Asserting power: The political economy of USS pension fund valuations.

The University and College Union (UCU) and the employers’ organisation of pre-1992 Higher Education institutions UUK are currently involved in an industrial conflict over plans by the employers to impose draconian cuts to the USS pension scheme. At the heart of the conflict is the valuation of the fund in 2017 by USS, apparently revealing a large deficit of about £6 billion, which needs to be addressed. In this post, I do not want to engage in economics arguments over how big the deficit actually is. Rather, I will focus on a political economy analysis of the actual struggle over who is in charge determining the criteria for the valuation in the first place. The valuation of the health of the fund is not an objective, economic task. It is ultimately a political decision on how to estimate the risk and especially on how to spread the risk across staff and employers

This is not the first time that UCU and UUK have been looked in industrial action over changes to the USS pension scheme. The health of the pension fund is valuated every three years. As in 2011 and 2014, the 2017 valuation resulted in a large deficit. As in 2011 and 2014, employers want to impose cuts to pension benefits in response. Following the dispute in 2011, the final salary scheme was closed to new entrants into the profession. The 2014 dispute resulted in the final salary scheme being closed for everyone from April 2016 onwards. Additionally, a defined contributions element was introduced for salaries above £55,500 per year.

Student demo in support of staff at Nottingham Uni, Photo by Ivan Wels

The 2017 proposals by the employers are the most draconian cuts yet. This time, they want to get rid of the defined benefits scheme completely and transform USS into a defined contributions scheme. Hence, while it would be specified what staff have to pay into the pension scheme, the return in retirement would be left completely at the mercy of the uncertainties of the stock market. The employers call this a de-risking of the pension scheme. In reality, the risk is shifted from the employers to academic staff. This goes hand in hand with a ‘de-risking’ of the Fund’s investment strategy. By shifting assets into low-yielding gilts/bonds, the Fund managers pursue an overly cautious investment strategy, which in turn makes lower benefits necessary and increases the deficit in valuations (see Michael Otsuka, 17 September 2017).

Student demo in support of staff at Nottingham Uni, Photo by Ivan Wels

UCU has calculated that the new system would imply a loss of £10000 per year of retirement. At the heart of disagreements is the particular way of how the health of USS is valuated. While the Fund’s valuation indicates a deficit of £5 billion and some even estimate that the real deficit is closer to 14 billion, based on assumptions such as the scenario that all pre-1992 universities, the most established and prestigious institutions, would go bankrupt at the same point in time, UCU’s own valuation indicates that USS is actually in good health (see UCU valuation).

Of course, we can engage in an economics debate about how the Fund should be properly valuated, which assumptions should be employed in the process. Nevertheless, what these vastly different valuation figures make clear is that there is no objectively correct way of assessing pension funds. Rather, the assumptions used in this process are subject to a political decision. The assumptions used in this process determine how the risk is shared between employers and employees and, consequently, reflect the power balance between the two sides in the conflict. When employers want to transform USS into a defined contributions system, then the intention is to shift the risk for pensions completely onto employees.

Student demo in support of staff at Nottingham Uni, Photo by Ivan Wels

But passing risk onto employees is not only a goal in itself. By ‘de-risking’ the Fund, universities become more attractive for private sector investment. Ultimately, the attempt at cutting back employers’ pension liabilities is another step towards opening up Higher Education to private sector involvement (see UCU briefing note). Cutting pension benefits is part of the same restructuring which includes high tuition fees and increasing casualization of the workforce, all intended to make it more profitable for private providers.

Student demo in support of staff at Nottingham Uni, Photo by Ivan Wels

In sum, it is clear that the valuation of the health of the fund is not an objective, economic task. It is ultimately a political decision on how to estimate the risk and especially of how to spread the risk across staff and employers. There is nothing new in this. The rationale is the same as three and six years ago. What is different this time round is the strength of industrial action taken by UCU members against the proposed cuts. Employers have completely misjudged the situation (see Striking for USS). This time, UCU will win! It will be a challenge to extend this victory into related areas and move towards re-establishing university education as a public good, access to which does not depend on the personal ability to pay.

Andreas Bieler

Professor of Political Economy

University of Nottingham/UK

Andreas.Bieler@nottingham.ac.uk

Personal website: http://andreasbieler.net

11 March 2017