COMMENT
july 16 2019, 12:01am, the times
Smashing the consensus on university pension pledges
patrick hosking, financial editor


One of the most surprising of recent official statistics was on strikes in the UK. Two thirds of all working days lost last year were down to walkouts in a single sector — education. Fifty-two per cent of the 39,000 people who downed tools last year were education workers.

The days when car workers, coalminers and steel workers dominated the stats are long gone, either because their industries have disappeared or because of they have fostered grown-up, reasonable industrial relations. Strikes are rare and even the strike-prone railways and airports were relatively peaceful last year.

Education, however, was not. It was dominated by a dispute over university staff pensions. Lecturers walked out in their thousands. Students missed out on 14 days of lectures and seminars. Corduroy replaced donkey jackets on picket lines.

A truce was called in April 2018, when universities abandoned their plan to scrap defined-benefit pensions and to move to a cheaper defined-contribution scheme, as well as agreeing to a joint panel of experts to take a fresh look at how to measure and tackle the shortfall in its defined-benefit pension fund, the Universities Superannuation Scheme.

Nothing has really been resolved. The University and College Union, with 121,000 members, is to send out ballot papers for a new strike. Lecturers could be out again by mid-November if universities push ahead with higher pension deductions from pay. That’s a toxic prospect.

Students paying their £9,000 a year expect lecturers to turn up. Staff have lost public support, thanks to the escalating packages of vice-chancellors and silly extravagances by their employers. Dame Glynis Breakwell at the University of Bath resigned over her £470,000 pay packet, but not before the university had spent £16,000 on getting her portrait painted.

This is a dispute with relevance not only for students, universities and for the USS, the biggest scheme in the private sector, with £64 billion of assets and pension promises to 420,000 present and past staff. It also indirectly affects every other defined-benefit scheme in the country — because the USS is so gigantic and, according to its critics, so grievously underfunded that in theory it could capsize the industry lifeboat, the Pension Protection Fund, or at least force it to raise the fees it charges all defined-benefit schemes. The USS is not state-backed. Lecturers won’t be bailed out by taxpayers if it were to fail.

According to the USS’s figures, an insurance company would demand an extra £69 billion to take over all its assets and obligations. One critic, John Ralfe, an independent pensions consultant, yesterday wrote to Bill Galvin, chief executive of USS, suggesting that the scheme deficit by one measure (s179) was “a whopping £20 billion”. With repair contributions running at only £155 million a year, it would take 129 years to close the shortfall on the present run-rate.

But the parties are miles apart on their assessments of the strength of the USS. Estimating pension fund health is difficult. Small changes to assumptions projected 60 years into the future can make huge differences discounted back to the present day. After the strikes, the joint expert panel persuaded the USS to slash its estimate for the shortfall in the scheme from £7.5 billion to £3.6 billion and to reduce its estimate of the required contribution rate going forward by making more favourable assumptions and by back-end-loading future contributions.

To critics, this was simply kicking the can down the road, but for others, it didn’t appear to go far enough. Jane Hutton, a member of the USS trustee board, alleged that she had been thwarted when she started asking questions about whether the deficit was, in fact, being exaggerated. The Pensions Regulator is now investigating.

Mr Galvin, a former pension regulator, takes comfort from the fact that he is accused of being reckless by one group and recklessly cautious by another. Perhaps USS is roughly in the right place, after all.

It’s tempting to take a relatively rosy view and to hope that something turns up. Employees face smaller deductions in the short run. Employers make smaller contributions. Trustees and regulators don’t have to admit they were too soft in the past. Students get taught.

Lecturers walked out last year for 14 days over changes in pensionsLecturers walked out last year for 14 days over changes in pensions
ALAMY
In the corporate sector, shareholders have been there to inject some realism and to recognise the true cost of defined-benefit’s open-ended promises, which has usually resulted in a scheme’s closure. In the academic sector, there is no equivalent force.

That is, until last month, when Trinity College, Cambridge took the highly unusual decision to bale out of USS and set up its own private scheme. It is paying an exit fee of about £30 million to release itself from all liabilities to the USS. The defection has been played down. Trinity, after all, was just one of 340 sponsoring institutions and a relative tiddler, accounting for 0.05 per cent of the USS active membership.

But this misses the point. The USS is a “last one standing” scheme. Every time a member employer fails or leaves, its liabilities are shared among the survivors. If the richest — and Trinity is one of the wealthiest of all, with published assets of £1.3 billion — start peeling off, the aggregate covenant of the remaining sponsors deteriorates. That dramatically reduces the willingness of regulator and trustees to tolerate deficits.

The Trinity move smashes the consensus that all universities are in it together and will ensure that pension promises to staff everywhere are met. No wonder the unions are worried — to the point of approving threats by dons of other Cambridge colleges to refuse to teach Trinity students. The USS is now considering plans to give itself a power of veto over future employers leaving.

The move by Trinity, alma mater to Sir Isaac Newton, may have subtly altered the dynamics of the entire pensions world. Whether it stops university staff from striking this autumn is another matter.

Patrick Hosking is Financial Editor of The Times

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