UCL UCU's Letter to the Provost and his (HR's) Reply

UCU Wrote to our Provost in September on the USS question and UCL's position on it at Universities UK.

This is our letter:

Professor Michael Arthur President and Provost University College London

University College London UCU Branch
President: Saladin Meckled-Garcia, Political Science 
Secretary: Tony Brown, Information Systems Division 
Enquiries: ucu@ucl.ac.uk, www.ucl.ac.uk/unions/UCU

Thursday, 28 September 2017

Dear Professor Arthur

I am writing briefly on behalf of UCU to explore UCL’s position on the current valuation of the USS pension scheme. 

As you will recall, I wrote to you in 2014 regarding the valuation methodology at that time. I enclose that letter. Despite substantial concessions by UCU members and increased contributions from subscribing employers, we appear to be at a similar position with the current valuation as we were at the last. 

In their proposed valuation,1 USS maintains that, to continue to provide the same level of pension benefits, contributions would need to increase from the current 26% (18% employer plus 8% employee) of salaries to a much higher rate of 32.6%. As 18% and 8% are widely regarded as the upper limits of what employers and employees are willing to pay, the implication of USS’s proposed valuation is deep cuts in defined benefit pensions. 

If it became necessary our position would be any costs would need to be borne by the employers. That way leads us towards a traditional trade dispute. 

However we believe that such a dispute can be avoided should the employers join forces with the academic trade union and insist on a thorough review of the valuation methodology of the scheme. 

On behalf of UCU, First Actuarial2 has pointed out that, considered as a business with inflows and outflows of cash, USS is in fact extremely sound. Income and expenditure is projected to match closely without touching assets. Risk and variation is shared across individual members and between subscribers. 

The current valuation problem centres on the interconnection between the valuation itself and the investment strategy proposed by the trustee, and the consequential projected future value of USS assets. The trustee proposes that the current investment strategy, which has seen an average growth in the total USS asset value of 12% per annum in the last five years, is changed for a ‘de-risking’ investment strategy which places the majority of holdings in gilts and other bonds. This ‘Test 1’ assumption then creates a large deficit in the valuation of the liabilities compared with the assets.3 At
that point the Pension Regulator can object that there is a risk that individual pensioners may not receive the full value of their pension. 

Empirically, over the last two valuations, the current valuation methodology has caused employers and employees to pay more and receive less for our pension contributions. Unfortunately no end is in sight. The strategy of ‘de-risking’ [sic] creates new risks which will continue to renew in the future. The deficit projection will recur triennially, and USS will be devalued to a point where it will cease to be attractive to staff. 

Wise counsel would say that the entire valuation and investment approach must be reviewed. I would urge you to review First Actuarial’s report and other critical analyses4, and to join with those employers who are seeking to open up the debate on the valuation methodology. 

I appreciate time is pressing, but the future of our pensions and those of future generations is at stake. Please feel free circulate Council members and SMT colleagues with this letter and attached documents as you see fit. If it is helpful to arrange a meeting in the next few days I will endeavour to ensure we attend. 

Yours sincerely
Sean Wallis
UCL UCU Vice President

  1. The full set of USS valuation documents are publicly accessible from https://www.sheffield.ac.uk/hr/thedeal/pensionupdates/ussvaluation.
  2. Salt, H. and Benstead, D. (2017) Progressing the valuation of USS. First Actuarial for UCU, http://ucu.group.shef.ac.uk/wp-content/uploads/2017.09.15-progressing- the-valuation-1.pdf (enclosed).
  3. Test 1 is not a condition required by the Pension Regulator. A number of analysts have reasonably objected that USS does not publish the results of a valuation were Test 1 set aside.
  4. For example, see Otsuka, M (2017) Would a shift from bonds to growth assets keep the USS afloat?, WonkHE, accessible from http://wonkhe.com/blogs/would- a-shift-from-bonds-to-growth-assets-keep-the-uss-afloat (enclosed). 

    The response came from  the Head of HR:

    Sean Wallis
    UCL UCU Vice-President

    11th October 2017

    Dear Sean,

    I’m writing in response to your letter to the Provost 28th September, to which he has asked me to respond.

    We too have concerns regarding the current valuation and discussed the matter at length at SMT on 13th September.  The need to protect members’ accrued pension rights and to ensure that USS remains attractive and valued for employees is of critical importance.  Ensuring we achieve this within the bounds of affordability and our appetite for risk is the challenge that we are collectively tackling at present.  A particular concern for us is our competitiveness in being able to recruit academic staff from outside the UK and we have asked UUK to undertake some further work on comparative approaches to pension provision in order that we can better assess the risk. 

    We also share your disappointment at being faced with the prospect of significant changes to USS so soon after the changes that followed the last valuation have been introduced.  Our view was that the hybrid scheme offered the prospect of an enduring solution to scheme benefit design.  This has not proved to be the case because of the prevailing economic conditions; index-linked gilt yields have fallen from historically low levels of -0.1% in 2014 to -1.7% in 2017 and have driven up the price of assets in all classes. 

    USS propose in their consultation, a set of assumptions which are inherently more risky than in 2014.  Had the same assumptions as in 2014 been applied, the deficit would be £8.5bn and the cost of future service accrual 37.9%.  This additional risk places the assumptions at the limit of what would be regarded as acceptable to us. 

    Neither the problem, nor the solution, in our view lie with the valuation methodology.  Following the previous valuation, a joint UCU/UUK group reviewed the methodology in detail and produced a joint report which did not challenge the valuation basis.  It is important to avoid misunderstanding the purpose and application of test 1.  It is not the case that the Trustee proposes shifting the investment approach to a majority of low-risk assets (gilts and bonds).  Test 1 seeks to measure the capacity of the scheme, together with the benefit of the assessed level of possible reliance on the employers, to stand behind pay pension benefits in an adverse set of circumstances.      

    The risks being run to fund pensions are a concern for us all.  Increasing the level of risk borne by the employers today to such a level that, should that risk not pay off, employers are not able to afford appropriate benefits in the future would make the scheme unsustainable. If the costs of pension benefits increases to unaffordable levels this could threaten the security of benefits built-up if an adverse scenario occurs.  We should, furthermore, be careful about discounting the prospect of an adverse scenario. Three years ago there was an assessed 10% probability of required employer contributions exceeding 21% in 3 years; it now stands at 24.6%.    

    USS is, as you state, cash flow positive and this is helpful in avoiding the necessity to sell assets and crystallise losses. The Trustee however has a responsibility and a legal duty to assess the funding level over a long period.  The scheme’s liabilities and assets are projected to grow much faster than the payroll of the scheme’s membership.  Cash flow, whilst important, does not address issues relating to increasing costs in the future and the management of that risk.

    A final point about the Pension Regulator (tPR). We should not be unduly driven by the views of tPR, but ultimately they must approve the valuation outcome.  They have expressed the view in writing to the Trustee that they do not accept the Trustee’s assessment of the covenant strength (they believe it is weaker) and even if they did accept it, the proposed assumptions would be “at the limit of what would be acceptable”.  Work is ongoing to encourage tPR to moderate their position but it suggests little room for manoeuvre. 

    I hope this is helpful in explaining our position.  We have submitted our response to the recent UUK survey and USS consultation and will be monitoring developments closely.  

    Yours sincerely,

    Fiona Ryland
    Executive Director, HR


    However it seems that the Provost and Senior Managers have backed the new UUK proposals (that will effectively decimate the pension scheme). The reason he has given in Faculty forums is that keeping the pension at its current level would mean UCL paying 26% contributions and UCL can "only afford" to pay 18% contributions. Paying more is, apparently, impossible. UCL UCU challenge whether this would be the real cost (given that we challenge the valuation methodology UCL has bought into). UCL UCU also notes that the 3% surplus push senior management have been trying to get by increasing faculty contributions, more than ably covers that rise in pensions. As always it comes down to a choice: large and ongoing capital spending projects, with lots of cash for whatever priority the senior leadership fancy at the moment or investing in the people that make a university what it is: its staff, and spending a little bit less on bricks in the short term. It is disappointing that whilst other universities, such as Warwick and Glasgow, have thought critically and come out against the UUK position, UCL (clearly with its eye on all the new buildings it wants to build) has decided to take this position.


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