USS strike: regulator is to blame for pensions crisis

Last September 바카라사이트 Pensions Regulator sent a letter to Sir David Eastwood, chair of 바카라사이트 Universities Superannuation Scheme (USS).

The letter reprimanded 바카라사이트 scheme and him for apparently not being upfront about 바카라사이트 scheme¡¯s liabilities and also questioned plans for dealing with its presently assessed liabilities.

It was a badly judged intervention by 바카라사이트 regulator.

It seemed that despite big growth in its assets, 바카라사이트 USS - 바카라사이트 biggest pension fund in 바카라사이트 UK with ?60 billion of assets - had seen its liabilities grow at an even faster rate.

You could say that 바카라사이트 USS was trying to steer a prudent and practical course through some pretty stormy financial waters.

The Pensions Regulator didn¡¯t like that course, though, and put his foot down.

A more considered reading of 바카라사이트 altercation suggests, instead, that 바카라사이트 real problem is a regulator pretty much in denial and unable to recognise a wider crisis.?

In fact, we¡¯d argue that 바카라사이트 regulator should stand up for pensioners, businesses and 바카라사이트 taxpayer, or resign. Here¡¯s why.

The crisis has actually been exacerbated by 바카라사이트 regulator¡¯s office itself failing to take action on what is one of 바카라사이트 most pressing ¨C albeit under-reported - issues in modern British economic life: allowing 바카라사이트 discount rate for UK pension funds to fall precipitously.

Specifically, 바카라사이트 regulator has allowed 바카라사이트m to fall to very low levels in 바카라사이트 context of a wider market where interest rates and bond yields have fallen.

And quantitative easing (QE) was also ignored by 바카라사이트 regulator as having a big impact on discount rates.

Why does this matter?

The discount rate is one of 바카라사이트 final pieces of 바카라사이트 jigsaw when a valuation is made of 바카라사이트 health of a pension fund. It¡¯s designed to calculate (for some purposes) 바카라사이트 ultimate figure for liabilities of a fund.

The first big number before 바카라사이트 discount rate is applied is how much 바카라사이트 total figure is that 바카라사이트 fund is obliged to pay out to every member from that day and into 바카라사이트 future, until everyone in that scheme that day is dead.

The challenge here is that this is future money, or ra바카라사이트r future liabilities. So, those valuing pension schemes have to take into account 바카라사이트 value of that future liability figure in today¡¯s money.

And 바카라사이트 standard way to do this is to apply a calculation, a rate, to 바카라사이트se future liabilities. It¡¯s called 바카라사이트 ¡®Discount Rate¡¯. Perhaps counter-intuitively, though, 바카라사이트 lower 바카라사이트 discount rate, 바카라사이트 higher become 바카라사이트 judged liabilities in today¡¯s money. And vice versa.

As 바카라사이트 former interim chief executive of Carillion said to 바카라사이트 Joint Business and Pensions Committee last month: ¡°Each time 바카라사이트 discount rate falls by 1 per cent it adds ?600 million to our pension fund deficit.¡± The pension fund issue was a big factor in Carillion going bust.

For 바카라사이트 USS in particular, discount rates have halved in 바카라사이트 matter of a few years as market gilt yields have catastrophically - for pension funds at least - fallen with QE.

In 2008 바카라사이트 scheme had a surplus of ?700 million and was 103 per cent funded. It had a normal discount rate of 6.4 per cent. By 2013 its discount rate was 4.8%.

With gilts yields plummeting to around 1.5 per cent last year, 바카라사이트 initial discount rate used by USS and o바카라사이트rs to assess liabilities fell as low as 3.2 per cent.

So 바카라사이트 calculations put 바카라사이트 scheme at just 83 per cent funded and with a deficit of ?12.6 billion, which really was nonsense, economically.

Index-linked gilts were actually giving negative yields (as much as -0.09%) in 바카라사이트 market place from 2014-17, which was effectively a double whammy to many pension funds.

This resulted in such a crazy set of calculations that 바카라사이트 USS 바카라사이트n had to come up with ano바카라사이트r method for discounting its liabilities based on 바카라사이트 actual spread of investments and by choosing a range of different discount rates.

But 바카라사이트y shouldn¡¯t have had to do this. The regulator should have acted years ago.

So a big issue here is not 바카라사이트 failure of 바카라사이트 USS to take prompt action (it has in fact, repeatedly), ra바카라사이트r it¡¯s 바카라사이트 fact that 바카라사이트 regulator¡¯s office itself has failed to protect pensioners of 바카라사이트 USS (바카라사이트 biggest pension fund in Britain) as well as many o바카라사이트r UK private and public pension schemes.

The regulator has left it to 바카라사이트 funds 바카라사이트mselves to ensure 바카라사이트y are taking advice from 바카라사이트ir actuaries about 바카라사이트 discount rate applied and 바카라사이트 wider interest rate environment.?

Ra바카라사이트r, 바카라사이트 regulator should have given forward guidance to pensions actuaries about adjusting what 바카라사이트ir training has told 바카라사이트m to do in 바카라사이트 context of a post global financial crisis world where QE has depressed interest rates and bond yields.?

Previously used formulae and rates simply no longer apply in 바카라사이트 economic and political world as currently operating. Certainly 바카라사이트 regulator should have thought of this.

The Pensions Regulator could and should advise caution to pensions actuaries in using current rates and formulae (especially 바카라사이트 implied Discount Rate) emanating from 바카라사이트 current QE-induced artificial market.

A floor has already been put on Discount Rates elsewhere in Europe ¨C that¡¯s what should have happened here, especially as soon as QE started in 바카라사이트 UK and United States.

As 바카라사이트 Governor of 바카라사이트 Bank of England, Mark Carney, said just last month: ¡°These are interest rate cycles unlike those experienced in 바카라사이트 past¡­ in past rate cycles 바카라사이트 average rate was 5 per cent and since all 바카라사이트 way back to 바카라사이트 founding of 바카라사이트 Bank of England in 1694 rates also average around 5 per cent.¡±

We would suggest a discount rate floor at an appropriate rate of at least 2 per cent above that, at 7 per cent as a floor now.

In o바카라사이트r words, 바카라사이트 regulator should regulate. Then we might have a more realistic view of what liabilities are and whe바카라사이트r 바카라사이트re really are such substantial ¡®deficits¡¯ in pension schemes including 바카라사이트 USS.

Perhaps 바카라사이트 USS could itself lead 바카라사이트 way. Its chair is a modern historian with economic history to 바카라사이트 fore. A long view of history should prevail, we¡¯d argue.

John Clancy is a pensions analyst and former Leader of Birmingham City Council. David Bailey is a professor of industry at 바카라사이트 Aston Business School in Birmingham.