Consultation: DC - Defined Contribution
You will have received an email recently from HR.Pensions inviting you to complete a questionnaire
about the new Defined Contribution section of your pension scheme.
We discussed this matter at the Warwick UCU branch meeting, following from advice received from
pensions experts, and our inclination is to recommend that you do not respond to this questionnaire.
This is the advice that we have received:
It is unlikely that any response to this survey will result in an improved DC scheme. The questions
don't directly ask for our views about what we would like in the DC section, and there is no option to
provide such views. The survey seeks to create a brief profile of how you individually respond to risk
in investment contexts, but the vast majority of us are unused to contemplating investment strategy,
and the use of the word 'risk' in usual circumstances is of a negative thing. Some questions seem to
be leading (for example, there is a question about risks attached to ethical investments, but none
about risks attached to other baskets of investment).
The survey is designed to produce data that will most likely be used to design the DC scheme. However,
we also perceive a possibility that any data produced by the survey might well end up also being
used by people wanting to make money out of our pensions savings. In this sense, the questionnaire
constitutes market research, or could be used to construct a scheme that is less in our favour than it
If we (inadvertently) collectively reply in a way that suggests that we are all individually risk
averse when it comes to investments (whether or not we are used to making such decisions), this could
be used by USS to argue that we are risk averse in support of their general 'de-risking' rhetoric, and
so weaken the UCU in current and future negotiations.
Given the ongoing negotiations about the pensions and how to handle risk, providing USS with data on
individual risk preferences is likely to weaken our chances of collectively negotiating a scheme that
is better for all. Though this is not a formal position, our inclination then is to recommend that you
do not respond to this questionnaire.
1. Very short reply. If you only want to write one or two sentences, use Q12 'General Comments' and state that you are dis-satisified with the proposals and the reasons given for the proposals.
3. Moderate length replies: Link.
4. Longer replies. I recommend that you consider: A note by Nicholas Barr. LSE, which discusses reform of USS as simply as possible. Mike Otsuka's reply; from this page, you can also see responses from several universities, which query the USS approach. Our Warwick colleague, Dennis Leech has many useful comments on his blog. Imperial College's response and detailed assessment are also useful. An expert actuarial report commissioned from First Actuarial by UCU is also important.
These are questions which you might consider, in the light of your own understanding of the USS valuations, and the information and mis-information which has been circulated.
I notice that the UUK heat map comparison is not really like for like, as the hybrid scheme uses higher contribution rates for employee and employer. I expect Mike Otsuka and Dennis Leech will update their blogs on this; UCU did not agree the annuity rates, and asked for the DC modelling to be based on industry wide ones of -0.5%, 2.5% and 5%. Most of the benefit for the hybrid must come from the increase to 8% and 18% contribution rates. A fair comparison would use the same contribution rates for both. Further, the set of conversion rates (4.5%, 5.5%, 6.5%) are far more generous than any annuity available on the market today. And they're far more generous than the conversation rates that the USS modeller assumes, (Furthermore, the annuity rates used for DC are higher than used in the funding calculations. As far as I know, the interest rates used in valuing USS are 4.05% going down to 3.45%, but the lowest rate quoted in the heat map is 4.5%. It appears that USS assumes returns, for the purpose of setting contribution rates, below the lowest of the three rates of returns they model for DC.) Also, the Final Salary comparison appears to assume one stays on the same salary point indefinitely. Finally, the comparison does not consider how final salary contributions made before 2016 are treated.
Meeting with Bill Galvin, CEO of USS.
Saul Jacka and I were invited by Bill Galvin, CEO of USS, to meet him 'in a spirit of openness and transparency'. The meeting took place in London on Friday 27 March 2015. Jeff Rowney, the senior internal (USS) actuary, Ali Tayyebi, the scheme actuary from Mercers and Brendan Mulkern, Chief Policy and External Affairs Officer for USS were also present. Although Bill Galvin initially made his excuses, he stayed for almost an hour.
Ali Tayyebi made it clear that a major driver for the single estimate of the deficit which has been made public was the UUK's insistence that the employers' contribution could not go above 18%, as they could not afford more. However, UUK also insisted that the salary forecast should be CPI + 2%, (RPI + 1%, or they might be minded to accept RPI+0.7%), substantially above the historical position, even when the unprofessional discarding of the last three years actual salary position is used. So the UUK position is incoherent: they say they cannot afford to pay for pensions, but they can afford to assume a rate of pay increases which is know to be well in excess of what is actually paid. I reminded Ali Tayyebi what the statistical definition of bias is; the evidence is that the assumption on salaries gives a large over-estimate of the liabilities. There are other inconsistencies, and circular arguments, rehearsed again by the actuaries.
Ali Tayyebi also stated that describing uncertainty was a fundamental part of his advice. He had provided numerous different estimates of the deficit, under all the assumptions which we and Imperial College suggested, and many more, to the USS Trustee and the UUK. The USS Trustee has had open discussions with UUK. Bill Galvin said that, to his knowledge, nothing had been withheld which people have asked for. I find this strange, as both institutions (Warwick, Imperial College) and individuals have requested sight of a range of valuations.
Bill Galvin said the range of estimates of the deficit or surplus of USS will be released after the consultation. It seems to us that the USS Trustee and the UUK are withholding important information from members. We do not see how the USS Trustee can claim to be acting for the benefit of members and standing up to employers (two of their statutory duties) whilst failing to provide a range of estimates until after the consultation. In my opinion, I should not trust the USS Trustee to be open, transparent, or willing to respect beneficiaries of the USS.
I cannot find the 'openness and transparency' which was offered. Our replies to the consultation must request sight of the full set of estimates provided by Ali Tayyebi for Mercer.
Employers Pension Forum (EPF)
The Employers Pension Forum (EPF) put out a Q&As on the USS dated 11 August 2014. The original version can be seen here.
I wrote to EPF point out the gross errors in life expectancy on 9 September 2014. I have not received a reply to this letter as yet (27 Nov 2014). However, by 2 October 2014, the errors had been deleted, but the date of the document had not been changed.
The conclusions drawn remained, with no indication that a change had been made. The EPF released a document on 9 October 2014, Proposed Changes to USS – Myths, Misconceptions and Misunderstandings, which contained false assumptions.
An expanded set of alleged Myths, Misconceptions and Misunderstandings was published on 7 November 2014, which appears to include a mixture of the highly disingenuous, the unfortunately misleading and the downright erroneous, contrary to the stated aspiration 'to include additional facts'. For example, two statements in response to my 9 September letter were false. Professor Saul Jacka and I wrote 'Mistakes and misinformation' to Professor A Muscatelli, the Chair of the USS Group of the Employers’ Pension Forum, and received this reply:
From: The Principal <email@example.com>
Sent: 19 November 2014 15:38
Dear Professors Jacka and Hutton
Thank you for your letter of 17 November regarding the document titled `Proposed Changes to USS: Myths, Misconceptions and Misunderstandings'.
I am pleased that you felt many of the headings and glosses were reasonable but I acknowledge you have concerns over a number of points and am therefore passing the letter to our advisers and to USS (although I recognise you have copied the Chairman of USS on your letter).
Professor Anton Muscatelli FRSE AcSS
Principal and Vice-Chancellor
University of Glasgow
In my opinion, this email seems to suggest that the errors come from the USS Trustee.
In response to the latest 'USS: 2014 Actuarial Valuation: A Consultation on the proposed assumptions...' Several of us have written to the USS Trustee to query the method of estimating the apparent deficit, which might be a surplus. We received this reply, to which we responded.
As the EPF Q&A claims to provide information, it is at least unfortunate that errors are repeatedly published. 15 January 2015: I have finally received a letter from Professor Muscatelli acknowledging the error in the life expectancy statements. He did not apologise, nor has a correction been published. I believe the admission of error is connected with my putting in a formal complaint to the USS. I received a reply on 28 February, the deadline by which USS was required to reply to me. I am not satisfied with the reply, and will take the matter further.
Further discussion of the weaknesses of the USS Trustee claims are provided by LSE and Imperial College. The IC working party report is at the bottom of the page in the link. Just above it is the College's response.