“Well, I wouldn’t have started here,” is the punchline in the well-known joke about an economist failing to answer a question. Similarly, the Universities Superannuation Scheme, which funds pensions for UK professors, would prefer to be in a different place. On its current forecasts, the USS does not have enough money, the Financial Times reported on Friday. It requires not only a big top-up but a better approach to assessing investment risks.
Since 2017, when pension terms were diluted, university academics have discovered how big USS’s problems are. Universities and academics contribute to the fund and rely on USS to coax enough gains to meet future obligations. In practice, USS has had to admit that it has come up short. Its most recent estimate is by £6.6bn.
USS’s mistake was in being too slow in recognising how the investment environment had changed. UK gilt yields, indexed for inflation, are an important factor. The lower these fall, the more money is needed for future payments. That extra money will come from academics and universities. UK academics are modestly paid — about £49,000 on average, according to a Times Higher Education study. Low salaries were once balanced by hopes of a decent pension. Universities fear they will need to make job cuts if their contributions rise.
Might USS have anticipated this kerfuffle? Ten-year indexed gilt yields fell below zero eight years ago, suggesting the funding threat has been growing for years. A Joint Expert Panel — including beneficiaries and universities — formed in March 2018 was a recognition that, yes, USS could have done better assessing the long-term risk to its portfolios. This is not about short-term investment performance, which has been tolerable. It is about asset allocation.
USS’s governance needs overhauling. For its financial problems to evaporate, UK interest rates would need to rise or the state to backstop beleaguered academics. They are right to ask why the government shoulders huge pension liabilities for civil servants and teachers, but not for them.