Thread by @aechitty1

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake Mike, thanks for this. I'll try to clarify my view.

It is true that JEP have accepted Test 1 for the current valuation, despite their pretty scathing criticisms of it. However what drives 'de-risking' is not Test 1 as such but the way USS chooses to interpret it. 1/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake Their current definition of Test 1 (Sep 2017 TP consultation doc, p. 58) is:

"Test 1: a test designed to measure whether or not the long-term risk in the DB section of the scheme is within the risk appetite agreed between the trustee and sponsoring employers. 2/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake The test checks that the difference between self-sufficiency and technical provisions in 20-years time does not become too large for the employers to support." 3/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake As we know, the figure USS currently asserts is the largest the employers should be asked to support (the 'target reliance on covenant') at year 20 is £10bn. /4

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake USS's definition of 'technical provisions' is "a prudent estimate of the assets needed to pay the pensions earned up to the valuation date (accrued pensions)" (Sep 2017 TP consultation doc, p.13; cf. Oct 2014 TP consultation doc, p. 4). 5/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake This follows the definition in the Pensions Act 200: "A scheme's 'technical provisions' means the amount required, on an actuarial calculation, to make provision for the scheme's liabilities" 6/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake And that in turn follows the tacit definition in the EU's IORP Directive 2003 (which I think introduced the term): "an adequate amount of liabilities corresponding to the financial commitments which arise out of their portfolio of existing pension contracts." 7/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake So technical provisions in 20 years time (TP20) simply means "a prudent estimate of the assets needed in year 20 to pay the pensions earned up to year 20". 8/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake Test 1 (with the present target reliance figure inserted) simply says that a criterion of prudence in setting a figure for TP20 must be that it is at least the self-sufficiency value of liabilities at year 20 minus £10bn. TP20 >= SS20 - £10bn. 9/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake This supplements USS's standard criterion of prudence for TP: that TP20 must be at least the value of liabilities accrued to year 20, discounted using a 67%-prudence-adjusted expected rate of return on assets on the planned portfolio from year 20 onwards. TP20 >= L(r67)20. 10/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake So far so good. If you have two criteria of prudence for then you make sure your TP20 figure meets whichever is the most demanding. 11/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake The trouble is that USS have interpreted Test 1 as incorporating a third requirement: that the second criterion must produce a figure that is at least as demanding as the first. L(r67)20 >= SS20 - £10bn. 12/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake This forces them to adopt a planned portfolio from year 20 onwards that approximates to a self-sufficiency portfolio. In turn this justifies (or at least seems to justify) a 'de-risking' strategy between now and year 20 so as to achieve that planned portfolio by year 20. 13/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake This is laid out very clearly in Sam Marsh's first submission to the JEP (medium.com/ussbriefs/unde…). 14/

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake The third requirement may be a result of muddled thinking on the part of USS. More likely it is their way of embodying the ideal of progressively reducing the volatility of covenant reliance. Either way it must be rejected. Once it is, Test 1 ceases to mandate 'de-risking'. 15/15

@JohnRalfe1 @felicitycallard @MikeOtsuka @DrJoGrady @ProfTomMole @carlomorelliUCU @USSEmployers @ucu @AlistairJarvis @JoanneSegars @SallyBridgeland @Sam_Marsh101 @Flibitygibity @HershMarion @Dennis_Leech @DaveGuppy @UofGVC @adamtickell @RedActuary @Derek_Benstead @kevinwesbroom @GuyCoughlan @USSbriefs @JosephineCumbo @Wonkhe @stianwestlake cc @wkw_uk @WillBrambley @ForPension @UCL_UCU