A group of leading authorities on statistics, financial mathematics and actuarial science have written to Sir Martin Harris, the chairman of the USS trustees, and members of the board, criticising the assumptions that have been made underpinning the estimation of the deficit, as detailed in the document ‘USS: 2014 Actuarial Valuation: A Consultation on the proposed assumptions…’
They point out that some key assumptions the trustees have made, that underlie the calculations that produce a figure for the deficit of over £12 billion, are unrealistic and in fact unnecessarily pessimistic. In particular they criticise the trustees for assuming:
· pessimistic investment performance based on gilts rather than the actual experience of the USS investment portfolio,
· a far too high rate of price inflation,
· a rate of salary growth above what has been achieved in the past,
· an increase in the rate of increase of longevity without supporting data (indeed the latest actuarial estimates report a reduction in expected lifespans),
· too short a time horizon for the employer covenant (one more appropriate to a private company than the university sector).
They also make some fundamental criticisms resulting from the methodology being used:
· There is an element of circularity in the reasoning – much of the deficit is due to the expectation of poor returns in the future (because of the gilts-based approach) and the short 20-year time horizon for the employere covenant – which in turn is said to be necessary because of the unwillingness of employers to pay high contributons due to the deficit.
· The assumptions are chosen in a manner which is economically incoherent – buoyant salary growth assumes a strongly growing economy while poor investment returns assume an economy permanently in recession – both these assumptions serve to inflate the deficit.
· All the assumptions made assume a ‘worst case’ scenario. The combined effect is to be unduly pessimistic.
· The estimates obtained by the trustees’ approach exhibit wild swings, with rapid instability over a period of months in the estimated liabilities, while the real liabilities are known to vary very slowly on a decadal beasis.
…moving to evidence‐based assumptions on salary growth and RPI would show the scheme to be in healthy surplus on a neutral assumptions basis. Remove the derisking assumptions and that surplus would be substantial. Substitute historic asset growth performance for Gilts plus and the neutral basis would show a very substantial surplus.