MORE ON THE RESISTIBLE DEMISE OF PRIVATE DB SCHEMES

Since I wrote the abovementioned article a short time ago, there has been a mini-explosion of commentary on Henry Tapper's blog concerning the valuation of the USS pension scheme.

The first thing to mention is that Henry's blog, for any benighted folks who may not be familiar with it, is the platinum standard for informed commentary and unvarnished opinion on all aspects of the UK pensions scene. Henry's prolific writing, and that of his frequent guest contributors, has an unwavering focus on identifying the best value for members of pension schemes of all types and firmly calling out those strategies, practices, structures, procedures, regulations and policies that fall short of this standard.

My readers will recall that I made the case for a significantly greater exposure to higher return-seeking assets especially in open DB schemes, based on straightforward market logic and enshrined in the proposition that it's easier to predict long-term asset class returns than short-term ones. There could hardly be a more apt case study for this proposition than the Universities Superannuation Scheme (USS). It's the largest private (and open) DB scheme in the UK. Assets have been growing significantly in recent years, while valuations have been heading in the opposite direction (go figure), despite rising contribution levels over the same period!

I'm not going to attempt to add anything to the remarks of Henry's expert and erudite interlocutors below, except to ask two related, astonished questions: why would you value the bulk of your long-duration liabilities at a discount rate based on gilts (which, in Ros Altmann's lovely phrase - if indeed it is hers - now provide a return-free risk rather than a risk-free return)?; and why would you, as a consequence, embark on a low-return de-risking strategy for an open scheme in which both current contributions and existing surpluses are more than enough to cover pensions payouts for the indefinite future?

If I can wildly simplify what all the commentators below are saying: the (growing) deficit at the USS pension scheme is entirely an illusion brought about by a servitude to an over-prudent valuation methodology which has little foundation in the dynamics of the capital markets or in the circumstances of the scheme itself (I invite any of them to correct me if I have misquoted or parsed their highly detailed observations in any way inaccurately).

So if you're interested in reading a far more penetrating analysis, please see any or all of the following below. Woon Wong is particularly lucid on how the USS scheme is actually in surplus, with the implication that it may not have needed to introduce the new DC component in 2016; while Sam Marsh's equally clear video makes a similar point that USS's actual asset growth has been exceeding its regular forecasts for at least the last decade.

Michael Bromwich

https://henrytapper.com/2021/01/27/assumptions-are-dangerous-bromwich-on-uss/

Dennis Leech

https://henrytapper.com/2021/02/01/dennis-leech-on-valuations-uss-and-the-cost-of-prudence/

Con Keating

https://henrytapper.com/2021/02/06/con-keating-calls-the-obscurantism-of-uss/

Woon Wong

https://henrytapper.com/2021/02/07/another-expert-woon-wong-finds-uss-accumulating-surplus-assets/

Sam Marsh

https://www.youtube.com/watch?v=NnKU_7-ufL8

Now, I know that there are all manner of complexities to the governance and management of the USS scheme which it is easy for someone like me to overlook. And a huge amount of time is taken up by trustees and management in dealing with any number of issues, regulations, procedures, relationships and politics in addition to the scheme valuation and investment strategy.

But if I may indulge in an analogy, many years ago I attended the excellent one-week leadership training course at The Leadership Trust (incidentally, the very last one which was run personally by its founder, David Gilbert-Smith, MC, and a treasured memory of mine). Based entirely on experiential learning, a large part of the course took the form of a series of tasks of increasing complexity which you had to resolve with the help of a team. One of them defied resolution by anybody. It turned out that what they had done was taken a very simple task that could be achieved very quickly and efficiently by two people, and superimposed upon it multiple layers of management and decision-making, boards and committees, external consultants and advisers, and so on. The result, inevitably (and deliberately, because that was the point they wanted to demonstrate) was that nobody could see the wood for the trees, and identify the easy solution that should have been staring them in the face. I submit that, again without decrying all the other important work that needs to be done in the running of such a large pension scheme, that something similar is going on at USS when it comes to the overall valuation of the assets and liabilities and its ability to meet its ongoing obligations to its members.