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Michael Otsuka @MikeOtsuka
, 19 tweets, 11 min read Read on Twitter
#USS provides blinkered, inaccurate, exaggerated measures of risk in their consultation document, all three of which are tied to the gilt yield. More comments below. 1/
The first (see 5.4.1) is their measure of 'long term risk' in terms of their infamous Test 1 gap to 'self-sufficiency' in 20 year's time. Self-sufficiency is a gilts+0.75 portfolio. 2/
As I explain in this thread, it's only when they rewrite history by contradicting past statements that they are able to show a need to 'de-risk' into bonds in order to meet this test. 3/
Their 2nd measure of risk (see 5.4.2 & 6.2) is 'the discount rate expressed as a spread relative to inflation (i.e. CPI) or gilt yields.' Their measure of CPI is, however, derived from gilt yields. So this 2nd measure = discount rate relative to gilt yields or gilt yields. 4/
Their 3rd measure of risk (see 6.3) is 'the short-term level of reliance', which is the gap between actual asset level during the next 3 yrs & the amount of assets required to purchase a gilts+0.75% self-sufficiency portfolio. 5/
This is an especially meaningless measure of risk. See this blog post: 6/…
In order to mitigate risk by these 3 measures, #USS is calling for an expensive shift of the portfolio into gilts & other bonds & fixed income that approximate gilts. 7/
What's lacking, however, is an account of why the gilt yield provides a good measure of risk. E.g., no reply to @FirstActuarial's argument that the gilt yield is hardly relevant to the level of risk of an open, ongoing scheme that will be cash flow positive for 50+ yrs. 8/
#USS has therefore failed to provide satisfactory responses to these highlighted @UniversitiesUK requests for further information in their response to the JEP consultation: 9/
They have also failed to provide a satisfactory analysis of risk that tPR requested in their recent letter: 10/
Conspicuously absent is any reference to their stochastic modelling, which shows that 'de-risking' into bonds depresses expected returns w/o providing any material increase in protection against downside risk. See Sec I: 11/…
#USS appears to have cherry-picked three gilts-based measures of risk in an attempt to block full adoption of the JEP recommendations which were endorsed by @FirstActuarial and @Aon_plc. 12/12
🚨Acceptance of JEP in full turns out to satisfy 2 of #USS's 3 measures of risk! Re 1st 'long term risk' criterion, see above tweet & embedded thread: a/
Re 3rd 'short term reliance' measure, #USS notes on p. 16 that 'the impact on reliance is the same regardless of which of [JEP] changes 5 to 8 are incorporated into the 2018 valuation'. Here are changes 5-8: b/
So it's only USS's 2nd measure of risk -- extent to which discount rate exceeds gilt yield -- which tells against acceptance of all JEP adjustments. This measure of risk is the tPR benchmark against which they judge valuations acceptable. c/
But as @FirstActuarial notes: d/
And see also this statement by @FirstActuarial: e/
In short, apart from via appeal to a measure of risk that serve the interest of tPR rather than scheme members & sponsors, #USS has not made out the case for refusal to accept JEP proposals in full. f/f
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