Thread by @MikeOtsuka

It is @UCU's official policy that #USS is not in deficit. HE7 (linked) calls on negotiators "not to accept that the USS is in deficit". Below I distinguish and assess different arguments for and against the claim that the scheme is in deficit. 1/

ucu.org.uk/article/9502/H…

Argument #1: The scheme is not in deficit but rather is in surplus because it will be cash flow positive for the next several decades. 2/

This argument is implied by UCU Special Conference Resolution 9 (link), which asks JEP to "explain in simple terms by what process exactly does it go from being cash flow positive, with an annual surplus of £1bn, to deficit" 3/

ucu.org.uk/hescjune18

Here's the explanation: according to the regulations, whether the scheme is in 'deficit' is a matter of whether the market value of the assets in the scheme's portfolio as of 31 March 2017 (which was £60 bn) is less than the present value of the pensions liabilities... 4/

...associated with contributions into the scheme up to 31 March 2017. The liabilities themselves are simply the pensions that will eventually be paid in return for these past contributions. Such pensions are streams of payments that extend decades into the future. 5/

These streams of payments are represented as a sum of money which represents their 'present value'. If that sum is larger than the value of the assets, then the scheme is in deficit. 6/

Whether that sum is larger than the assets is a very different matter from whether the scheme will be cash flow positive. It's possible for a scheme to be cash flow positive forever but also in severe deficit. 7/

Cash flows are a matter of whether the contributions received in a given year plus income from investments exceeds the pensions paid out in that year. A scheme might be forever cash flow positive but also in severe deficit for the following reason: 8/

Incoming contributions might exceed outgoing pensions payments every year simply because more and more new members are joining the scheme, and hence the ratio of active members to pensioners is forever growing. 9/

The above is consistent with the following: the contributions for each member of the scheme are never sufficient to cover the pensions promises that these contributions give rise to. 10/

Whether the scheme is in deficit as of 31 March 2017 is a matter of whether contributions PRIOR TO THAT DATE are sufficient to cover the pensions promises to which those PRIOR contributions gave rise. 11/

If those prior contributions, plus the returns on investment they will receive, are insufficient to cover the pensions promises to which these contributions gave rise, then the scheme is in deficit. 12/

The fact that FUTURE contributions, which give rise to new pension promises, will always be sufficient to cover past pensions promises, is insufficient to establish that the scheme is not in deficit. 13/

I hope the above provides an explanation "in simple terms by what process exactly does it go from being cash flow positive, with an annual surplus of £1bn, to deficit". But I'm happy to elaborate if anyone is unconvinced. 14/

In my opening tweet, I said I'd "assess different arguments for and against the claim that the scheme is in deficit". I've now gone on long enough that I'll limit myself in this thread to the one Argument #1 above, and stop here. 15/15