Universities Superannuation Scheme rejects valuation error claim

The Universities Superannuation Scheme has rejected claims that it has made a “large and demonstrable mistake” in the valuation of its £7.5 billion deficit.

The pension fund, which represents thousands of UK university staff, issued a response on 16 October after the publication of an analysis of the scheme’s health by Sam Marsh, a lecturer in the School of Mathematics and Statistics at the University of Sheffield.

Dr Marsh, who is the University and College Union’s branch president at Sheffield, has claimed that the £60 billion fund is actually in surplus, not deficit, having analysed USS data.

In the analysis, published on 13 October, Dr Marsh claims that the USS scheme actually has a “substantial” long-term surplus and that there is no need for detrimental changes to benefits or contributions.

Writing in a subsequent blog on 15 October, Dr Marsh said that he had exposed a “harmful inconsistency” in the way that the USS had conducted a key test of risk management, known as Model 1, which was designed by the scheme in 2014 to ensure that university employers and scheme trustees remained within an agreed comfort zone of investment risk.

“The motivation for Test 1 has always been framed in terms of ensuring a ‘safe harbour’ for the scheme, known as ‘self-sufficiency’, remains within reach in 20 years’ time,” he explained.

“Such a safe harbour is a way of mothballing the scheme, of putting it into a stable end state ready for closure,” said Dr Marsh, who added the USS’ test was “flawed” and had relied on a “crooked logic”.

Dr Marsh's findings were highlighted by Mike Otsuka, professor of political philosophy at the London School of Economics, in a blog post on 14 October, which prompted a response from the USS.

In a statement, however, the USS hit back at Dr Marsh’s allegations, saying that although his analysis was “not wrong in isolation”, it was “simply not an adequate premise on which to fund the scheme”.

Addressing the claim of a “large and demonstrable mistake”, it added that “there is no such error in USS’s valuation”.

The USS said that the “commentary that this analysis has generated is based on an incomplete understanding of the scheme’s current funding proposals and of regulatory requirements”.

“Throughout the valuation process, USS has engaged extensively with employer and member representatives appointed specifically to consider these issues in depth and in context,” the USS statement continued.

“It is important to understand what lies beneath the projections: most notably, an assumption that interest rates will rise in the future – and sooner than financial markets are currently predicting. The risk is that they do not.

“The trustee’s view is that contributions must rise in the short term to manage these risks, acknowledging that the likely (but by no means certain) path for contributions is that they fall in the future.”

In a separate technical document, Guy Coughlan, chief risk officer at the USS, added that Dr Marsh’s analysis was “based on the erroneous premise that setting contributions which are adequate on average over 20 years is sufficient to fund the scheme”

While this was a “necessary condition”, it alone was not a “sufficient condition” of complying with the regulator’s rules, which require the scheme to manage other elements of risk that the scheme may face, he added.

jack.grove@timeshighereducation.com