Thread by @MikeOtsuka

Every #USS member should read @FixingEconomics's "Reckless Prudence:
How to break a pension system" (link). Some quotes and comments in the thread below. 1/

https://twitter.com/FixingEconomics/status/1010268978437115904

Intro to piece: "Were British university staff right to strike over changes to their
pensions system? We were asked this question a few weeks ago, by one of our clients. Our short answer was: Yes, it looks like the academics were
probably right to strike." 2/

Re #USS/@UniversitiesUK proposals involving "increased contributions, reduced benefits, moving to a defined contribution model, and ‘de-risking’ the investment
strategy by switching from equities into bonds", @FixingEconomics writes: 3/

"In our view, it is probably unwise to trigger a wholesale reengineering of the scheme, based on a [Test 1] solvency test that is itself likely distorted by temporarily depressed bond yields due to Quantitative Easing." 4/

Re 'de-risking' into bonds: "we can be very confident long-term UK government bonds will lose at least 1.6% on average over the next thirty years. If you’re so inclined you can guarantee that long term loss today, by buying long term index linked gilts with negative yields" 5/

By contrast "UK equities are currently priced to deliver a real, after inflation, return of about 7% per year." Therefore: 6/

"A worker who sacrifices £100 of today’s spending power into his or her pension may expect to withdraw the equivalent of £760 of spending power in 30 years’ time, if they invest in equities." 7/

But "If they invest in very long-term UK government bonds they should expect only around £60 of spending power. If over those 30 years inflation turns out to be about 2% higher than currently expected the bond investor will get back only around £30 of spending power." 8/

Isn't it too risky to remain heavily invested in equities, given the volatility of their price? Answer might be yes "If the scheme is operating in a shrinking or dying industry", since "the flow of future contributions will dry up, forcing the scheme to rely on its assets." 9/

But answer is no "if the industry remains vibrant and expanding", since "the inflows could continue indefinitely and the scheme may never need to sell its assets." 10/

Moreover, "education is an industry likely to survive into perpetuity.
If we accept universities are a perpetual industry, then future pension contributions from university staff should be considered a perpetual income stream." 11/

"This means it is safe to rely on those payments to meet future pension payments. ...Serving, as it does, an expanding perpetual industry, it is conceivable the University Superannuation Scheme may never need to draw on its assets." 12/

My one main point of disagreement with the piece is the suggestion that USS be run "on an entirely unfunded pay-as-you-go model, without any assets at all." See these tweets on @RedActuary's post for why I disagree: 13/

https://twitter.com/MikeOtsuka/status/1010422434720374786

But I think the conclusion to which the post builds is important and sound:

"As we see it, much of the problem lies in the rigid guarantees built into Defined Benefit Schemes...." 14/

"...We believe all parties, including the pensioners themselves, would be better off if Defined Benefit schemes were recast as Expected Benefit schemes.

By relaxing the guarantees pension schemes would be able to invest in more appropriate higher returning equities...." 15/

"This would allow schemes to remain open so that more people would benefit from them. It would reduce the average funding cost of pensions and would leave sponsors in a better position to invest in their own industries, for the benefit of all generations." 16/16