Full text of original letter sent to the Financial Times: Examining the numbers on pension valuations

We are concerned about the transparency of decision making in the USS pension scheme. The USS has announced a substantial deficit, but the data and methods they have published are very limited, making them impossible to judge.

The USS manages £60bn in assets on behalf of its members. The most recent USS accounts and reports indicate the scheme has a large deficit. However, the USS provides insufficient information about the methods used to value its assets and liabilities. They present no confidence intervals around the point estimate of the deficit, indication of estimation error, or any sensitivity analyses. They provide virtually no details of what data or analytic code they used to come to their conclusions. Even the CMI 2014 report underpinning the mortality assumptions is not publicly

available.

The USS and Mercer list the assumptions used on page 106 of the most recent report. They also indicate how they have changed the assumptions between 2013 and 2017. In brief, they assume:

1. A fall in the expected long-term nominal investment return from 4.7% to 2.8%.

2. An increase in general pay growth from CPI (2.6%), to RPI + 1% (4.4%).

3. Life expectancy increasing by 1.5% per year.

We find these assumptions curious. First, how can expected investment returns have fallen by 40% in four years? Surely a collapse in returns on this scale would be reflected in the equity or bond markets? Equity markets in high income countries are up 51.7% in the last four years (11% per year). Their assumptions are consistent with a 0.33% per year return on investments after CPI. Is this rate of return possible without a global recession?

Second, in 2014 the USS assumed cumulative pay growth over the following four years of 16%. Yet general pay increases have fallen well short of this, cumulatively increasing by 5.8%. Their estimates of the deficit assume that in future general pay will rise at a rate of RPI +1% (4.4% per year). Is there any evidence that universities will award cost of living increases at this rate? Furthermore, the ONS and the RSS has repeatedly warned that the RPI is a flawed measure of inflation, and should not be used. So why are the USS using it to estimate the deficit?

Third, there has been little increase in life expectancy since 2011. The Institute and Faculty of Actuaries estimates that mortality is around 11% higher in 2016 than would have been expected based on the historical trend. This means life expectancy is lower, which will lower the USS’s liabilities.

A shorter version of this letter was published by the Financial Times on September 19th 2017. The link to that and a PDF of this version can be found here

Prof Steven Julious

Professor of Medical Statistics, University of Sheffield

Prof Mark Gilthorpe

Professor of Statistical Epidemiology, University of Leeds

Dr Fred Martineau

Clinical Research Fellow, London School of Hygiene and Tropical Medicine

Dr Abigail Fraser

Reader in Epidemiology, University of Bristol

Prof Danny Dorling

Professor of Geography, University of Oxford

Prof Yoav BenShlomo

Professor of Clinical Epidemiology, University of Bristol

Dr Rhian Daniel

Reader in Medical Statistics, Cardiff University

Sedona Sweeney

Health Economist, London School of Hygiene and Tropical Medicine

Dr Ben Goldacre

Senior Clinical Research Fellow, University of Oxford

Prof Charles Taylor

Professor of Statistics, University of Leeds

Dr Joanna Reynolds

Assistant Professor, London School of Hygiene and Tropical Medicine

Sandra Mounier-Jack

Associate Professor, London School of Hygiene and Tropical Medicine

Prof Steven Haberman

Professor of Actuarial Science, Cass Business School, City, University of London

Prof Andrew Clare

Associate Dean, Cass Business School

Dr William Johnson

Lecturer, Loughborough University

Prof Kate Tilling

Professor of Medical Statistics, University of Bristol

Catherine Pitt

Assistant Professor of Health Economics, London School of Hygiene and Tropical Medicine

Prof George Davey Smith

Professor of Clinical Epidemiology, University of Bristol

Dr Eleanor Hutchinson

Assistant professor, London School of Hygiene and Tropical Medicine

Professor David Spiegelhalter

Professor of Biostatistics, University of Cambridge

Dr Tara Beattie

Assistant Professor, London School of Hygiene and Tropical Medicine

Prof Saul Jacka

Professor, University of Warwick

Prof Martin Bobak

Professor of epidemiology, University College London

Dr Beniamino Cislaghi

Assistant Professor, London School of Hygiene and Tropical Medicine

Prof Jonathan Sterne

Professor of Medical Statistics and Epidemiology, University of Bristol

Dr Luisa Zuccolo

Senior Research Fellow, University of Bristol

Dr Natasha Howard

Assistant Professor, London School of Hygiene and Tropical Medicine

Neil Davies

Research Fellow, University of Bristol

Prof Tim Cole

Professor of medical statistics, University College London Great Ormond Street Institute of Child Health

Dr James Woodcock

Programme Lead, University of Cambridge

Dr Hynek Pikhart

Reader in Epidemiology and Medical Statistics, University College London

Dr Ana Maria Buller

Deputy Director Gender, Violence & Health Centre, London School of Hygiene and Tropical Medicine

Dr Shelley Lees

Associate Professor in Anthropology of Gender, Violence and HIV, London School of Hygiene and Tropical Medicine

Prof Graham Medley

Professor of Infectious Disease Modelling, London School of Hygiene and Tropical Medicine

Prof Marcus Munafò

Professor of Experimental Psychology, University of Bristol

Dr Josephine Borghi

Associate Professor, London School of Hygiene and Tropical Medicine

Prof Peter Green

Professorial Research Fellow, University of Bristol

Dr Sam Marsh

Teaching Fellow, University of Sheffield

Prof Guy Nason

Professor of Statistics, University of Bristol

Prof Chris Metcalfe

Professor of Medical Statistics, University of Bristol

Dr Laura Howe

Reader in Epidemiology and Medical Statistics, University of Bristol

Benjamin Palafox

Research Fellow in Pharmaceutical Policy & Economics, London School of Hygiene and Tropical Medicine

Dr Fern Terris-Prestholt

Associate Professor in the Economics of HIV, London School of Hygiene and Tropical Medicine

Dr Krishnan Bhaskaran

Associate Professor in Statistical Epidemiology, London School of Hygiene and Tropical Medicine

Prof Bianca De Stavola

Professor of Medical Statistics, University College London

Prof Martin McKee

Professor of European Public Health, London School of Hygiene and Tropical Medicine

Dr Clare Chandler

Associate Professor, London School of Hygiene and Tropical Medicine

Dr Aaron Reeves

Associate Professorial Research Fellow, London School of Economics

Matthew Quaife

Research Fellow, London School of Hygiene and Tropical Medicine

Dr Giulia Greco

Assistant Professor and MRC Fellow, London School of Hygiene and Tropical Medicine

Prof Caroline Relton

Professor, University of Bristol

Prof Qiwei Yao

Professor of Statistics, London School of Economics

Dr Melisa Martinez-Alvarez

Assistant Professor, London School of Hygiene and Tropical Medicine

Prof Simon Wood

Professor of Statistical Science, University of Bristol