Market deficit

The letters on the Universities Superannuation Scheme published by Times Higher Education in the past two weeks (“Assets, liabilities and old age tensions”, 14 November; “Equity inequities”, 21 November) illustrate what happens when dodgy economic theories are believed.

We are being told it is wrong to count contributions into the USS as income, on the argument: “What happens…when a company goes bust, so there can be no further contributions?” Which company is being referred to here? The pre-1992 university sector includes many of the world’s greatest (and richest) seats of learning. So it must mean the USS having to be able to cover the possibility of great universities going bust – surely not very likely.

Funding is the elephant in the room of all the discussions about the USS’ sustainability. The argument is that there should be enough marketable assets to cover an estimate of the scheme’s future liabilities. Implementing this rule literally – to comply with the requirements of the unwise legislation in the Pensions Act 2004 – requires schemes to switch their business model from one basis to another without having the cash available to do so.

In common with all defined benefit schemes, the USS is being forced to go from what we might call a “social” cash-in, cash-out model – where each generation of workers’ contributions help guarantee the pensions of the previous, retired one – to a “market” model, where the world is seen only in financial terms and pensions must be pre-funded. This is where the USS “deficit” comes from: it is the result of an ideological change being foisted on us.

It is rather as if it were decreed that mortgages had to be abolished forthwith and that every household had to pay off their existing contract within a year. They would obviously have to find a lot of money to do so.

The idea behind all this is that markets are efficient – a busted flush of an economic theory (see the 2008 crash). Through this ideological prism, the world is seen, not as a long-lived society but as an abstract, timeless market: this induces a kind of neoliberal myopia that leaves believers unable to appreciate the difference between an ancient university and a firm on the edge of bankruptcy.

The USS is only one of many private defined benefit schemes. Many others have been closed because of the rules that imposed this funding logic. It is time the law was changed.

Dennis Leech
Professor of economics
University of Warwick