Remember how a few weeks back #USS sent me some data relevant to the valuation and, in particular, Test 1? Well, I've been playing around with it and found out some VERY interesting (if technical) things. Read on. 1/
@OpenUPP2018 @USSbriefs @ForPension
@OpenUPP2018 @USSbriefs @ForPension
Firstly, the new data has pulled the valuation spreadsheet I've cobbled together nicely into line with numbers #USS have published in various documents. In other words, I have got a rough and ready model of the valuation which works pretty well. 2/
September valuation?
USS say 5.1bn deficit, my spreadsheet says 5.0bn
November valuation?
USS say 7.5bn deficit, my spreadsheet agrees
Cancel the de-risking (allowing for prudence)?
My spreadsheet says 0.5bn deficit, same figure I was told last year by @alanhigham100 of USS. 3/
USS say 5.1bn deficit, my spreadsheet says 5.0bn
November valuation?
USS say 7.5bn deficit, my spreadsheet agrees
Cancel the de-risking (allowing for prudence)?
My spreadsheet says 0.5bn deficit, same figure I was told last year by @alanhigham100 of USS. 3/
My spreadsheet's replication of the best-estimate valuations are close, but tend to slightly under-estimate the figures stated by #USS. This could be due to different cashflows used to generate those best-estimates, or perhaps something else. 4/
But here's my first firm finding: cancel the de-risking, and on a best-estimate basis the scheme has a surplus IN EXCESS OF £11.6bn! This has never been publicly stated by USS, who claimed they didn't even know the figure as it lay outside of @UniversitiesUK's 'risk appetite'. 5/
(I'd previously claimed £13bn for that best-estimate surplus, but that was using patched together data rather than cashflows straight from USS. And in any case, I think the £11.6bn in my spreadsheet is a lower-bound.) 6/
Moving on, I now had most of the information I needed to properly analyse Test 1, assuming I've understood its application correctly, as described in my JEP submission. 7/
medium.com/ussbriefs/unde…
medium.com/ussbriefs/unde…
I finished that submission with a series of questions I encouraged the JEP to investigate. At the time, I didn't have the data I needed to answer them myself. But now I've answered bits of Qs 3 and 4 above, and had Q1 in my sights... 8/
Firstly, I calculate that the technical provisions at Year 20 must be around £112.5bn. The gap to the self-sufficiency valuation at Year 20 has to be £15.8bn, so this means that the Year 20 Self-Sufficiency figure must be something like £112.5+15.8bn=£128.3bn.. 9/
Cancel the de-risking, and the technical provisions liabilities at Year 20 would be £93.5bn-ish, which means a gap of around £35bn, a little outside of max reliance inflated by salary growth of £29.4bn. 11/
This answers Q1, and pretty much seals an earlier claim: had @UniversitiesUK chosen the least restrictive Test 1 parameters in Feb 17, (almost) no de-risking would have been needed, and the DB scheme could have passed the valuation unscathed. 12/
But now a new question!
Suppose you cancel the de-risking. What is the expected value of the assets at Year 20, taking into account the expected asset growth, benefit payments and contributions under current rates?
More than the 112.5bn figure above would be VERY GOOD NEWS. 13/
Suppose you cancel the de-risking. What is the expected value of the assets at Year 20, taking into account the expected asset growth, benefit payments and contributions under current rates?
More than the 112.5bn figure above would be VERY GOOD NEWS. 13/
If I've done my sums correctly (and you can't check my workings, because #USS won't let me pass on the data), the expected Year 20 value of the assets without any de-risking or contribution rate changes is a massive £123.5bn! That's £11bn more than is needed at Year 20! 14/
If this is correct, this is strong valdiation of @MikeOtsuka's suggested approach: putting off de-risking until after Year 20 would be expected, under prduent assumptions, to result in an £11bn surplus and a £4.5bn gap to self-sufficiency at Year 20! 15/
medium.com/@mikeotsuka/ho…
medium.com/@mikeotsuka/ho…
One final question.
Suppose you de-risk as planned by #USS. What is the expected value of the assets at Year 20, taking into account the expected asset growth, benefit payments and contributions under current rates?
The answer to this was very surprising! 16/
Suppose you de-risk as planned by #USS. What is the expected value of the assets at Year 20, taking into account the expected asset growth, benefit payments and contributions under current rates?
The answer to this was very surprising! 16/
Even if you do de-risk, by Year 20 you'd expect the assets to have reached £112.2bn. This is short of the required level at Year 20 by just £0.3bn! In other words, at the current contribution rates you'd expect the deficit to have shrunk to a tiny £0.3bn! 17/
Now, this thread is definitely too long. So if you didn't read, here's the summary: Test 1 is well and truly broke, and the figures prove it. @MikeOtsuka's alternative fits #USS's supposed motivation for Test 1 and that suggestion allows DB to continue at the current rates. 18/18
