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Sussex UCU response to the UUK consultation on the USS valuation



The following was prepared with input from across campus, and submitted as a paper for Council meeting 257, 7 May 2021. The Council meeting was a single issue meeting to prepare the University of Sussex institutional response to the UUK consultation on the USS 2020 valuation. Council papers should be available on the Council page of Sussex Direct in the near future.


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Our view is that the USS 2020 valuation is not fit for purpose, the governance of USS is also not fit for purpose, and the Pensions Regulator is exceeding its remit. This situation is endangering the viability of the UK university sector.


We support the following statements by UUK and their actuaries.

  1. In UUK's public letter to USS, calling for a review of the valuation, it was described as ‘unjustified’, ‘unnecessary’, and ‘unaffected by the evidence presented’.

  2. In the Aon report for UUK, the methodology was described as ‘misleading’ and a ‘hall of mirrors’.

  3. In writing to the Pensions Regulator, UUK stated that ‘we are particularly concerned about the influence of the Pensions Regulator on the USS Trustee’ and ‘we have seen little evidence to date that there is focus on your statutory objective’.

  4. In the UUK consultation document, it was explicitly stated that ‘scheme governance is long overdue a review’.


It is our view that Sussex must uphold its values by publicly calling for reform of the governance of the scheme, transparency in its interactions with The Pensions Regulator, and by rejecting unjust benefit cuts that increase and amplify inequity, and that damage the international reputation and future prospects of the HE sector.


The current public position of the University, which creates the impression that Sussex cannot and will not challenge the USS valuation, is, we believe, in direct opposition to the historic role, values and strategy of our institution. We do not see how Council can, through its silence, appear to endorse a UUK illustrated outcome, based on a valuation that assumes unreasonably low asset growth, that devalues future pensions by 21% and which all stakeholders agree is unjustified and misleading. Governance and valuation reform requires a coordinated political, regulatory and legal strategy and engagement from all parties. We need to collectively and publicly challenge both the USS Trustee and the Pensions Regulator.


It is worth pausing to consider the size of the scheme. The assets, at £80 billion, are half the National Wealth Fund of Russia. The membership of 460,000 is comparable to the population of Malta. Lack of accountability and misleading documentation are never acceptable. In relation to a fund of this strategic importance and magnitude, it is an international scandal.


We have divided this document into two sections: our views on the consultation, then additional comments on the climate crisis, engagement across campus and USS forecasts.


Finally we ask, again, that Council responses to UUK consultations be shared, in a timely manner, as is the practice at other leading and progressive universities.


Section 1: Answers to UUK Consultation


COVENANT SUPPORT MEASURES

1. Would you be willing to support the alternative covenant support package which UUK has outlined in section 3, as the means to achieve a solution which might be acceptable in the round (see also question 15)?


Like UUK, we were disappointed that the USS Trustee refused to conduct a review as requested by stakeholders and fully expect that such covenant support concessions, in response to this question, will enable the USS Trustee to review its valuation at pace.


We consider the covenant of the UK university sector to be uniquely strong. With the caveat that both the valuation and the governance of USS are not fit for purpose, we support the alternative covenant support package as a means to achieve a review of the USS valuation. We recognise the flexibility shown by those employers who are able to agree to support such measures. Given the low levels of trust, we expect the USS review of the valuation to provide sufficient justification and data to allow all calculations to be verified independently.


COVENANT SUPPORT MEASURES

2. If the USS Trustee is not willing to accept UUK’s alternative proposal (should there be employer support for it), would you be willing to support the USS Trustee’s scenario 3 covenant support package to obtain a ‘strong’ covenant rating? If not, why is this and what level of covenant support would you be willing to provide?


We do not yet feel able to comment on this without further discussions, including with the University of Sussex Finance Director.


COVENANT SUPPORT MEASURES

3. Are there areas of the covenant support measures which cause you particular concern, or which you would wish to see modified? Please provide details.


We do not yet feel able to comment on this without further discussions, including with the University of Sussex Finance Director.


COVENANT SUPPORT MEASURES

4. Are there other areas of covenant support you would wish to consider such as contingent contributions or asset pledges?


We do not yet feel able to comment on this without further discussions, including with the University of Sussex Finance Director.


CONTRIBUTIONS

5. Do you agree that the current levels of employer contribution (21.1% of salary) and member contribution (9.6%) are the maximum sustainable – and should be the foundation for any solution?

a. If not, please state the level of employer contribution you would be willing to pay to USS following the 2020 valuation.

b. We would welcome any commentary on the reasons for your views.

c. We would also welcome employer views on the level of member contribution.


We offer the following three comments. (i) The opt-out rate is a serious cause for concern both for Sussex UCU and UEG, but the data given in the UUK consultation document is quoted as ‘based on a sample of employers who respond to the quarterly request. The sample varies over time but all times represent at least 30% of the USS membership’. This suggests that the data is not from 30% of USS members, but from an employer sample who represent 30% of the membership, which could be biased towards larger institutions. In addition the dramatic decline from 30% opt-out to less than 15% over the course of a year suggests the data is either subject to sampling errors or needs more analysis to understand the underlying causes. We feel there is not yet enough data or analysis on this important topic to make informed decisions about contributions rates in relation to opt-outs. (ii) It is not possible to answer questions about contribution rates and value without reliable information on the valuation and the benefits they would provide. (iii) We recognise the challenges involved in considering the strategic financial planning of the sector as a whole, but we consider that increased investment in staff is strongly justified.


BENEFITS

6. Do you support the broad principle of seeking to retain the hybrid benefit structure?


UCU opposed the implementation of the hybrid structure at its introduction, but we are not seeking to restore full DB at this valuation. We expect the current hybrid benefit structure to be retained with the threshold at its current level and that this threshold should continue to track inflation for at least five years as agreed in January 2020.


BENEFITS

7. Looking at the illustrative hybrid benefits which UUK has put forward, would you consider this an acceptable outcome in terms of benefits at this valuation – based on the positions on covenant support and contributions laid out?


No. Please see answer to question 15.


BENEFITS

8. If the illustrated hybrid would not be acceptable, what alternative benefit arrangements would you wish to provide (and please indicate alternative positions on covenant and contributions as appropriate)?

(For example, if the USS Trustee does not ultimately amend its assumptions, would you wish to offer a hybrid solution as set out in the USS Trustee’s illustrations (p18 of the Update Report) or would you prefer to move to a different offering, such as DC provision?)


Please see the answer to question 10 for our comments on DC provision. With regards to the illustrated hybrid, this is not acceptable and is based on an unjustified and misleading valuation. Before discussing benefit arrangements, USS should review its assumptions to include the evidence provided by the Valuation Methodology Discussion Forum alongside a justified, coherent and transparent approach to prudence. The reviewed valuation should provide sufficient justification and data to allow the calculations to be verified independently. Together UUK and UCU have the levers to force this movement, and we look forward to discussing details of any illustrated benefit structure following the review.


BENEFITS

9. Would you wish to explore conditional indexation or other conditional benefit models as a possible solution (likely longer-term, beyond the 2020 valuation)?


While recognising that this involves a shifting of risk from employers to employees, we support the exploration of Conditional Indexation. We hope employers recognise the movement shown by UCU as representing a commitment to working towards a sustainable outcome.


FLEXIBILITIES AND OPTIONS

10. Would you like to see flexibilities implemented for members to move away from the current uniformity of the USS structure, and if so which flexibilities do you think are particularly important?


Although the degree of flexibility is currently constrained by the high contribution rates, USS is not, and has never been, a uniform structure. As stated before, we would want to see more analysis of opt-out rates in order to make informed decisions about flexible options.


We are concerned that questions on flexibility are open to mis-intepretation and we would want to see specific costs and details, including Equality Impact Analysis, before commenting on any proposed options. We remain extremely concerned that individual DC, which moves risk entirely to the individual, is higher in cost and which amplifies existing inequalities, is being proposed as a ‘flexible solution’ to the orthogonal question of the valuation and governance crisis. Offering ‘choice’ as a solution to an invalid valuation is not acceptable. USS needs to review, justify and evidence its valuation.

The USS Employers paid-for content on flexibility, low-cost options and DC options are regrettable and are viewed by the community as misleading and dangerous. Such actions erode trust. We ask that UUK exercise responsibility and integrity in their messaging.


FLEXIBILITIES AND OPTIONS

11. Would you support the creation of a lower cost saving option for members and which of the parameters described in this paper are most important / or would need modification?

(If yes, we would welcome employer views on the options to achieve this (potentially informed via engagement with eligible USS employees).


No. Please see answer to question 10.


FLEXIBILITIES AND OPTIONS

12. Would you support the creation of an option for members to switch (from the hybrid structure) to wholly DC pension saving?

(We invite employer views on whether the same deficit recovery contribution should

be made for members choosing any new flexible DC alternative option, and what

levels of member and employer contributions devoted to DC pensions saving

should apply).


No. Please see answer to question 10.


FLEXIBILITIES AND OPTIONS

13. Would you wish to explore options for employers so that they can offer some variations to the USS standard benefits in the future – and if so, what would those variations be?


No. Please see answer to question 10.


GOVERNANCE

14. We would welcome views from employers in relation to the governance of the scheme and the valuation process (including views on the Joint Negotiating Committee). Specifically, would you support a post valuation governance review, and what areas what you like to see covered in such a review?


Co-ordinated work on governance reform should not be delayed until post-valuation.


It is clear to all that the governance of USS is in crisis. This is causing understandable, widespread and increasing anger among USS members, university staff and students. It is also clear that the Pensions Regulator is exceeding its remit at the expense of the sustainability of the sector. A reminder of the opinion of the FT Editorial board, in November 2019, that an ’independent inquiry should scrutinise the handling of the USS valuation by all key players, including the Pensions Regulator’. Concern about the crisis of governance and the blurring of the regulatory environment is now the mainstream view.


The JEP2 report recommended governance changes including establishing a Funding and Valuation Sub-committee, a Joint Forum between the Trustee and JNC and a Steering Committee. These improvements could be achieved by a rule change at any point.


Further improvements in governance should consider accountability models from other countries. For example the Danish University pension scheme Akademika Pension (140k members, £15bn) is fully owned by members who vote for Trustees and hold AGMs. The Netherlands government and education sector ABP (3,500 employers, 2 million members, £400bn) has an Accountability Board of 48 members, 32 of whom are elected, and who oversee the Trustee Board along with a smaller Supervisory Board. The multi-employer Jointly Sponsored Pension Plan model used in Canada, for example the University Pension Plan Ontario (33k members, £6bn) is fully and equally employer and employee run. Closer to home the Railway Pension Scheme is 50:50 employer to employee, and the Superannuation Arrangements of the University of London has up to 12 Trustees, of whom 5 and 4 are appointed by employers and employees respectively.


UUK ALTERNATIVE

15. As part of a solution to the 2020 USS valuation would you support the alternative covenant support package illustrated by UUK (headlines – moratorium of a minimum of 20-years with debt-monitoring and a pari-passu arrangement for secured borrowing above c15% of gross/net assets), to provide a hybrid benefits package at current contribution rates in the order of (pension accrual of 1/85 of salary [plus 3 times lump sum] up to a salary threshold of £40,000 with the CPI indexation of benefits [for active, deferred and pensioner members] capped at 2.5% per annum, and with DC above the salary threshold at an overall contribution of 20% of salary), together with a lower cost alternative to address the high opt-out rate, as well as a governance review of the scheme and valuation process?


We urge Council to weigh this question carefully and give serious consideration to rejecting the illustrated hybrid benefits on the grounds that such a path is a mis-direction and in opposition to the stated values and strategy of the University. No-one should agree, or be seen to be agreeing, to cut future benefits by 21% on the basis of a valuation that all stakeholders agree is unjustified and misleading.


We note the widespread criticism of the illustrated hybrid benefits, including, we hear, from the governing bodies of other universities, and the fact that the illustration is a higher priced version of the illustrated benefits rejected mid-way through the 2018 industrial action.


We appreciate the challenges associated with securing progressive change in the running of USS, and the added complexity given the way the scheme interacts with the regulatory environment. However, we urge Council to stand up for the sector, uphold the values of the University and take the difficult decision to reject the illustration now in order to ensure the debate can continue to move towards a sustainable and progressive solution. The alternative is to the repeat errors of the past which led to widespread industrial action.


Section 2: Additional comments and engagement


USS’s unrealistic forecasts and unjustified prudence

The graph below shows quite how high is the level of prudence applied to asset growth forecasts in the USS 2020 valuation compared with the prudence levels of previous valuations. We are in agreement with UUK that this level of prudence is unjustified.

Source: Sam Marsh, How extreme prudence and misguided risk management sent the USS into Crisis, March 2021


Climate emergency and ethical investment

We welcomed the University’s declaration of a Climate Emergency in August 2019. We support People and Planet in their call for social and environmental justice. We request that Council call on the USS Trustee to act likewise and in particular to declare a Climate Emergency. We are outraged that the USS Trustee voted against the Shareholder motion in 2020 for Shell to set and publish targets aligned with the goal of the Paris Climate Agreement. Such behaviour is out of step both with the universities’ public statements on climate and with UK pension bodies such as LAPFF. UK universities should be held accountable for the investments in the pension fund and should be calling for a target based investment strategy that addresses the climate crisis and social and environmental justice.


Engagement across the Sussex community

It is somewhat unfortunate that the Council meeting to consider the institutional response is on 7 May, when the UUK consultation deadline is 24 May. This makes for a tight turnaround on meaningful engagement on this complex issue.


i) On the University of Sussex engagement with staff: We are pleased with the increased level of engagement, but have raised concerns about errors and the inclusion of UUK marketing materials in presentations by the ‘independent expert’ employed by the University of Sussex. There remain a number of errors and confusing statements on the University of Sussex 2020 valuation pages and we have asked for these to be clarified and corrected. As discussed with the Director of Finance, the staff survey used by the University of Sussex was widely considered to be misleading and open to mis-intepretation.


ii) On Sussex UCU engagement with members: The UCU branches of Sussex and the Institute of Development Studies have a joint pensions working group. We have items on USS in our bi-weekly newsletter, we regularly update members in more detail via email and post views on the Sussex UCU blog. In the run up to the consultation we emailed all members and asked reps to forward details to non-UCU colleagues. These emails contained our initial views, details of office hours, invitations to complete a free-text survey, offers of presentations and much further reading. We gave a presentation at the UCU EGM to over 100 UCU members and gave presentations at departments across campus. We received a good amount of feedback, including from non-USS members and non-UCU members. We have kept the USSU updated and continue to engage and consult widely across campus.


A team of five UCU members met with the University of Sussex Finance Director and Pensions Officer on the 27 April. We have a second meeting scheduled for 18 May.


Taking on board the feedback received to date we have updated our Initial views on the UUK consultation to produce this document. We look forward to continuing engagement with the University.


Sussex UCU Exec and Reps


This paper is the result of work by the Sussex and IDS Pensions Working Group, and is informed by the feedback received from across campus on our initial views posted here. It was submitted to Council on 5 May 2021 for Council meeting on 7 May 2021 and published on the Sussex UCU blog on 12 May 2021.


Photo credit main image: Mário Pires ‘Simply Rockers Sound System’.



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