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Michael Otsuka @MikeOtsuka
, 15 tweets, 9 min read Read on Twitter
The fundamental problem w/ the #USS valuation is that they have two funding targets, & their unjustified choice to meet the one target precisely renders it prohibitively expensive to meet the second target as well. More details in tweets below. 1/
1st target is statutory funding obligation (SFO), according to which assets must be sufficient to cover the liabilities, where the latter have been discounted at the rate of the expected returns on these assets, w/ expectations prudently adjusted downward to 67% of success. 2/
2nd target is that the assets be sufficient in 20 yrs time, via supplementation by +7% extra employer contributions over 20 more years, to purchase a self-sufficiency portfolio by year 40. 3/
.@Sam_Marsh101's asset projections, confirmed by #USS, show that if USS retained its return-seeking portfolio, rather than de-risking into bonds, the scheme would meet the 2nd target, even in the absence of JEP recommended relaxation of Test 1 reliance parameter. 4/
It would meet the 2nd target by OVERSHOOTING the 1st target: i.e., by going into substantial surplus by year 20. 5/
As revealed in this linked blog post, however, @GuyCoughlan maintains that the USS trustee refuse to allow for an overshooting of the 1st target. Rather, the 1st target must be met exactly. The scheme cannot run a significant TP surplus. 6/…
But as I maintain in👆blog post, @GuyCoughlan provides no good justification for refusal to run a surplus. Such refusal isn't required by regulations or HMRC, isn't written into any Statement of Funding Principles employers have accepted. And it makes no actuarial sense. 7/
Rather, it makes actuarial sense to overshoot the less demanding SFO target in order to meet the more demanding self-sufficiency target. 8/
#USS's Test 1 driven de-risking of the scheme is based on the unjustified assumption that the SFO be met exactly. JEP's 2 proposals to mitigate start of & ultimate degree of de-risking of assets would be fully justified if USS abandoned its insistence on no surplus. 9/
If #USS rejects either of these 2 JEP proposals (re delay of de-risking by 10 yrs & increase of reliance to £13 bn), or makes automatic triggers of higher contributions a condition of accepting either of them, UUK & UCU mUst demand that USS answer the following question: 10/
👆In the interests of scheme members, UCU & UUK must press this question until they receive a satisfactory answer from USS. 12/12
For more on lack of justification of @GuyCoughlan's assumption that trustees (e.g., @DaveGuppy & @UofGVC) will not allow scheme to go into significant surplus, see section of @FirstActuarial report called 'Reliance, discount rate and investment strategy'. It begins as follows:
Here's the remainder of the section:
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