Let’s reclaim USS for the many, not the few

2018_UK_higher_education_strike_placards_By Deepa Govindarajan Driver (written in a personal capacity)**

This article should be read in conjunction with the motions on USS passed at Congress 2019 – some of which are reproduced below – and demonstrate the urgency of a firm response from members of the Scheme.

It has been another action-packed few weeks on pensions. Since the last Branch Solidarity Network update, the Universities Superannuation Scheme (USS) saga continues to unfold with ever more twists to the plotline.

Highlights this time, include

  • USS now has Master Trust status
  • USS Limited (USSL) the corporate trustee proposing three contributions options to employer representatives Universities UK (UUK)
  • a leaked letter from The Pensions Regulator (TPR) questioning USS governance and expressing displeasure about the communications from USSL to TPR in relation to the three proposed contributions options (as above)
  • a leak showing that the executive decision-makers at Trinity College Cambridge (100 members in USS) had voted to leave the Scheme
  • a UCU-nominated director being recused from the USS board after blowing the whistle on malpractice and
  • UCU’s National Dispute Committee calling on UCU’s Congress to recall UCU-nominated trustees, which is an event without precedent in the history of the Scheme.

But before we examine these recent developments, let’s take a step back and remind ourselves of some facts. The 2018 USSL annual report says that contributions totalled up to £2.2 bn while benefits total £2bn. What this means is that the Scheme, with £64.4 bn of net assets, was not drawing on these assets to pay benefits. Nor was it drawing on returns on assets. So why would what is described by the JEP as an immature (i.e. with a slew of new entrants on DB) Scheme and a cashflow positive Scheme that is expected to remain so for another 50 years, be at the centre of a serious crisis in Higher Education (HE)? What is the argument about deficits all about?

USS is a ‘last-man standing’ Scheme with an employer covenant that binds together USS institutions in a remarkable way, ensuring the strength of the Scheme and its sustainability in the longer term. Some HE management teams however have used institutional balance sheets to take on questionable and unprecedented amounts of debt and expenditure causing the regulator to pay more attention to the strength of this covenant. While in the past, employers were keen to celebrate the supposed surplus in USS (see underpayments estimated to total roughly £7bn over a decade), even strong employers now cite financial constraints or plead poverty as a reason for cutting research budgets, making redundancies and not injecting additional funds into the Scheme. This makes the strength of the covenant even more suspect to a regulator sensitive to employers’ asset-stripping of assets underpinning pensions promises.

Coupled with this, is the lower risk appetite expressed by the management teams, who (perhaps in order to engage in even more shenanigans on their balance sheet), are sending strong messages to USSL to “de-risk”. At a time when bond market yields are historically low, USSL has undertaken this “de-risking” by moving the fund’s investments more and more into debt instruments rather than equity. Given that gilts are getting a -0.8% return and with even a conservative estimate of returns on equities of 4%, when we move into debt from equity we are losing an effective rate of 4.8% per year. Also over a 30 year horizon, although more volatile in the short term, a substantial investment in equities is critical to allow us to achieve the returns we need to meet our projected benefits. From a societal point of view, pension funds are important longer-term investors and like USS must invest and take risks by funding longer-term investment and entrepreneurial activity.

What this means is that in reality, for members and for the sustainability of the Scheme, USSL’s actions do not de-risk. Instead they introduce an unjustified increase in risks to members and to the sustainability of the Scheme.

What is going on?

Members would be right to wonder what on earth is going on and how to make sense of recent changes in this context. To understand what is going on, it is worth looking at each of these developments, and then putting them in perspective as part of a bigger picture.

Let’s start with the news that USS has become the first hybrid pension to get Master Trust Approval.

The Master Trust regime was introduced in 2017. Although the statutory objectives of The Pensions Regulator remain the same, Master Trust status means that TPR now explicitly approach regulatory oversight of these schemes in a four-pronged way examining the fitness and propriety of those running the schemes, checking if systems and processes are robust, requiring a sound continuity strategy for the scheme and asking for demonstration of the scheme’s financial stability. USS’ chairman Prof Sir David Eastwood has presented this authorisation as a significant achievement and there is no doubt significant work was undertaken at USS in order to jump through the regulatory hoops required for this authorisation.

However, it is worth remembering that for all the fanfare from USSL, this is in reality only an authorisation from The Pensions Regulator that it requires from all trustees if they wish to run a multi -(unconnected) employer Scheme with a money purchase component. What is more important to members is how the Scheme will be required to be run in the future as a result of this authorisation. The status subjects the Scheme to changes in how it will be governed and requires USSL to rebalance the make-up of the trustee Board towards including more independent directors. At a time when the independent trustees on the USSL Board give cause for serious concern to members, given their past / current affiliations outside the Board, and their visible lack of commitment to DB, it would be understandable to worry that inclusion of these so-called independents – who are part of prevailing industry groupthink about valuations and appear to have a predisposition towards the closure of defined benefit schemes – might not be in the best interest of the Scheme and its members. This becomes particularly important in the context of concerns raised previously by UCU about the power imbalance caused by the fact that UUK has four trustees on the Board while there are only three UCU-nominated trustees.

Callard and Hardy, Govindararajan Driver, and Hersh (herself a member of UCU’s superannuation working group) are amongst those who have already raised grave concerns regarding governance including poor decision-making, lack of transparency and potential conflicts of interest of those moving the Scheme in particular directions.

It is also important to remember that USSL could instead have chosen to retain the old status, as long as the DC element was cleaved from our predominantly DB Scheme. Such a plan would have required USSL to propose to TPR this option of running the non-money purchase element of the DB Scheme and demonstrate to the regulator that the separated DB (and DC) elements would be adequately governed. What makes USSL’s march towards Master Trust authorisation (that allows including more industry insiders on the Board) even more suspect, are the recent revelations that UCU-nominated trustee Jane Hutton has blown the whistle on governance concerns at USSL noting her frustration with USSL for not providing information allowing her to check if the supposed deficit was vastly overestimated. This is all the more worrying given the points raised by UCU advisors First Actuarial questioning the USSL’s take on the position of the Scheme, not to mention the serious flaws pointed out by Marsh, and reconfirmed by Wilson and Chitty, that challenge the valuation and the calculation of the so-called ‘deficit’.

What’s in it for the employers?

So why are employers willing to pay more if the increases are unjustified? For some management teams, the entire pensions dispute has – largely and slyly – been the mechanism for removing uncertain pensions liabilities from balance sheets to allow them to engage in shady financial transactions and to take on debts that have covenants or funders who want to have a certain kind of balance sheet. All this is largely in the aid of new shiny buildings, performance incentives for management, large marketing budgets, privatisation of provision, meaningless rankings, metrics etc.

Now let’s turn to the letter dated 7 May 2019 from USS to UUK that indicates that USSL has proposed three options to employers, NONE of which reflect credible engagement with the recommendations of the first phase of the Joint Expert Panel constituted after the USS strike. According to a response from UUK’s advisors, and a subsequent indicative response from employers on 21 May, only the third of these three options is of interest to employers. Meanwhile a leaked letter from The Pensions Regulator suggests that they are concerned that, although USSL had consulted the regulator on two of those options, it had not consulted with them on this third option. The regulator has taken issue with governance processes that do not seem to demonstrate that trustees have given thought to the implications of the third option, instead choosing to kick the can down the road to a presumed 2020 valuation. It is worth wondering whether the only reason USSL trustees – who seem to be in constant contact with the TPR – pulled a rabbit out of a hat and proposed this third option was that they were planning to later withdraw it on grounds that TPR wasn’t satisfied with it.

In the meanwhile, some have already started undermining our Scheme. Trinity College Cambridge which is a relatively tiny employer with circa 100 members in the Scheme has made the extravagant decision of buying itself out of the USS by voting to pay £30 million to leave. Trinity’s decision is being watched closely but unlike other decouplings it is likely to happen quite quickly. The trustees will now have to make a case to the regulator as to the soundness of what is termed as the employers covenant on the Scheme, that binds constituent members of the HE sector into what is termed a ‘last-man standing’ Scheme.

We must not forget that pensions have a very big equalities dimension. Changing the mutuality and the benefits and member contributions on USS entrenches further structural barriers for those who are already discriminated against.

Last but not least, self-interested management teams at many universities have played a long game in eroding USS, and it is noteworthy that the trajectory of the erosion of USS follows a path that has been outlined by a member of staff at UUK’s advisors Pinsent Masons. I urge you to read this article and get your branch members aware that the contributions increases we have paid out for have not happened by accident. They are well-orchestrated steps to make our Scheme unviable, to undermine investments that are sustainable in the longer term and to atomise the sector, to suit the financial interests of the few. Let us reclaim pensions for the many and prepare for campaigning and industrial action to defend what is our right and far from a luxury.

What do we need to do?

See these motions passed at Congress 26 May 2019 which we urge all branches to consider as soon as possible.

 HE6 USS employee contributions

Conference notes USS letters to members in March 2019 notifying them of increases in employee contributions up to 11.4%, with 8.8% from April 1 and a possible 10.4% from October 1.

Conference resolves to:

  1. call on UUK to pick up any additional employee contributions (including contingent contributions) from 1 October 2019 and not pass them on
  2. enter into dispute and prepare for an industrial action ballot in 2019 if the employers do not agree.

HE7 USS pensions

Conference notes:

  1. the transformative impact of the USS strike on UCU
  2. the failure of USS to implement the JEP’s first report leading to proposals for increasing contributions and threats of worsening of benefit
  3. additional USS contributions have already led to some research contracts being substantially reduced in length from the time period originally costed, offered, and accepted – from 5 years to 4 in one case – damaging research projects, and passing employer costs onto staff.

Conference believes the refusal to adopt JEP recommendations is underpinned by a governance failure within USS trustee body.

Conference resolves:

  1. to reaffirm UCU’s position calling for the resignation of Bill Galvin USS CEO and call for the resignation of all independent trustees
  2. to call a higher education sector conference on USS in the autumn term 2019 to review the position and consider all actions available to UCU to defend USS
  3. to call for a national Day of Action on USS
  4. to call on employers to protect research projects and staff by picking up additional pension costs.

HE8 USS dispute

HESC notes that:

  1. USS has calculated that full implementation of the JEP proposals to the 2018 valuation would lead to a £0.6 billion technical provisions surplus and require a contribution rate of only 25.5%. This vindicates the UCU position of ‘no detriment’
  2. Nevertheless USS are continuing to insist that the JEP proposals be implemented only in part and that contributions be raised to a minimum of 29.7% for the coming valuation period
  3. The USS dispute has not been resolved.

HESC resolves:

  1. to call on USS to implement in full, in the 2018 valuation, the 6 JEP proposals for the 2017 valuation
  2. not to accept any increase in member contributions, including ‘trigger contributions’, for this valuation and that any threat of these should be countered with a ballot for industrial action in line with existing policy
  3. to call on all employers to publish their response to the USS technical provisions document.

HE9 UCU must remain open to a legal challenge against USS

The handling by USS of their recent actuarial valuations has been subject to intense scrutiny. Concerns over USS’s decision-making, governance and associated processes have been raised by many members and branches, and also by UCU’s actuarial advisers and the Joint Expert Panel.

The Academics for Pensions Justice group, set up in the wake of the USS dispute, crowd-funded over £50,000 from nearly 2,000 individual donations to obtain specialist legal advice about potential mismanagement by the board of trustees of USS.

Conference believes that UCU must remain open to supporting a legal challenge over the actions of USS, and instructs those with relevant decision-making powers (including but not limited to the superannuation working group, national dispute committee, higher education committee, national executive committee and the general secretary) to give serious consideration to taking further legal steps in defence of members’ pensions.

Conference agrees:

  1. UCU must do work with aligned groups in pursuit of defending our pensions wherever possible
  2. to draw up a full report on legal options open to UCU, via meaningful consultation with Academics for Pension Justice (and associated legal advisors), NDC and SWG
  3. this report will make recommendations which will inform HEC’s consideration regarding next steps in pursuit of any possible legal challenges over the actions of USS.

L5 No confidence in the USS board of trustees

Conference notes that on 7th May 2019 the USS board of trustees definitively and unilaterally rejected the report of the Joint Expert Panel (JEP), by offering three contributions options none of which accepted the full set of JEP recommendations.

Conference resolves that it has no confidence in the corporate trustee of USS and its board.

Conference invites UUK to also withdraw their nominated trustees.

If UUK refuse to confirm by 1st June 2019 that they will not impose any contribution increases in October 2019, HESC instructs the Higher Education Committee to initiate an immediate campaign for industrial action, highlighting USS’s destructive role, with a ballot commencing 1st September 2019 which will give UCU negotiators the necessary leverage to save the USS defined benefit pension with no detriment to members.

HE10 Defending the ‘no detriment’ position in our USS dispute

HESC notes:

  1. The multiple failings of the USS 2017 and 2018 valuation documents
  2. USS has calculated the full implementation of the JEP proposals in the 2018 valuation leads to a £0.6 billion technical provisions surplus, requiring a contribution rate of 25.5% which vindicates ‘no detriment’
  3. USS is imposing large ‘cost sharing’ increases in contributions, to 8.8% in April 2019, 10.4% in October 2019 and 11.4% in April 2020, whose rationale has been extensively debunked

HESC believes these increases are unnecessary and violate UCU’s position of ‘No Detriment’.

HESC calls on UUK to join UCU in resisting any contributions increases and to refuse to implement the October 2019 and April 2020 increases.

L6 UCU directors of USS

Conference notes:

  1. that UCU-appointed director Prof. Jane Hutton has recused herself from the Trustee Board after pressure following her whistleblowing with regard to the 2017 valuatio
  2. Prof. Hutton has been a consistent critic of the valuation methodology and forced USS to adjust their mortality assumptions.

Conference believes:

  1. UCU Directors should be free to represent members’ interests without interference by the USS executive and offers Prof. Hutton our strong support
  2. UCU has no confidence in the valuation methodology or the USS executive.

Conference resolves:

  1. to seek legal advice on behalf of its three USS directors regarding the implications of their removing themselves from the Trustee Board until Prof. Hutton’s concerns are satisfactorily addressed
  2. to re-state our call for the resignation of Bill Galvin CEO of USS and issue a press release stating this
  3. to demand a public enquiry into the undermining of USS DB scheme.

** Please note that this article is an extract from a longer unpublished piece of research by the author.










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