Thursday, 22 February 2018

University Pension Dispute

I see a lot of my academic friends are going on strike about the proposed changes to the USS pension scheme. This is the scheme for University academics but also University management as well so it isn't a simple "academic" vs. "management" fight.

I'm not a member of that scheme but I do know a little about pension schemes so thought I'd be in a good position to highlight the good and less good arguments made on each side.

Does the USS deficit need to be reduced? 
It does, of course, and it is a legal requirement to attempt to close the deficit. This requires payments from employers, usually in the form of a part of the pension payment to future staff being redirected to pay for the deficit arising for past staff.

However, it doesn't need to be reduced anywhere near as strongly as UCU is proposing to do. In fact, it seems illogical for it to take such a risk-averse actuarial calculation. The deficit only appears so big on the assumption that the trustees will only invest in low-risk low-return investments. USS is investing for the long-term so that seems unnecessary (unless they know there is going to be a big economic crash that no-one else knows about).

Does the USS need to reduce its risk?
I think there is an argument for de-risking given that a lot of employers have little in the way of assets and the scheme as a whole has no contingent asset to back it up. Nevertheless, it isn't really a distressed scheme as things stand.

In DB schemes the risk falls on employers. In multi-employer schemes the risk falls on the remaining employers (last-man standing).

Its possible to imagine a doomsday scenario whereby the University sector largely collapses, at which point only a few elite institutions would remain (including Oxbridge colleges who may only have a few staff in the scheme but would then be liable for the deficit). These institutions would then be liable for all of the pensions for all the academics who worked in other places, which might cause those with money in the bank to be worried.

However, that doesn't look a likely scenario at the moment. 

Nevertheless, if the pension scheme continues to be in deficit and require extra contributions by employers then this will be a big drag on the University sector. Instead of growing and thriving it will have to make payments to make up the deficit. This will impact on future staff in the sector too.

DC pension schemes pass investment risk off to the individuals involved, rather than the employers.

Will the proposed changes make academics worse off? 
This is where I've got a bit of an issue with some of the claims. As ever, the issue is what the baseline is.

The proposed changes won't change any pension already earned - it only affects future pension earnings.

It would unreasonable to say that one's pension terms should never become less generous - given the rise in life expectancy and the fall in gilts all pension schemes and UK employers would probably be bankrupt if they still had generous final pension schemes! Change was necessary and no doubt will be in the future. 

On the other hand, it seems like there should be a good reason to switch from the status quo. 

The reasons given above about the deficit and riskiness do give some justification for changing the scheme. Mike Otsuka has suggested a very reasonable alternative which would reduce risks but retain some of the advantages of a DB scheme. 

This is why I think that the use of the pension calculator outcomes I have seen is a bit misleading. It will include a lot of assumptions about the continuation of the current scheme and the performance of DC investments. 

Also - if people are going to be optimistic about how well the DB scheme investments will go then shouldn't they be similarly optimistic about DC investments? If people think that their DC investments will perform poorly then why should they expect future University staff to pick up the tab if their (alternative) DB scheme would be similarly hit?

Universities don't have shareholders on the hook for pensions. So where would the funds come from? 

That is one of my concerns - that the incidence of the deficit falls largely on future University staff. Essentially, future staff in the sector will face lower benefits if there is a deficit to make-up. No-doubt savings can come from other places, such as spend on other aspects of research, and maybe fewer fancy flagship buildings. However, HE is a human-intensive sector and pensions deficit payments are paid via employer contributions relating to present staff in normal conditions. 

It is perhaps hard to take for young academics that whatever happens they won't be getting anywhere near as much in the way of pensions as older colleagues and recent retirees. But that is the case for all younger people now of course who look enviously at the income of the recently retired. 

The deficit has to be made up from somewhere the longer the scheme remains in deficit the more of a drag it will be on the sector. UK Universities compete internationally for talent and to undertake research, and will lose competitiveness if all new hires come with extra pension deficit payments attached. 

Should staff go on strike?
A strike seems like a reasonable course of action to me - the proposed changes seem more extreme than necessary. Its a dispute between employer and employees so its up to them to resolve the dispute. Hopefully all parties will be reasonable and come to a decent compromise.

The Union's job is to get its members fired up of course, so you can understand why they talk about 'axing' pensions etc.

However, I just hope that the parties don't get too entrenched in their positions - the idea that people are having 'half their pension' taken from them is very emotive and I worry it is misleading.

It would be great if UCU would reconsider and look at something like Mike's proposal above as a way to share risk in a more effective manner.