• The Gaudie

Gilt Complex

Move to defined contribution pension scheme means universities absolved from gilt sell off, and risk will be left to people who teach


by Matthew Keracher



Members of the University and College Union (UCU) at Aberdeen will join over sixty other campuses in a series of strike days over the end of February and into the beginning of March.


The strikes, which will disrupt classes and inconvenience students, come after talks broke down between the UCU and Universities UK (UUK) over fundamental reforms proposed to the Universities Superannuation Scheme (USS). Whilst many students will feel affronted by a disruption to planned lectures and tutorials (especially international students who pay the most to learn), those same students likely don’t understand the wider context within which this industrial action comes as a last resort.


According to a press release on their website from 23rd January, talks over the future of the USS ended without an agreement between representatives from UCU and UUK. The UUK represents the interests of governing bodies across British universities. (Founded in the nineteenth century, it was originally called the Committee of Vice-Chancellors and Principals of the Universities of the United Kingdom.) Following the talks, UCU general secretary Sally Hunt, quoted in the press release, said: “Staff will feel utterly betrayed by their leaders. We are disappointed at how talks ended today, particularly after UUK suggested yesterday that it wanted more talks to avoid strikes. Universities must be on notice that unless there are dramatic changes in their negotiators' position then strike action will be arriving on campus next month”.

 UUK advocate the wholesale transference of the future pension promises from one of Defined Benefits (DB)—in which pensioners are paid depending on a percentage of their salaries and the number of years they’ve worked under an employer—to one of Defined Contribution (DC), in which both the employee and the employer’s contributions are invested, and the proceeds then used to buy a pension or other benefits at retirement. Under a DC scheme, pensioners’ income fluctuates based on investment earnings.

“There is much talk of a crisis of leadership in higher education at the moment, especially after the recent vice-chancellor pay and perks scandals. Now is the time for university leaders to recognise the scale of this problem, how angry their staff are and to work with us to avoid widespread disruption in universities”.


Hoping to understand the specifics of the strike, and to investigate whether the disruption to classes and students could be justified, I went to talk to Dr. David Watts, a human geographer and trade unionist working at the Rowett Institute on The University of Aberdeen’s Foresterhill campus. The USS is a pension scheme that pools and invests from members payments, including academic and academic-related staff in many UK universities. USS is the second largest of such schemes in the United Kingdom, with more than 390 participating institutions and more than 390,000 members. Most of these members work or worked at older institutions in existence as universities before 1992. Those incorporated after, previously polytechnics, enjoy the state-guaranteed Teachers’ Pension Scheme. This has created a ‘two-tier’ system in the higher education sector, in which the USS is the less desirable of the two pension schemes: proposed changes to the scheme will have the effect of widening this gulf even more.


Dr. Watts told me, that for most members paying into the USS, the proposed changes to the pension scheme would see retiring academics receive between a 20-40% reduction in the lump sum they receive after retirement. Academia is often seen as a sector of the economy that receives lower pay versus how much they work. This is offset not just by scholars’ passion for what they do but also their pension. Those on the Universities Superannuation Scheme, as opposed to the Teachers’ Pension Scheme, see the change as cataclysmic not only to their own pensions—but further into the future, widening the gulf in where the best scholars see it as desirable to teach, research, and live.


Universities like Aberdeen seek to lose out the most, in being a smaller-league university compared to other pre-1992 institutions (like Edinburgh, or Cambridge). For Dr. Watts however, and others who believe the strike is necessary, the calculus by which the proposed changes are justified is not only empirically flawed, but is also being used to wider ideological ends by both the UUK and the USS.


Under dispute is the way in which money is given to academics earning under £55,000 a year when they retire. UUK advocate the wholesale transference of the future pension promises from one of Defined Benefits (DB)—in which pensioners are paid depending on a percentage of their salaries and the number of years they’ve worked under an employer—to one of Defined Contribution (DC), in which both the employee and the employer’s contributions are invested, and the proceeds then used to buy a pension or other benefits at retirement. Under a DC scheme, pensioners’ income fluctuates based on investment earnings.


Announced by then-chancellor George Osborne in the 2014 Budget, the ostensibly labelled pension ‘freedoms and choice’ act relaxes a lot of regulations upon employers. Under the DB system, pension scheme capital is still invested. (In 2012, USS Axle, a USS subsidiary, purchased Brisbane Australian train company Airtrain Citylink for A$110 million. USS also has shares in Thames Water).


The difference is, under a scheme, USS have to make sure the £60 billion accrued assets of the fund—money paid in by universities and individuals—is able to be paid to people when they retire, called a pension promise. The proposed movement to a DC scheme would see this money liquidated into a capital investment fund, into which members of the scheme ‘volunteer’ their contributions, taking on the risk of investments failing themselves. Government frames this as a movement towards individual choice and freedom, allowing employees over 55 to ‘unlock’ parts of their pension to independently invest to future benefit; however, this doesn’t candidly reflect that, as well as an individual contribution of around 8% of income, the university contributes an equivalent 16%: Individuals who choose to ‘free’ themselves from this arrangement, and consider a private pension, lose out on the University’s contribution. Staying within the DC scheme, as would-be pensioners of Northern Rock bank now know, would mean taking on all the risk and having none of the control over where that money is invested. For USS, as well as the Universities themselves, a DC scheme would mean no longer having to be accountable on the returns of people’s investments. As a result, the Universities contribution to future pension promises is to fall from 16% to 13.25% and will only be guaranteed at that level until 2023, when no doubt it will fall further. Ideally, the UUK wouldn’t want to have to contribute to pensions at all and would instead envision a neoliberal model in which USS’ investment portfolio is strong enough so that retirees could get the equivalent or more from the free market.


The proposition to move to a Defined Contributions (DC) scheme comes after the USS reported a technical deficit of £17.5 billion in July 2017. Liabilities were projected to be £78 billion, growing by one-third over the previous year, over their £60 billion assets, which grew only by one-fifth from £49 billion in the same timeframe. According to this assessment, the growth of its assets has not kept pace with the increase in its liabilities. To combat this deficit, reduce reliance on, and risk to, universities, USS sought in its 2017 Actuarial Valuation to go about finding a way to move “the scheme to a low-risk, ‘self-sufficient’ portfolio—one that would have a low probability of ever requiring any further employer contributions in respect to benefits earned up to that point in time”. In other words, USS and UUK want an investment portfolio strong enough to cover benefits without universities having to contribute 16% equivalent of employees’ salaries, as in the current defined benefits system.


According to Dr. Watts, there are diverse ways pension funding is calculated and reported. Rather than an objective reflection of reality, calculating futures depends on a “complex actuarial exercise” in which minor changes to a metric can have a big effect on the generated result. During a valuation discussion forum in 2017, USS applied what Watts calls “layered prudence,” in their calculation of how the pensions scheme—in its current DB form—would weather future markets. Dr. Watts claims that this deficit, which is being used to rationalise the move to a DC pension scheme, is projected following a series of peculiar and fallacious assumptions: The most salient and absurd being the assumptions of where and what investments USS has. Dr. Watts told me that the calculus used by USS, in consultation with UUK, assumed that 100% of USS assets were invested in government-backed gilt bonds. Making this assumption would yield the £17.5 billion deficit stated, given the falling yields of gilt bonds since 2007, and create the need for the proposed reforms. However, that assumption isn’t true.

 Following the 2016 Brexit vote, the yield of gilts plummeted from 2.2% to 0.98%, hitting historic lows.

Before the 2008 Credit Crash, the USS pension fund was composed of about 84% equities. Equities are shares in private companies. Over the year of the Credit Crash, the fund’s assets fell from £32.6 billion to £23.1 billion because of falling equities. Following the 2008 Credit Crash, the government issued cheap ‘gilts’ in order to raise liquidity. (Gilts are bonds issued by the British government, so-called for being issued on paper with gilded-edges). This was intended as a form of ‘quantitative easing,’ which means increasing the amount of money available and circulating in the market by buying others debt. In 2009, the Bank of England lowered interest rates to their lowest value since it was founded in 1694 (0.5%) and created £75 billion to buy gilts and corporate debt so both the government and corporations could spend again. Following 2008, USS did the same and invested heavily in gilts: Being backed by the government, they are supposedly a low-risk, high-value investment. In other words, they are a good place to keep pension monies since the government cannot default on repaying the loan. Between 2007 and 2017, gilds went from making up 7% of the pension fund (then valued at to 31%. NOTE: Need to contact author for clarity on this. Following the 2016 Brexit vote, the yield of gilts plummeted from 2.2% to 0.98%, hitting historic lows. As of this month gilt yields sit at only 1.80%, compared to their sitting at 4.45% in 2009–around the time that USS increased its asset share of gilt bonds.


USS want to make more profits from their investment, so that universities don’t have to contribute to pension benefits in the future. However, changing their portfolio now, after buying these gilts during a period of historically-low gilt yields and interest rates would be very expensive for the USS, and would raise the level of liability and reliance on employers (read, UUK) to cover pension promises. Moving to a Defined Contribution (DC) scheme moves the risk away from universities because they would no longer have to pick up the slack if USS investments slump; however, it would put that risk onto individuals, who would be left with whatever their investments look like at the time of their retirement.


For Watts, overly ‘conservative’ assumptions by which USS make their calculations on future liabilities create a fatalistic opinion of the working DB scheme. According to him, over-estimating the amount of gilts in USS’ investment portfolio artificially creates risk and reliability on universities: A future that may never come to fruition because it exists only in USS’ sums. According to Watts, USS’ calculations use excessively prudent assumptions out of line with most pension forecasters in equivalent Individual Defined Pension (IDC) schemes and are not even required by the pensions regulator. Dr. Watts assured me that, compared to other pension schemes, the USS is considered ‘young,’ in that more people are paying into the scheme than taking money out: On this basis, analyses show the fund healthy in its current form until ‘after 2080’.


If the USS moved to a Defined Contributions (DC) pensions scheme, it would be able to diversify its gilt-heavy portfolio back into pre-2008 equity investments at a cost to individuals paying into the scheme, rather than universities (UUK). A DC scheme would allow USS more liberty in what they can invest in, and especially in their ability to take a loss without endangering UUK coffers; that would come out of staff pension benefits.


Right now, under a Defined Benefits (DB) scheme, because the pension regulator makes USS and UUK make a pension promise, they are trapped in the gilt slump and cannot shift assets. This means that certain individuals within USS and UUK are unable to make personal profits from such investments under their oversight. To people in USS, it is like seeing all this investment capital just sitting in government gilts and going to waste. Freeing that investment and putting it back into equities would mean greater returns on investments in the future but with higher risk to individuals who just want a fair pension.

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