The understandable anger of Britain’s striking lecturers

“The students are revolting!” is a familiar cry. Not so much for their teachers. But we nevertheless heard it last week as UK academics kicked off a strike in protest over plans by university bosses to downgrade their pension schemes. Instead of a defined benefit arrangement – a guaranteed annual payout from employers on retirement based on salary – they’d receive a defined contribution. That is, the cash accrued with individuals and employers feeding cash in a pot until the point of retirement.

In the old days, students might have welcomed (more) days in bed. But in this era of £ 9,000-a-year tuition fees many (though not all) are less understanding of industrial action from their tutors. Although pension reforms would apply to lecturers’ future contributions rather than their accumulated entitlements, they are right to think reform would make them worse off in retirement.

Defined benefit schemes in the private sector have been closing to new entrants for many years because they are deemed too expensive and burdensome for employers. The numbers of people in active schemes has more than halved over the past decade. Defined contribution is now the norm almost everywhere except in the public sector. So is this part of that inexorable trend? Are lecturers, selfishly, standing athwart history yelling stop? 

It’s worth examining why academics are being asked to swallow this reform. The most recent annual report from the Universities Superannuation Scheme says its investment portfolio has done well lately, rising by 12 per cent a year over the past five years, taking total assets in the scheme to £60bn in 2017. Indeed, that strong performance is the reason given for the scheme awarding large pay rises to its investment managers, including the scheme’s chief executive, last year.

So what’s the problem? That the scheme’s liabilities have risen even faster than assets since 2014, hitting £73bn. Why? Have there been big pay rises for academics over that time? An unexpected surge in members’ longevity, meaning the scheme will need to pay out pensions for longer? No.

The answer is that it’s the accounting treatment of those future pension promises. Government bond yields fell by around 1.5 percentage points between 2014 and 2017. That means the discount rate conventionally applied by auditors to a scheme’s future liabilities also shrank. The upshot is that the present value of liabilities has risen substantially and the scheme’s deficit (liabilities minus assets) more than doubled from £5.3bn to £12.6bn in three years.

The administrators don’t think the deficit is actually that big. But they’ve still downgraded their estimates of the appropriate discount rate for the scheme’s liabilities, partly on the basis they think investment returns may well be lower in future than in recent years, and they now put the deficit at around £6.1bn.

This, they say, is simply too large for comfort and supposedly demands substantive remedial action.

Universities don’t want to increase their employer contributions, claiming this would mean less resources for students, so they say the only option is to reduce the generosity of the scheme for members.

Like a hung over student in an early-morning seminar, many non-specialists will be forgiven for struggling to follow that explanation. Suffice to say, there are grounds for being suspicious of these actuarial methods of estimating liabilities and for the general view that a scheme’s deficit, even one of this extreme size, should be a cause for alarm and the justification for drastic cuts in entitlements.

For one thing, as interest rates rise, defined benefit schemes’ liabilities will automatically shrink. UK 10-year sovereign bond yields have already risen around 30 per cent on the levels of March 2017 when the scheme presented its last annual report, and that alarming near £13bn deficit.

Aggregate data on the accounting value of all defined pension scheme deficits from the UK’s official pension fund lifeboat, the Pension Protection Fund, shows deficits are extremely sensitive to market interest rates, with swings from just £1.2bn in 2011, to £244bn in 2015, and back down to £162bn in 2017.

Deficits estimated in other ways are also highly sensitive to eminently challengeable assumptions about future rates of returns on assets.

Defined benefit pension scheme deficits should certainly not be casually dismissed. Employers clearly have a responsibility to take prudent action to ensure they are an in a position to meet their pension promises to employees. Yet the brute fact is that accounting deficits matter more for some pension schemes and employers than others. Large schemes with significant deficits attached to ailing companies, as we’ve seen in the outrageous recent cases of BHS and Carillion, are particularly vulnerable.

But the chances of the entire British university sector going bust and all 390,000 lecturers being dumped into the UK’s pension lifeboat scheme seem pretty remote.

Whatever view one takes over whether academics’ defined benefit scheme should survive, or whether they should have to put up with a defined contribution scheme like most of the rest of us, the question should really be determined by considerations of fairness, not panic over an inherently volatile accounting deficit.

And it’s not surprising remuneration hikes for investment managers have not gone down well while members are effectively being asked to bear future cuts, The accounts for the university lecturers’ pension scheme show its underlying costs jumped from £108m to £122m in 2017, driven, in considerable part, by those performance bonuses. This underlines another germane point for this particular pensions showdown and also others. The bigger threat to most people’s standard of living in retirement is not pension scheme deficits but the excessive fees extracted by the managers of their pots.

#lecturers #PensionProtectionFund #pensions #definedbenefit #definedcontribution