Thread by @MikeOtsuka

Having previously assessed two bad arguments (see links) that USS is not in deficit, I now go on to offer a much better argument that it is not in deficit.

(Bad) Argument #1:

https://twitter.com/MikeOtsuka/status/1019471531796254720

(Bad) Argument #2:

https://twitter.com/MikeOtsuka/status/1019487244049100801

1/

(Good) Argument #3: USS lacks sound basis for de-risking the assets over the next 20 years. Once this de-risking is cancelled, the scheme is fully funded on a prudent basis. 2/

As reported in this blog post (linked), USS informed @Sam_Marsh101 and others in the Sheffield USS Working Group that, if Test 1 de-risking of the scheme is cancelled, the discount rate rises sufficiently to pretty much wipe out the entire deficit. 3/

medium.com/ussbriefs/unde…

Such elimination of the deficit tallies with independent calculations based on available information that @Sam_Marsh101 has made, as well as more rudimentary calculations I've done myself. 4/

Such elimination of the deficit assumes that USS remains continually invested in its current portfolio, which is “broadly half in equities, one-third in bonds and the balance in infrastructure, property and other assets” (link). 5/

uss.co.uk/how-uss-is-run…

It also assumes returns on the investments in this portfolio which the scheme has a 67% chance of achieving. In other words, it assumes that USS sticks with its current prudent adjustment of the discount rate from 50% best estimate to 67%. 6/

I have argued that, once the underlying justification for Test 1 is made clear, we can see that the test does not justify any de-risking of the scheme for at least the next 30 years. (See linked blog post, which is also my JEP submission.) 7/

medium.com/@mikeotsuka/ho…

Moreover, Test 1 would mandate no de-risking at all, not even after 30 years, if @UniversitiesUK would stop insisting on an incoherently conservative reading of the "growth in reliance of covenant" parameter of Test 1. See 2nd para of linked blog post. 8/

medium.com/@mikeotsuka/th…

Therefore, properly understood, Test 1 does not force any de-risking of the scheme. That still leaves open the question of whether there is some other good argument, apart from Test 1, for a de-risking of the portfolio. 9/

One might argue that, even apart from Test 1, it is too risky to fund past DB accrual out of the current portfolio, given the downside risk of growth assets. See embedded tweet for more on this: 10/

https://twitter.com/MikeOtsuka/status/1019498967158132736

The response to this challenge is two-fold:

First, so long as the scheme remains cash flow positive because open to future DB accrual at a sufficiently high level (i.e., CRB 1/75 up to at least £30k), the risk of remaining continually invested in growth assets is low. 11/

For an explanation of why positive cash flow renders this risk low, click this blog post: 12/

medium.com/@mikeotsuka/th…

As I explain in my linked comment on a blog post by @AlistairJarvis, this risk is further lowered by the adoption of the internal rate of return approach to the valuation that @FirstActuarial has recommended. 13/

wonkhe.com/blogs/pensions…

I say more about such an internal rate of return approach in this blog post, where I draw an analogy between a DB pension scheme and a buy-to-let mortgage: 14/

medium.com/@mikeotsuka/an…

For the above reasons, USS could prudently remain invested in its current growth portfolio, with past pensions liabilities fully funded on the basis of a 67% chance of success. 15/15