.

Amendments 78 and 106 (the Judge amendments):

Struck down in favour of allowing the tribunal concerned to take into account “evidence that was not available to the OfS” and making explicit the range of options open to the tribunal.

Amendment 156 (international students):

Struck down in favour of requiring (in clause 59: publication of information) the consideration of information that would be useful to international students and institutions that provide for them, including information about numbers of international students.

Notes

Page references are to The Bill as introduced to the Lords (HL Bill 76).

The consolidated list of Lords amendments referred to (posted 6.4.17).