3. Risk and regulation

We may begin with the Universities Superannuation Scheme – a long-established fund with an appealingly archaic title. USS is governed by a board of twelve: three members appointed by UCU (generally people who have held office in the union), four members appointed by UUK (current or former Vice Chancellors), and five ‘independent’ members. The latter are all people with careers in finance: asset managers, bankers, company directors. This board is ‘supported by’ the senior executives of USS Investment Ltd, USS’s wholly owned subsidiary company, again mainly finance people; it also draws on ‘advisors’ – actuary, lawyers, auditors – who, as the website carefully notes, ‘operate within the tight legal requirements that govern pension schemes today’. Interestingly, one of these ‘tight legal requirements’ is that at least one third of trustees be nominated by members of the scheme, that is, employees. As only three out of twelve USS board members are appointed by the organisation representing employees, UCU, there is some question of whether the board is legally constituted. In any case, it is clear that power within USS is likely to be held by the money people: the five ‘independent’ board members, the ‘supporting’ senior executives of USS Investment Ltd, and the ‘advising’ actuary, lawyers and auditors. These people, we may presume, call the shots in decisions about the kinds of funds USS invests in, as well as the sorts of assumptions it makes. One UCU member has called attention to the fact that USS invests in a rather small range of equity funds, somewhat dominated by the asset manager BlackRock; and one USS director, Michael Merton, is also on the board of a BlackRock investment trust. Ewan McGaughey of KCL has argued that the role of former asset managers – four of whom sit on USS’s board – is particularly suspect. Asset managers have a vested interest in the abolition of Defined Benefit pension schemes and their replacement by Defined Contribution schemes, as their companies will make money from selling and administering the latter.

Who sets and oversees the ‘tight legal requirements that govern pension schemes today’? The Pensions Regulator is ‘a public body sponsored by the Department for Work and Pensions (DWP)’; based in Brighton, it employs around 500 staff, and ‘works closely with’ other government agencies, including the Pension Protection Fund. Its board is chaired by Mark Boyle, who describes his career as having spanned ‘banking, FTSE corporate and central government’. This description can be extended, with minor modifications, to the rest of the board members: a mixture of former civil servants, accountants, corporate lawyers, and pension fund executives. One instance illustrating the revolving door between the regulator and the funds it is supposed to regulate is the fact that Bill Galvin, the current chief executive of USS, was head of the Pensions Regulator between 2010 and 2013.

The Pensions Regulator was created under the Pensions Act passed by New Labour in 2004. It replaced a former authority with a similar role, created in 1995 in response to Robert Maxwell’s embezzling a large chunk of his employees’ pension fund. The official rationale behind these pensions regulatory bodies was thus to protect employees from the risks of their employers defaulting on pensions commitments. The 2004 Act also introduced the Pensions Protection Fund, designed to safeguard against the risk of pension funds failing due to employers going bust. But as Dennis Leech of Warwick University has argued, the Pensions Act ‘also tightened up on funding rules and imposed an inappropriate market-based valuation methodology’. This methodology was ‘based on a purist belief in markets as a source of information – ignoring all evidence from academic economics, both empirical and theoretical, showing the limitations of markets as providers of information.’

The Pensions Regulator’s ‘flexible, proactive and risk-based approach’ (in the words of the Minister for Pensions Reform, Stephen Timms, in 2006) was aimed in theory at preventing pension schemes from going bust and having to fall back on the Pension Protection Fund. Yet the effect of its regulations has been to value Defined Benefit pension funds in such a way as to create huge and growing deficits. This has forced many such schemes to close, further perpetuating the notion that Defined Benefits schemes are unsustainable and outdated. Deficits have often been blamed on the growing life expectancy of pensioners, but – as Leech writes – this is a far from sufficient explanation. Rather, one suspects, it has become a convenient way of arguing that Defined Benefit schemes have been rendered obsolete by facts of nature, beyond our control. The notion that Defined Benefit pensions are in themselves a source of major financial risk is very much the accepted orthodoxy among financial practitioners – as stated recently by the Joint Forum on Actuarial Legislation. Behind the ever-growing ‘deficits’ of Defined Benefits schemes, Leech claims, is not the growing longevity of employees, but a major shift in financial managers’ attitudes to investment. ‘Instead of pension schemes being able to benefit long term from economic growth by investing in productive capital, the traditional approach, they are now seen as myopic speculators in financial assets’ – assets which bear ‘a fixed quantum of risk’. These ‘risks’ are then used to create models of the ‘deficits’ of pension funds. A key role of the Pensions Regulator is to make sure they take steps to reduce these ‘deficits’: its official role of ‘protecting workplace pensions’ thus becoming, in practice, one of undermining or destroying pensions. For one of the key points at issue in the story of the USS dispute has been, of course, whether USS has a deficit at all.

What is more, the models used by USS assume a pension fund underwritten by a single private company, which could be in danger of going bust. The spectre of the recent failure of BHS seems to have dominated correspondence over the summer of 2017 between the Pensions Regulator, USS, UUK, and MP Frank Field, Chair Elect of the Work and Pensions Committee. USS, on the other hand, is a huge scheme with a large number of stakeholder employers, representing a major part of the UK Higher Education sector. Even if these employers looked financially shaky, the scenario on which the USS scheme has been basing its ‘risk’ testing appears to be one in which several UK universities were to go out of business. As many academics have recently been arguing, this is a scenario which no government could allow to happen – although the current government does now envisage scenarios in which some individual universities go bust. But the lack of governmental underwriting of the scheme is again not a fact of nature. When USS was founded, Dennis Leech again points out, the state was a partner alongside UCU and UUK. The fact that the scheme is now underwritten solely by the employers – in contrast to other pensions schemes, for teachers and other public-sector employees, which are government-backed– is the product of the state’s own ‘de-risking’. The last phase of this came in 2011, when the Tory-Lib Dem Coalition government removed HEFCE, the government body which funds higher education, from formal involvement in managing the USS pension scheme. Again, what has been portrayed as natural and inevitable can be seen to be the result of political decisions, taken by specific people.

Out of these decisions came the assumptions behind the valuation of the USS pension fund conducted in September 2017. This valuation took a risk-averse approach designed to insulate the scheme from having to call on either employers or employees for more funds in any possible situation. This involved running ‘Test 1’: a scenario in which a large proportion of the scheme’s investments, in stock market equities, had to be converted into ‘gilts’, government bonds which are supposedly ‘risk-free’. Return on gilts are at a historic low, meaning that the USS ‘deficit’ can, by this means, be made to look enormous. In July 2017 it was reported as being £12.6 billion; in September the USS Trustee had altered its assumptions such that it came out at only £5.1 billion. At the same time, the ‘best estimate’ of USS’s actual future performance put USS in surplus to the tune of £8 billion. The actuaries employed by UCU supported adopting this ‘best estimate’ as the most valid indicator of the scheme’s condition. USS did not go so far, but even the revised estimate of only a £5.1 billion ‘deficit’ required the member institutions of USS – the universities – to accept a higher level of ‘risk’ on their balance sheets. It was this question that was put to them in September, via the now infamous survey.

As USS states, ‘The appropriate level of pension risk to take is a judgement [the] scheme’s employers must make given their broader commercial and strategic priorities and the risks attaching to these.’ What are the ‘commercial and strategic priorities’ of Britain’s university leaders and their collective organisation (or cartel), Universities UK?

[Image: CWC Pensions.]


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