The next dispute over the UK Universities Superannuation Scheme is in full swing (the documents for the ongoing consultation with the universities are available here). I’m not keen to involve myself in what has turned into a pretty dysfunctional conversation. But it prompted me to share a few philosophical thoughts I’ve had on pension funds.
The USS dispute is, again, over a valuation. It largely reduces to a dispute over the discount rate. The level of current contributions required to pay future pensions – pension liabilities – depends on the rate at which you discount those liabilities. The scheme’s actuary, under pressure from the regulator, benchmarks the discount rate to the yield on long-term government bonds, gilts, which remains historically low. The fund is tested for its ability to fund its pensions promises off very low-risk assets. In fact, however, it holds a portion of higher-risk ‘growth’ assets – equities that earn a higher rate. Neither the schedule nor the risk of those growth assets matches those of the pensions liabilities. The extent to which the discount rate can be set higher to take account of the growth assets depends on the strength of the covenant – members’ willingness to pay the difference if returns are worse than expected.Continue reading “A Few Thoughts on Pensions”