It’s time to stop chasing the ‘Conditional Indexation’ nightmare
- Deepa Govindarajan Driver (SWG, personal capacity)
USS pension indexation increases the value of your accumulated pension by the CPI inflation measure (with a ‘soft cap’). It preserves the value of retirement savings and pension income, potentially for decades. It provides certainty in retirement. Without such indexation, inflation would rapidly erode the value of our pension pot over time.
But making indexation conditional (rather than having a cast-iron guarantee that our pensions will keep pace with inflation) transfers risk from the USS employers to USS members (us).
Our USS pension currently has a surplus of c.£15 billion. So why would we want to snatch defeat from the jaws of victory at this point in time? Why would we want to accept a more insecure pension by eroding the indexation guarantee that makes Defined Benefit pensions so valuable?
The theoretical ‘castle-in-the-air’ sales pitch for Conditional Indexation (CI) has been as follows. CI could allow USS to generate greater returns for members, because in a CI-USS scheme, the Scheme Trustee might be able to step away from some of the regulatory constraints that currently apply to DB schemes. Stepping away from the inflation protection guarantee within the current DB ‘pensions promise’ might allow the Trustee to invest in a wider set of assets than those it invests in now. Higher risk-taking, it is hoped, will then generate higher returns for members.
But such higher rewards arising from increased risk-taking are not a given. What if, instead, an unforeseen event, a ‘Black Swan’ risk, arises? Those who saw their USS pensions cut by around 40% five years ago – something we fought hard against and later undid – also saw how revolving doors between USS, employers, government and regulators perpetuated a ‘groupthink’, one that unfortunately remains to this day. This mindset led to the claim our scheme was in ‘deficit’, allowing rapacious employers to claim that the only solution was to immediately slash benefits.
Some proponents of CI have suggested we could ‘price in’ additional risks arising from conditionality by agreeing a set of rules for granting or denying indexation at the outset when our current Defined Benefit scheme is turned into a conditionally-indexed one. Yet if recent events have shown anything, it is that we must not underestimate the range of other parties who can influence whether or not inflation protection is granted! We cannot ignore the deference of regulators to governments or to perceived wisdom within the actuarial profession. We should also not underestimate the desire of pension fund trustees to fit in with market ‘wisdom’ (often exacerbating issues caused by willful ignorance).
But making indexation conditional (rather than having a cast-iron guarantee that our pensions will keep pace with inflation) transfers risk from the USS employers to USS members (us).
Our USS pension currently has a surplus of c.£15 billion. So why would we want to snatch defeat from the jaws of victory at this point in time? Why would we want to accept a more insecure pension by eroding the indexation guarantee that makes Defined Benefit pensions so valuable?
The theoretical ‘castle-in-the-air’ sales pitch for Conditional Indexation (CI) has been as follows. CI could allow USS to generate greater returns for members, because in a CI-USS scheme, the Scheme Trustee might be able to step away from some of the regulatory constraints that currently apply to DB schemes. Stepping away from the inflation protection guarantee within the current DB ‘pensions promise’ might allow the Trustee to invest in a wider set of assets than those it invests in now. Higher risk-taking, it is hoped, will then generate higher returns for members.
But such higher rewards arising from increased risk-taking are not a given. What if, instead, an unforeseen event, a ‘Black Swan’ risk, arises? Those who saw their USS pensions cut by around 40% five years ago – something we fought hard against and later undid – also saw how revolving doors between USS, employers, government and regulators perpetuated a ‘groupthink’, one that unfortunately remains to this day. This mindset led to the claim our scheme was in ‘deficit’, allowing rapacious employers to claim that the only solution was to immediately slash benefits.
Some proponents of CI have suggested we could ‘price in’ additional risks arising from conditionality by agreeing a set of rules for granting or denying indexation at the outset when our current Defined Benefit scheme is turned into a conditionally-indexed one. Yet if recent events have shown anything, it is that we must not underestimate the range of other parties who can influence whether or not inflation protection is granted! We cannot ignore the deference of regulators to governments or to perceived wisdom within the actuarial profession. We should also not underestimate the desire of pension fund trustees to fit in with market ‘wisdom’ (often exacerbating issues caused by willful ignorance).
Importantly, if groupthink against inflation indexation in one or more years were to surface within the USS trustee or at the regulator or in government, we would have little influence to reverse it, especially when any decision not to award inflation-matched indexation is presented to members as a technocratic outcome: “the computer says no.” Opposition through, say, industrial action would be difficult in these circumstances. Under CI, employers would have already passed on the indexation risks to us. They would have little reason to protest at the lack of indexation. And we would have limited opportunity to take the issue up with employers because they would politely tell us that it was not their problem any longer.
Our shared desire for an assured retirement income is why we opposed employer efforts to push us into a Defined Contribution Scheme some years ago. It’s also why we must firmly oppose Conditional Indexation now. As redundancies, cuts and casualisation ravage our sector, it becomes even more important to ensure that staff’s retirement income is protected.
It would also be foolhardy of us to imagine we can, not just predict, but also cost such risks and find a suitable quid pro quo for members. Future risks are ultimately unknowable. The younger the employee (and potentially, the more precarious or fragmented one’s career), the greater the exposure to risk. Conditionality also creates huge uncertainty for members planning for retirement.
Since conditional indexation makes members’ pensions directly dependent on USS investment strategy and performance, how accountable are its investors to UCU? In fact, although the employers have discussed this strategy with us, USS has been resistant to oversight. Nor has it shown good accountability to members when calibrating its investment management decisions. USS’ latest records reveal it has lost members’ money in poor investments – in fact, it wrote off a billion pounds twice in the last three years. (Despite this, the Scheme is projected to have a surplus of c.£15 billion.) Industry experts have repeatedly asked why USS investment performance is not even better. But the CI pathway means our retirement income will become directly dependent on both investment management and valuation methodology.
Some theoretical benefits of CI may be rationalised for a weak single-employer scheme with a paucity of new members. However, USS is an open ‘immature’ (growing) DB scheme with a sector-wide membership and a collective underpinning from employers, some of whom have vast swathes of assets, the strongest having existed for over 500 years! This recognition already allows the Scheme Trustee to invest more extensively in productive assets and benefit from risk management over a longer-term time horizon, if they want to. It allows the Scheme to deliver strong real returns and helps the Trustee not just to secure ‘the pension promise’ but also provide positive outcomes, for our communities and society.
That is what negotiators should be focused on promoting. We don’t need to go down a conditionality route, leaving ourselves at the mercy of current and future technocrats, econometric models or gambles. Good governance with more meaningful oversight by members is what will ultimately secure good outcomes for members.
Our shared desire for an assured retirement income is why we opposed employer efforts to push us into a Defined Contribution Scheme some years ago. It’s also why we must firmly oppose Conditional Indexation now. As redundancies, cuts and casualisation ravage our sector, it becomes even more important to ensure that staff’s retirement income is protected.
It would also be foolhardy of us to imagine we can, not just predict, but also cost such risks and find a suitable quid pro quo for members. Future risks are ultimately unknowable. The younger the employee (and potentially, the more precarious or fragmented one’s career), the greater the exposure to risk. Conditionality also creates huge uncertainty for members planning for retirement.
Since conditional indexation makes members’ pensions directly dependent on USS investment strategy and performance, how accountable are its investors to UCU? In fact, although the employers have discussed this strategy with us, USS has been resistant to oversight. Nor has it shown good accountability to members when calibrating its investment management decisions. USS’ latest records reveal it has lost members’ money in poor investments – in fact, it wrote off a billion pounds twice in the last three years. (Despite this, the Scheme is projected to have a surplus of c.£15 billion.) Industry experts have repeatedly asked why USS investment performance is not even better. But the CI pathway means our retirement income will become directly dependent on both investment management and valuation methodology.
Some theoretical benefits of CI may be rationalised for a weak single-employer scheme with a paucity of new members. However, USS is an open ‘immature’ (growing) DB scheme with a sector-wide membership and a collective underpinning from employers, some of whom have vast swathes of assets, the strongest having existed for over 500 years! This recognition already allows the Scheme Trustee to invest more extensively in productive assets and benefit from risk management over a longer-term time horizon, if they want to. It allows the Scheme to deliver strong real returns and helps the Trustee not just to secure ‘the pension promise’ but also provide positive outcomes, for our communities and society.
That is what negotiators should be focused on promoting. We don’t need to go down a conditionality route, leaving ourselves at the mercy of current and future technocrats, econometric models or gambles. Good governance with more meaningful oversight by members is what will ultimately secure good outcomes for members.
Some colleagues have argued that UCU needs to continue to participate in joint CI work even now, so we can understand the potential upside to CI before turning it down. I have some intellectual sympathy with this argument, although it completely ignores the motivations of employers in promoting CI.
But the employers have already made up their minds about Conditional Indexation. Employers would not have spent over a year pushing for and working on CI, if they weren’t preoccupied with introducing it and shedding responsibility for pension risks and costs.
In short, the employers know CI serves their interests. CI reduces the employers’ exposure to potential increased contributions if the Scheme is declared in ‘deficit’ again, and reduces the (largely theoretical) risk of bailing out the Scheme (the ‘Employer Covenant’). This is why the most recent UCEA consultation document for employers says
But the employers have already made up their minds about Conditional Indexation. Employers would not have spent over a year pushing for and working on CI, if they weren’t preoccupied with introducing it and shedding responsibility for pension risks and costs.
In short, the employers know CI serves their interests. CI reduces the employers’ exposure to potential increased contributions if the Scheme is declared in ‘deficit’ again, and reduces the (largely theoretical) risk of bailing out the Scheme (the ‘Employer Covenant’). This is why the most recent UCEA consultation document for employers says
‘Employers wish to now push ahead with the development of CI as a future design of benefits in USS, as it carries the potential to deliver greater longer-term stability, and greater value for money from the contributions being paid-in by employers and members.’
Working on CI, meanwhile, has become an effective distraction for UCU, and has taken us away from our core task of serving as the stakeholder advancing members’ interests.
Trade unions gain strength when they actively advance working people’s interests, rather than simply spending their time reactively defending members against employer attacks, or ‘exploring’ the erosion of members’ pensions or terms and conditions expecting tomorrow will be worse. UCU’s energies should be spent improving the pensions of our lowest paid members, engaging seriously with regulators and parliamentarians to raise awareness of the uniqueness and strength of USS, reforming the governance of the USS Scheme, improving the valuation methodology and, importantly, exploring paths to stability that benefit both members and employers.
Many employers (especially the wealthiest ones) have huge reserves. Yet UCEA (their representative body) are ruthless about keeping pay stagnant, while employers entrench precarity and push for more and more cuts. These same employers now want to push pension risks onto staff.
Trade unions gain strength when they actively advance working people’s interests, rather than simply spending their time reactively defending members against employer attacks, or ‘exploring’ the erosion of members’ pensions or terms and conditions expecting tomorrow will be worse. UCU’s energies should be spent improving the pensions of our lowest paid members, engaging seriously with regulators and parliamentarians to raise awareness of the uniqueness and strength of USS, reforming the governance of the USS Scheme, improving the valuation methodology and, importantly, exploring paths to stability that benefit both members and employers.
Many employers (especially the wealthiest ones) have huge reserves. Yet UCEA (their representative body) are ruthless about keeping pay stagnant, while employers entrench precarity and push for more and more cuts. These same employers now want to push pension risks onto staff.
But members cannot afford to gamble with inflation protection, particularly in old age and retirement. Conditionality of pensions can rapidly burn through any little cushion that our hard-earned wages have given us.
The employers are planning a propaganda juggernaut to make us think conditionality of inflation indexation is good for us. Our union must not respond by continuing to ‘explore CI’ (however ‘sceptically’) and thereby advancing the employer agenda while simultaneously creating a rod for its own back. Anyone tempted by the upside of such conditionality should know that if it went wrong, there is no easy way back. We must not forget the various dastardly employment practices employers have pushed through in periods of emergency but not reversed when circumstances improved. Since 2011 we have lost Final Salary pensions, a retirement age of 60 and an early retirement protection clause in redundancy.
Conditional indexation is a one-way street from Defined Benefit towards more insecure Defined Contribution-type pensions. Even if one were to feel strongly about the theoretical possibilities of any upside on investments, does anyone who has worked in academia really think our employers will voluntarily move us back to a guaranteed and inflation-indexed DB pension, if CI turns out to be a disastrous experiment? Who are we kidding?
Are we really going to focus on CI, and even ask to explore this further? How ‘sceptical’ are we really being if we do not grasp this fundamental industrial relations dynamic?
We should not interpret the current absence of industrial action by UCU members against employers over USS, or cordial interactions with employers at the USS Joint Negotiation Committee, to mean that employers have increased concern for our well-being, now or in the future!
We should not simply say we are sceptical about Conditional Indexation. We should act on our scepticism. It is time to say ‘Enough’!
This article is adapted from https://deepadriver.org/tpost/why-we-should-not-gamble
The employers are planning a propaganda juggernaut to make us think conditionality of inflation indexation is good for us. Our union must not respond by continuing to ‘explore CI’ (however ‘sceptically’) and thereby advancing the employer agenda while simultaneously creating a rod for its own back. Anyone tempted by the upside of such conditionality should know that if it went wrong, there is no easy way back. We must not forget the various dastardly employment practices employers have pushed through in periods of emergency but not reversed when circumstances improved. Since 2011 we have lost Final Salary pensions, a retirement age of 60 and an early retirement protection clause in redundancy.
Conditional indexation is a one-way street from Defined Benefit towards more insecure Defined Contribution-type pensions. Even if one were to feel strongly about the theoretical possibilities of any upside on investments, does anyone who has worked in academia really think our employers will voluntarily move us back to a guaranteed and inflation-indexed DB pension, if CI turns out to be a disastrous experiment? Who are we kidding?
Are we really going to focus on CI, and even ask to explore this further? How ‘sceptical’ are we really being if we do not grasp this fundamental industrial relations dynamic?
We should not interpret the current absence of industrial action by UCU members against employers over USS, or cordial interactions with employers at the USS Joint Negotiation Committee, to mean that employers have increased concern for our well-being, now or in the future!
We should not simply say we are sceptical about Conditional Indexation. We should act on our scepticism. It is time to say ‘Enough’!
This article is adapted from https://deepadriver.org/tpost/why-we-should-not-gamble
