Michael Otsuka Profile picture
Sep 26, 2018 20 tweets 7 min read Twitter logo Read on Twitter
Now that @AlistairJarvis's @UniversitiesUK has opened the linked consultation, it's important for @ucu & #USS members to make the case to our employers to STRONGLY & PUBLICLY support all 4 JEP recommendations. Links below to arguments in support. 1/
Embedded thread w/ arguments in support of JEP recommendation #2, re lowering of deficit recovery contributions. 2/
Embedded thread w/ arguments in support of JEP recommendation #3, re smoothing of cost of future service, which draws on @Sam_Marsh101's cashflow data analysis. 3/
JEP RECOMMENDATION #4--update to the most recent mortality data--is a no brainer. As UUK says, "it would be reasonable to regard this as not exposing employers to additional risk & simply a refinement for new data." But this reduces contributions by only 0.12%. 4/
JEP RECOMMENDATION #1 has two parts: (a) Reversion to September '17 delay of onset by 10 years of 'de-risking' shift to bonds. (b) Increase extent to which scheme assets can outperform a gilts+0.75 self-sufficiency portfolio. 5/
For a defence of #1(a) delay of de-risking by 10 years, see this blog: 6/
That just leaves #1(b), which I'll discuss in the main thread below. #1(b) relates to the notorious Test 1. In order to be able to close the DB scheme by year 40, Test 1 requires that it be possible to purchase a bond-weighted self-sufficiency portfolio by then... 7/
...via supplementation of scheme assets via an increase of 7% — from the current 18% to the maximum affordable 25% of salaries — in employer contributions from years 20 to 40. 8/
The assets must reach a market value by year 20 that is sufficiently high that it is possible to get from there to self-sufficiency via such a 7% increase. 9/
JEP RECOMMENDATION #1(b) is entirely down to how much extra cash we can assume would be generated via +7% contributions in years 20-40. This depends on how much more it is assumed scheme members will be paid then versus now. 10/
#USS's current Test 1 assumption is that the average scheme member will be paid less in real CPI terms than today, taking into account promotions as well as negotiated pay increases. 11/
This, however, conflicts with #USS's own assumption that average pay will increase by CPI + 2% each year (taking account of promotions & average age of scheme members as well negotiated pay increases). 12/
In their Feb 2017 consultation, #USS expressed a willingness to assume CPI + 2%. Upshot = £19 bn would be generated by +7% & hence very little de-risking of assets over the next 20 years would be needed to satisfy Test 1. 13/
Had employers accepted CPI+2% plus assumptions of the Sept valuation, it would have been possible to retain the DB status quo via +1% employer & +0.5% member contributions, which is better than JEP's recommendations. See more details in this blog: 14/
Inexplicably & inexcusably, employers refused CPI+2% (=£19 bn) & instead embraced CPI+0% (=£13 bn). USS ended up saddling employers w/ CPI MINUS about 1% (=£10 bn). 15/
JEP says £10 bn is too low & suggests a move to CPI+2% (£19 bn): 16/
In the end, they recommend something more modest: CPI+0% (£13 bn). Given how much gratuitous trouble Test 1 is causing the scheme (see JEP critique of Test 1 👇), employers have overwhelming reason to unshackle themselves from it by endorsing the least restrictive parameters. 17/
Please see this blog post for an explanation of the extent to which #USS's current version of Test 1 amounts to recklessly prudent overkill. 18/
In short, adoption of JEP RECOMMENDATION #1(b) relaxation of Test 1 shackles is a no-brainer UNLESS employers would like to continue to try to make the case that DB is too expensive and must close, and everyone should be shifted over to 100% individual DC. 20/20

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More from @MikeOtsuka

Oct 6, 2018
.@UCL_UCU has responded on Twitter to my linked blog post "Questions for advocates of No Detriment". Below I expose two problems with their response. 1/
In that blog, I ask: "Do you think union members would vote to authorise a strike for a No Detriment elimination of their 1.1% rise for three years rather than accepting the JEP-modelled solution?" 2/
.@UCL_UCU's rejoinder is that they are proposing a negotiation of a No Detriment elimination of any rise in contributions, not only of the modest 1.1% over the next three years, but also beyond that three year period. 3/
Read 18 tweets
Oct 3, 2018
.@UCL_UCU branch officers reveal that they misunderstood an important aspect of the JEP report when they pushed for their No Detriment motion today. In the embedded tweet, they write that JEP "don't refer accrual rate to JNC": 1/
In my subsequent exchange with @UCL_UCU that begins with the embedded tweet, I demonstrate that it is just as clear that they refer accrual rate to JNC as that they refer cost-sharing to JNC. 2/2
Read 5 tweets
Oct 3, 2018
A query for @UCL_UCU regarding their tweet below: 1/
If employers call for a cut to DB accrual from 1/75 to 1/80 in order to keep employer contributions down to 19.3% on a 65%/35% employer/member cost-sharing basis, would that also be consistent, in you view, with acceptance of the JEP recommendations in full? 2/2
Here I elaborate on my above query, in an email to @UCL_UCU President Sean @SeanAWallis or anyone else who would like to respond:
Read 5 tweets
Oct 3, 2018
It has been over a month since @Sam_Marsh101 submitted his Addendum to the JEP and #USS. If he's right, the current valuation contains a significant, hidden layer of prudence ABOVE AND BEYOND the following that JEP lists here: 1/
I say more about the significance of Sam's Addendum in this blog post, where I also explain why #USS and @GuyCoughlan owe us an answer to Sam's findings. 2/
I believe that, so far, this is the only response @Sam_Marsh101 has received: 3/
Read 11 tweets
Sep 29, 2018
🚨💣😱.@Cambridge_Uni's response to a 2016 consultation re strength of the #USS covenant has recently been released via FOI. Cambridge disputes PWC's finding of a strong covenant over 30 as opposed to merely 20 years! The following statement in their response is a bombshell: 1/
"We would be concerned if the increase in visibility of a strong covenant was used to support a less prudent approach to the 2017 valuation than that adopted in 2014, either in terms of the assumptions adopted or the time horizon for de-risking." 2/
We are all aware that tPR's challenge, in their Sept 2017 letter, to the PWC/#USS assessment of the strength of the covenant, wreaked havoc on our DB pension and helped explain the shift to the more conservative November valuation. 3/
Read 25 tweets
Sep 26, 2018
JEP RECOMMENDATION #3: Smooth the cost of future service contributions over at least the next 6 years. As this chart indicates, this would reduce contributions by 1.5%. 1/
#USS's failure to smooth the cost of future service contributions constitutes a significant hidden layer of prudence. See this blog post: 2/
...and this blog post: 3/
Read 8 tweets

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