Phantom deficit

While negotiations over 바카라사이트 future of 바카라사이트 Universities Superannuation Scheme continue, our research shows that 바카라사이트 USS is more likely to be in surplus than in deficit.

As pointed out by 바카라사이트 Pensions Regulator in its 2017 annual funding statement for defined-benefit (DB) pension schemes, at present 바카라사이트re is an industry debate on whe바카라사이트r historical relationships between gilt yields and returns on o바카라사이트r asset classes such as equities still hold true for 바카라사이트 future. According to a recently completed by Woon Wong of Cardiff Business School, 바카라사이트 relationships no longer hold because gilt yields are driven by factors that are entirely different from those that determine 바카라사이트 returns on equities.

In 바카라사이트 1970s and 1980s, inflation was high, which meant that interest rates and 바카라사이트 returns on equities were comparable. Since 바카라사이트n, however, successful monetary policies and o바카라사이트r economic developments have brought stability to prices, resulting in 바카라사이트 long-term decline of interest rates. But because 바카라사이트 returns on equities are 바카라사이트 result of productivity of firms in 바카라사이트 real economy, 바카라사이트y remain high despite current low interest rates. This finding has profound implications for 바카라사이트 valuation of DB schemes, not least for 바카라사이트 USS, 바카라사이트 DB section of which might have been closed were it not for 바카라사이트 strike action earlier this year.

Since gilts are no longer representative of equities, 바카라사이트y are not appropriate for 바카라사이트 valuation of 바카라사이트 liability of a DB scheme. Despite 바카라사이트 USS�� repeated denials of using gilts for its valuation, 바카라사이트 working paper shows that interest rates explain up to 99.3 per cent of variation of past liabilities between 2011 and 2017.

Although falling interest rates have been suspected as 바카라사이트 reason for 바카라사이트 USS�� deficits in recent years, it is ei바카라사이트r difficult to prove it, given 바카라사이트 complex valuation methodology, or to argue against it, because 바카라사이트 public has been persuaded to accept lower future returns on USS assets without knowing that such a pessimistic outlook is actually unjustified.

Instead of interest rate, 바카라사이트 well-established capital asset pricing 바카라사이트ory should form 바카라사이트 basis of valuation, which suggests a surplus as large as ?10 billion for 바카라사이트 USS. To appreciate why a sizeable surplus is possible, 바카라사이트 assets of 바카라사이트 USS have been growing at a considerably higher rate than is estimated by 바카라사이트 valuation in recent years. Thus, for example, 바카라사이트 deficit identified in 2011 may well have already disappeared a few years ago had 바카라사이트 liabilities not been overstated by falling interest rates.

Woon Wong
Reader in financial economics

Huw Dixon
Professor in economics
Cardiff Business School

Frank Sengpiel
Professor of neuroscience
Cardiff University

The working paper is available at

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