Pensions after the pandemic

Before Covid-19, the sector was facing industrial action and financial concerns about pensions. Craig Berry asks what could happen next.

The 2017 valuation of the Universities Superannuation Society pension scheme (USS) kicked off a wave of industrial action in the higher education sector, despite a revised valuation taking place in 2018, and the 2018 valuation then being ‘updated’ in 2019.

With the latest University and College Union (UCU) strike barely over, the 2020 valuation is already due. USS will proceed was a valuation process based on the scheme’s funding status on 31st March 2020 (with the outcome published by June 2021).

In the post I consider the potential implications, not simply of the specific outcomes, but of the fact that the valuation will take place at all. It is difficult not to be cynical about USS’s decision to proceed in the present circumstances, but nevertheless, there are questions for UCU about whether its pensions agenda should any longer be based on defending USS entitlements.

March madness

Readers might have noticed: things have changed rather a lot since 2019. Things have changed rather a lot in the last fortnight. The economic consequences of ‘lockdowns’ imposed throughout the world in response to the Covid-19 outbreak means that the USS deficit has ballooned from around £3.5 billion to over £11 billion. And it would be unwise to assume the crisis has bottomed-out.

As equity values plummet, USS reported itself to the Pensions Regulator last week for breaching self-sufficiency thresholds. There are concerns it might be unable to make cash payments to current retirees without asking employers for exceptional contributions (a scenario, however, which USS currently sees as unlikely).

Postponing the 2020 valuation would, in the circumstances, have been permissible by The Pensions Regulator. Yet the USS board is pressing ahead. We were told, in the esoteric language typical of pensions industry practice, that the corona crash would be taken into account:

With the 2020 valuation set to take a snapshot of our financial position on 31 March, market conditions are likely to paint a more negative picture than was anticipated.

As we have committed to a 2020 valuation, we will continue the process for the time being. However, we will review conditions and take action as appropriate, which may include applying post-valuation experience that allows us to adjust the picture based on significant changes to conditions at the late stages of the valuation.”

The suggestion here is that USS is already planning to revise the valuation it has not yet conducted. The flexibility available in this regard helps to explain why the valuation is proceeding: either the funding position improves, and USS can be seen to be dialling back from the implications of the March 2020 snapshot, or it deteriorates further, and the initial valuation will have softened up members for the potentially grave consequences.

The future of USS

The suspicion will be that USS are not, as they say, letting a good crisis go to waste. If the deficit is even in the ballpark of £11 billion when the valuation is finalised, we can expect the contribution increases due in 2021 to be revised upwards. There may even be pressure from higher education employers to revisit the wholesale closure of USS’s defined benefit scheme in favour of defined contribution provision (where employees, not employers, shoulder the investment risks).

Members will, and should, resist any such moves. The uncomfortable truth, however, is that higher education employers were probably right about the sustainability of USS, even if they were right for the wrong reasons. The impact of Covid-19 could not be foreseen, but funded defined benefit pensions provision is inherently unstable and, as I argue in my forthcoming book Pensions Imperilled: The Political Economy of Private Pensions Provision, has become more unstable in the context of financialisation.

The notion that USS is more sustainable than employers are prepared to acknowledge – advanced by UCU – depends implicitly on a more optimistic view of capital market performance, specifically the future value of ‘safe haven’ assets used to match liabilities such as gilts. And this view itself rests implicitly on the assumption that the (neoliberal) state will always act to prop up asset values. Even if these were reliable assumptions, they lead to an uncomfortable place for a trade union to position itself.

UCU also has a more optimistic view of the strength of USS’s employer covenant. The covenant is the employer’s guarantee to stand behind the scheme’s pension promises come what may (what I term in the book the ‘temporal anchor’ required to cope with failed futures). UCU’s position is that universities are more financially robust than university leaders claim. Again, this depends implicitly on an expectation – as yet untested – that the state will always act to prevent insolvencies among universities (thereby guaranteeing the continuation of contributions).

TPS to the rescue?

The apparent fragility of USS has encouraged some academics to float a radical alternative for higher education pensions provision, that is, absorption of USS by the Teachers’ Pension Scheme (TPS). Any such move would represent a bailout for academics on an epic scale.

TPS is an unfunded public sector scheme, primarily for primary and secondary school teachers, which means pensions are paid directly by government, rather than enabled by investment returns. It cannot become insolvent. It is worth noting that the post-92 universities are already part of TPS rather than USS, due to their origins in further education.

The question of whether higher education is rightly understood as part of the public sector has underpinned the recent dispute. (We should probably see the post-92s’ position as an anomaly: it is not alone justification for absorption of the rest of the sector by TPS.) USS is, unambiguously, a private pension scheme. But if its members are providing a public service, do they not deserve pension entitlements in line with other public servants?

It is absolutely right that academics defend the public service we contribute to society. But we should also recognise the limits of our contribution, at times like this. Some of these limits are inherent – most of us do not save lives for a living, for instance – and some result from marketisation and intra-sectoral competition taking universities away from their core purpose. As Steven Jones argues, we should see Covid-19 as an opportunity for renewal in this regard.

The pensions dimension of this mission would see academics argue not simply for stronger guarantees for themselves, but rather better pensions for all – including the many low-paid ‘key workers’ in the private sector, whose pension rights are far inferior. This might involve, for example, USS assets being used to capitalise new forms of collectivist provision open to other sectors.

One response to “Pensions after the pandemic

  1. A lot of USS members will not be happy to see their right to automatic cash disappear if they end up in TPS

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