A Few Thoughts on the Strike
UUK’s propaganda (I don’t use the term lightly) repeatedly refers to a funding deficit in the Universities Superannuation Scheme. This is blowing smoke. Large accounting units run deficits as a matter of course, simply as a result of maturity mismatch. When liabilities fall due and assets aren’t yet yielding, you move into deficit. When assets yield and liabilities aren’t due, you move into surplus. Unless you’re an accountant, you don’t know what to read from a deficit figure.
Also the absolute amount of the deficit is meaningless on its own. What matters is its size relative to the total asset holdings. Mike Otsuka, perhaps the union’s greatest asset, told me the deficit has barely grown relative to assets since 2014, when there was no ‘crisis’. Even the risk-averse will be comfortable setting the probability of Otsuka being wrong about something like this to effective 0.
For UUK to repeatedly release the mere figure to the press is simply to invite misinterpretation. It’s pure, shameless spin. I was hesitant about the strike until I saw how unnecessarily mendacious UUK decided to be. Choosing sides is easier when one side advertises its malice.
The deficit just isn’t the issue: the issue is the long-term affordability of the scheme. Is it affordable? It was, until UUK instructed USS to de-risk its portfolio.
USS is an unusual pension fund, because it performs so well. Compared with other pension funds, it holds more in high-growth equities (also infrastructure and property) and less in low-growth, low-risk ‘liability-driven instruments' (LDI) — bonds.
The Mighty Otsuka discusses a First Actuarial report commissioned by the union in this post. The upshot is that if USS shifted further into equities — the opposite of its current plan — it would average more than enough to meet its liabilities without raising contributions. This is true even on a conservative rather than best-estimate weighting. Even if the equities perform at their historical worst, it is much cheaper to fund off them than off LDIs.
The only issue is cash-flow. But why is this an issue? For a fund the size of USS, maturities don’t need to be matched. The fund can just build up reserves (put its returns into safe liquid assets) in fat times and run them down in lean times.
Think about what de-risking means. To de-risk a balance sheet means to make the asset side less contingent and/or the liabilities side more contingent. UUK wants USS to do both. DB pensions are non-contingent; DC pensions are contingent. LDIs are non-contingent; equities and property are contingent.
De-risking is risk-dumping. When you make your liabilities contingent, you push risk onto your creditor. When you make your assets non-contingent, you push risk onto your debtor.
Treasury gilts, with which UUK wants USS to fill its portfolio, are ‘risk-free’ for the bondholder. Risk falls on the debtor, which is UK Treasury. Of course it faces no cash-flow constraint since the central bank will always clear its payments. But politically it chooses to act as if it’s cash-constrained. When tax revenue dips, it cuts spending to make its coupon payments, inevitably hurting the poor and vulnerable, who form no powerful lobby.
So in two ways USS de-risking involves pushing risk onto those least able to bear it: individual pensioners, who have no reserves to draw on to cover cash-flow, and victims of future austerity when recessions drive up the government’s interest bill.
It’s unjust. But also expensive! Why pay through the nose for a portfolio of LDIs, to generate a return that won’t even cover liabilities as they are, when you could just keep the portfolio you have and earn more than enough to insure against cash-flow risk?
I feel that the answer must be political. Risk is not just an actuarial phenomenon. It’s political. Those who bear risk are mendicants. They have little bargaining power. They’re politically docile, because they’re too busy trying to make ends meet to stand up for their rights. They don’t rock the boat because they’re teetering on the edge.
De-risking is worth paying for, from UUK’s point of view, because it’s risk-dumping. It disempowers individuals and empowers institutions. UUK’s position makes no financial sense to me. But it makes political sense. And the sense it makes is unnerving as hell. That’s why I’m striking.