Columnist Josephine Cumbo argues that debate over the valuation of the UK's largest private sector defined benefit fund could see actuaries and regulators subjected to greater scrutiny by members in future.
The issue of whether certain valuation methods paint an accurate or misleading picture of the health of a defined benefit scheme has been at the core of a bitter dispute involving hundreds of thousands of members of the £63bn Universities Superannuation Scheme, the UK’s largest private sector retirement fund.
The dispute has sparked wider debate about the purpose of pensions regulation and raised uncomfortable questions for those involved in the broader demise of DB pensions in the private sector.
Where members fully understand the ways in which a pension promise can be measured, they will ask uncomfortable and persistent questions
In 2017, the USS fund looked set to follow the path of thousands of DB schemes before it and close after being deemed unaffordable by its 350 sponsoring higher-education sector employers.
However, 18 months after a £7.5bn deficit was identified by the USS trustees the DB scheme remains open, with the funding hole now dramatically shrunk to £3.6bn.
Academics subjected valuations to scrutiny
The seemingly remarkable turnaround in the fortunes of the USS marked an unexpected chapter in the troubled history of DB provision in the UK, where a view that guaranteed pensions are unsustainable has become entrenched.
The reason why the USS has bucked the trend of DB scheme closures was a combination of factors: chiefly pressure applied on employers through a sustained campaign of disruptive strikes by thousands of USS members, including academics, lecturers and higher-education staff.
But the valuation was subjected to wide-ranging critique and challenge by members, including some of the UK’s leading statisticians, mathematicians, philosophers and industrial relations experts, who demanded to see the workings underpinning the deficit calculation.
They did not accept the scheme’s finances, which on the surface looked in rude health, were as rocky as portrayed. For example, using the so-called “best-estimate” approach the scheme had a £5bn surplus.
Significantly, an independent review of the assumptions used in the 2017 valuation provided some vindication for members suspicious of the motivations for ending their guaranteed pensions.
Grievances vindicated
An independent expert panel – comprising employee and employer representatives, with an independent chair – identified flaws in the valuation process, including the Pensions Regulator’s assessment of the strength of the higher-education sector and its participating employers. They also criticised the USS trustees’ reliance on a test that steered the scheme toward “lower-risk” assets, which had the effect of pushing up contribution costs to a level deemed unsustainable by employers.
An employer consultation was shoddy, while the USS had not shared enough key information with stakeholders, thereby preventing members from undertaking their own assessment of the valuation. The panel’s conclusions did not reflect well on the scheme, the employers and the regulator.
The circumstances of the USS – a multi-employer, ‘last-man-standing’ scheme – are unique, but there are reasons why this episode should provoke wider discomfort.
While it is the case that the cost pressures on full-blooded DB pension promise have increased due to rising longevity and low interest rates, it has done so in an environment where some employers have been keen to get shot of their pension obligations.
However, very few workers can challenge a pension change like those who count Oxbridge dons among their fellow scheme members.
Questions now hang over how hard other scheme actuaries and professional trustees have pushed back against the regulator over a valuation, or whether member consultations have turned into tick-box exercises rather than meaningful engagement.
Regulation has increased DB costs
The Pensions Regulator rightly needs to guard against the added risk posed to the Pension Protection Fund from weaker employers using unrealistic assumptions to clear their pension deficits.
Equally, it must also protect members’ benefits. But being tougher on employers by insisting they have contingency plans in place, in case investment strategies don’t deliver as expected, is having the effect of ramping up scheme costs and therefore jeopardising members’ benefits.
The approach the regulator takes in balancing these two objectives does not occur in a political vacuum.
The USS dispute has shown that where members fully understand the ways in which a pension promise can be measured, they will ask uncomfortable and persistent questions.
Those involved in actions that weaken pension provision must be better prepared to address the transparency deficit that the USS dispute has exposed, and explain the reasons and evidence for their decisions.
Josephine Cumbo is pensions correspondent at the Financial Times
