Hoe the USS negotiations and dispute developed
Marion Hersh
Is there a deficit?
Think of a pension scheme with an enormous black hole deficit. Of course, USS. But wait a moment, USS assets increased 12.2% from £60 to £67 billion last year, whereas its liabilities only went up by 2.4%. The deficit is supposed to be 7.1 billion, So, hasn’t this massive increase in assets wiped out the deficit? But what about the increase in the cost of future contributions and short term reliance and … Something strange is happening here. By any real standards USS is doing really well – it has a positive cash flow, very high rates of return and a growing membership, with over 190 thousand active members paying money into the scheme. However, the USS Executive seems determined to show that there is enormous deficit which will require draconian measures and the poverty of many members into old age in order to eradicate it.
The Valuation
USS is legally required to carry out a valuation every three years. This involves a snapshot of the situation on 31 March 2018 with a statutory requirement to complete the valuation process and the associated decisions on benefits and contributions within 15 months i.e. by 30 June 2018. This is a mathematical modelling process involving considerably uncertainty. The choice of assumptions and model is critical and political and ideological factors as well as technical ones affect the decisions made (Meadows et al., 1972).
Unfortunately, the implicit aim of the USS valuation seems to be based on showing that a profitable and successful scheme is experiencing serious problems and requires drastic measures to resolve them. The approach is designed for a single employer which could go bankrupt tomorrow rather than large stable and financially and otherwise well-established sector comprising 68 universities, some of which are very large, several hundred small employers and 190 thousand active members paying money into the scheme. The issue of all these employers simultaneously withdrawing from the scheme is not really relevant. Similarly, bankruptcy is unlikely other than in the case of total economic collapse, for instance due to catastrophic climate change, yet here USS has not accepted the need for an ethical investment policy. Finally, large numbers of employers withdrawing simultaneously other than due to bankruptcy is unlikely, as this would require them to make large payments to USS to cover their liabilities, not to mention the impact on their prestige and positions in league tables etc.
Everything we do involves risk. Many universities are involved in a number of large and relatively risky construction projects. Therefore, there is a certain amount of real risk associated with USS, however, this risk is relatively small. In contrast there is also an excessive amount of risk associated with USS’s model and this is leading to very reduced estimates of assets and inflated estimates of liabilities. This reckless prudence has also led to proposals for derisking, or investment in gilts (government bonds), which are allegedly very stable and low risk (this is highly questionable), but have very low rates of return. Thus instead of a potential rate of return of probably in excess of 12.2%, income would artificially be driven down to CPI–0.5% (currently about 2.9%). It should be noted that the 9% difference in rates of return is close to the estimate additional costs that members and employers allegedly need to pay to maintain current benefits? Would it not be more sensible to allow the very highly expert and exorbitantly paid investment managers time to do their best work rather than artificially reduce revenue through derisking? Another area needlessly affected by reckless prudence is Deficit Recovery Contributions (DRCs). It is generally accepted, including by USS Executive, that derisking increases the deficit and therefore also deficit recovery contributions. Getting rid of derisking could also remove the need for DRCs. On the other hand, deriskiing and high DRCs lead to an increase in deficit, resulting in a need for even higher DRCs and more derisking, resulting in a negative spiral and destruction of a successful pension scheme.
Time Line in the USS dispute
September Technical Provisions released showing £5.3b deficit
19 October 2018: result of consultative ballot – 55.8% turnout, 86.6% prepared to take industrial action.
November Technical Provisions released showing £7.5b deficit
14th December: Employers table proposals to move to 100% DC
18 and 19 December: minor victory for UCU – employers agree not to table DC proposal; UCU agree not to table an alternative proposal for £50 K threshold and 1/80 accrual rate.
22 January: UCU industrial action ballot result – we have beaten the thresholds.
23 January: Independent’ chair votes in favour of UUK DC proposal
5 February: First USS JNC after vote for UUK proposals
22 February: First day of 14-day strike action – mass pickets!!!
27 February: Informal talks with employers, UCU presents 10-point proposal for settling the dispute – UUK positive response to last 5 points about the future, not very willing to look at 5 points on present valuation.
5-12 March: ACAS Talks with UUK
12 March: proposal 42K, 1/85 accrual, 2.5% inflation capping, proposal for expert panel to look at valuation issues
13 March: branch meeting followed by HEC, mass lobby of HEC. Branch meeting very strongly rejects the ACAS proposal; HEC agrees to continue the action and contact branches about best dates for further industrial action to affect exams and marking prior to notifying employers.
UUK agrees to suspend consultation on DC proposal.
16 March: Last day of main period of 14 day UCU strike action – mass pickets, support from students, leadings role of GTAs and casualised staff throughout.
23 March: UUK proposal presented to SWG as a possible way of resolving the dispute. This has been discussed by officials with UK. It involves an expert panel to evaluate and make proposals on the valuation. It initially looks good, but on reflection is a rewrite of the rejected proposal without the £42K part.
23 March UUK proposal made public
28 March branch meeting followed by HEC: Agreement that the approach involving an expert panel has potential, but concerns about the details have not be specified and could therefore go majorly wrong. No vote on outcome. Probably the majority feeling was to revise or clarify and resubmit, but HEC agreed to an immediate ballot.
19 April E-ballot agreed to accept the UUK proposal and to suspend, but not end industrial action.
27 April: HEC agreed that the JEP should have three UCU (and three UUK) members and that SWG should be responsible for choosing UUC members and agreeing the chair.
27 April: JNC unanimously agreed to withdraw DC proposal – major victory for UCU, as a result of industrial action, but still a lot of work to do.
The Different Proposals
| Defined Benefit cap £ | Accrual | Inflation capping | Valuation | |
| Employers DC | 0K | n/a | n/a | n/a |
| UCU £50K | 50K | 1/80 | 10% | n/a |
| ACAS | 42K | 1/85 | 2.5% | Independent valuation review by expert panel with independent chair – inform next valuation |
| UUK JEP | n/a | n/a | n/a | Joint expert panel, non-voting chair evaluate valuation, change the result of this valuation |
| USS rule 76.4 | 55.5K | 75th | 5% and half increase of any further inflation from 5-15% upto 10% max | November valuation and cost sharing increases in contributions |
Current benefits are based on a hybrid scheme with defined benefits (DB) up to a threshold of £55,500 and defined contributions (DC) beyond that. Inflation proofing increases as CPI up to 5% and then 0.5% for each 1% increase up to 10% for 15% inflation. The table above summarises the main features of the various proposals made to date. Reductions in accrual rate affect all members, particularly lower paid members, whereas reductions in threshold only affect higher paid members. Inflation is already above 2.5%. Since the effect of inflation capping is multiplicative over a number of years, the effect of further inflation capping could prove disastrous if, as is likely, inflation remains above 2.5%.
The employers DC proposal is clearly the worst. Its disadvantages including significant reductions in benefits. In addition, DB makes it much easier to plan for retirement, as you know high much pension you will be getting. This is not possible with DC, as the pension you receive is dependent on the market. This becomes particularly problematical with derisking, which artificially reduces rates of return. Therefore, members could potentially put off retirement for several years in the hope of market improvement. A move from DB to DC also transfers the risk from employers to members and while doing so makes model risk into real risk. Therefore, rather than employers facing minimal risks, probably lower than those associated with their other financial activities, due to the size of the scheme, members have individual investment pots and therefore face very real risks of a significant reduction in pensions.
Despite the significant disadvantages in reduced benefits and increased contributions of the £50K UCU offer, making an offer within the November technical provisions was the right move in December and January, as it showed willingness to negotiate. It was also a means to hold the UCU side with its different perspectives on what was achievable together and definitely much better than the £30K threshold and 1/80 or 1/85 accrual rate that some of negotiators considered the likely outcome. In the event of this proposal receiving the chair’s casting vote, the employers would have been very eager to reduce their contributions to the current 18% through changes to the valuation framework.
However, the successful strike action with mass pickets changed the situation and meant that we were in a position to demand something better. In addition, the UCU proposal had been rejected by UUK, so we were not tied to it, just because we had already presented it once. Unfortunately, not all the negotiating team agree with this perspective and there were subsequent references to reintroducing this proposal.
The ACAS proposal was somewhere between the UCU 50 K and UUK DC proposals and so probably seemed a reasonable outcome to ACAS. However, this ignores the facts that the 50 K proposal is already a significant reduction from the status quo and that the only reason for making changes is the flawed valuation approach.
The Joint Expert Panel for revising the valuation is potentially useful. However, there are various potential weaknesses which led to the call for revise or clarify and resubmit. In particular, the commitment to maintaining current DB benefits is not spelt out,
Negotiations
Negotiations are generally a team effort and to some extent we were able to use this to combine skills, maximise strengths and minimise weaknesses. However, one of our major differences was on differing political/ideological views on whether we should be aiming at maintaining the status quo through attacks on the deficit, making the employers pay more (which would mean us also pay more) or reduce our expectations as to what was feasible. We managed to maintain unity in the face of the employers, but doing this made it difficult to find a united position. The strike action totally changed the dynamic of the negotiations and changed what was achievable and what we should be aiming for. Unfortunately, this view was not shared by the whole team.
However, it is difficult to evaluate the impact of these factors on the outcome of the ACAS negotiations. It is open to question what the outcome would have been if the whole negotiation team had been committed to no detriment and submitted a proposal showing how this could be achieved early in the ACAS process.
Industrial Action
The strength and unity of members as demonstrated in the strike action was the crucial factor. Whatever we win will be as a result of it. The strikes served as a focus for member anger and frustration, about the proposed slashing of their pensions, but not just on pensions. The USS dispute also focused members’ rage at other linked issues, including marketisation, casualisation, equality, workload and bullying.
The picket lines saw many new members and first time pickets, given confidence to take action. GTAs and other members on casualised contracts played a central role, though in may cases their abysmal pay meant that they themselves were not in receipt of a USS (or other) pension. The support, particularly from students was amazing.
This action has transformed the union and we will continue to see the impacts.
Openness, Transparency and Accountability
There was an agreement with UUK and in SWG that negotiations would be totally confidentiality. To this end the negotiators agreed not to post on the UCU activitists list and not to reveal the location of the ACAS talks. A well-attended lobby of earlier informal talks had upset the employers. However, there has been no real discussion of whether total confidentiality is really necessary for negotiations. The employers’ reaction to the UCU lobby indicates that member awareness of what is going on and a member presence could change the dynamics of negotiation. This would also make it clearer to negotiators what is and is not acceptable to members and could possibly put pressure on the employers to respond more in line with member expectations.
Until the rejection of the £42K offer by members there was at least transparency within the SWG and involvement of all available negotiators. Following this rejection the process was taken over by the General Secretary. While there is a role for informal discussions being initiated by the General Secretary, at some point, preferably early on, negotiators need to take over. The UUK JEP proposal was presented to members without any involvement of negotiators with UUK. The negotiators saw the proposal for the first after the end of the informal talks with UUK and a few minutes before the start of a conference call to agree putting it to HEC. Similarly there was no negotiator or wider Superannuation Working Group (SWG) involvement in drawing up the terms of reference of the JEP. This is problematical. The process for electing negotiators was agreed by HE Sector Conference (HESC) and therefore negotiators are accountable to HESC and through it to the wider membership. However, this accountability mechanism breaks down when negotiators are excluded from discussion and decision making.
A related issue is the pressure for immediate decisions. While there are times in negotiation when rapid decision making is required, the pressures are often artificial and should be resisted. Excessively fast decision making without an opportunity to consider or consult can lead to serious errors.