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If USS executives attempt to trigger an automatic rise in contributions in the event of a specified increase in 'reliance' (aka the 'self-sufficiency deficit') during the next three years, the trustee board must intervene and stop them. 1/
This is because the executive's case for such a reliance trigger collapses in the light of their failure to account for their "large and demonstrable mistake" over Test 1. I explain why in this blog 👇. Please retweet! 2/2
medium.com/@mikeotsuka/wh…
medium.com/@mikeotsuka/wh…
Since #USS got us into this mess of automatic triggers in the first place 👇, one might expect them to be a bit more diligent, helpful, & apologetic in getting us out of it.
As I note in this tweet and the ones below it, tPR's December letter focuses on TP deficit, NOT short-term reliance, as the trigger of higher contributions. Hence USS cannot appeal to that letter to justify their fixation on a reliance trigger.
Sec VII of my above post is called "USS’s groundless refusal to allow the scheme to go into surplus". There I link to this blog 👇 in which I discuss a statement by @GuyCoughlan which he gave me permission to publicly post. 1/
medium.com/@mikeotsuka/th…
medium.com/@mikeotsuka/th…
In the👆blog post I also reproduce the email I sent @GuyCoughlan in response. PLEASE take a few minutes to click through & read my response. I think you will agree that Coughlan fails to justify a precise full funding target that rules out scheme surplus. 2/
The above is from December. On 4 January, when #USS announced the new consultation, they posted the linked FAQ's, including the following: 'Why isn't USS prepared to build up a funding surplus, as has been claimed?' 👇 3/
uss.co.uk/news/all-news/…
uss.co.uk/news/all-news/…
I discuss their FAQ answer here👇. 4/
In tweets below, I show how the FAQ answer fails to establish the case for a reliance trigger that would justify a rise in contributions above the lower bookend of 29.7% in the current valuation. 5/
Recall that @Sam_Marsh101's asset projections are based on the current 26% level of contributions. In their FAQ, #USS rejects 26% as not "based on the cost of the defined benefits accruing at that point in time [of the valuation] being properly funded". 6/
Importantly, however, the lower bookend 29.7% IS "based on the cost of the defined benefits accruing at that point in time [of the valuation] being properly funded". This is because 29.7% INCLUDES what #USS takes to be the proper funding of the cost of future accrual in 2018. 7/
#USS expects the cost of future accrual to decline over the next 10 years, as the gilt yield reverts above market forecasts. JEP recommended that the rate of contribution for future accrual be smoothed over the first 6 of these years. 8/
But #USS REJECTED smoothing: 29.7% is based on their estimated CURRENT cost of future accrual, with no assumption of future decline in cost of future accrual as the gilt yield reverts built in. 9/
Note the following comment on the cost of future accrual in #USS's FAQ answer👇. 10/
By rejecting smoothing over the decline in cost of future accrual as the gilt yield reverts as expected, the 29.7% figure ALREADY HEDGES AGAINST AN INCREASE IN SHORT-TERM RISK (=reliance) if the gilt yield fails to revert. 11/
For this reason, #USS would be double-counting if failure of the gilt yield to revert triggers a rise in contributions above 29.7%. The only gilt yield trigger that might make sense is one involving the gilt yield falling BELOW the rate currently implied by markets. 12/
In tweets below, I make a further, separate point: even if #USS is right to reject asset projections based on 26% as not "based on the cost of the defined benefits accruing at that point in time [of the valuation] being properly funded"... 13/
...#USS CANNOT reject asset projections based on a 29.7% contribution rate on such grounds. (See /7 above.) 14/
Moreover, a prudent 67% success projection of returns on the current 60%/40% equity/bond portfolio over the next 20 years would generate an EVEN GREATER TP surplus in 2038 if we assume contributions of 29.7%, not 26%, over the next 20 years. 15/
Such prudent returns on 29.7% contributions would surely reduce the reliance gap to less than the current £10 bn Test 1 limit, let alone the increased £13 bn limit that is incorporated into the current valuation. 16/
Significantly, NEITHER @GuyCoughlan's statement I discuss in my December blog, NOR #USS's latest FAQ on surplus, provides reason to ignore the TP surplus that is prudently expected to arise with lower bookend 29.7% contributions. 17/
The more closely one inspects it, the more holes are revealed in #USS's case for a reliance trigger. 18/
When #USS tried to impose arbitrary triggers of higher contributions in September 2017, @UniversitiesUK threatened to sue #USS 👇. 19/
Given everything we have learned since then about #USS's "large and demonstrable mistake" over Test 1, surely the case against imposing a reliance trigger is much stronger now than it was in Sept 2017. 20/
It would therefore be irresponsible for the trustee to approve a reliance trigger, absent an adequate response from the #USS exec to the well-founded claim that the case for such a trigger collapses in the light of their "large and demonstrable mistake" over Test 1. 21/21
PS: Re 7/ above, @GuyCoughlan rejects @Sam_Marsh101's asset projections based on a 26% contribution rate as not "based on the cost of the defined benefits accruing at that point in time [of the valuation] being properly funded". a/
In Sec 1.2 of the linked blog👇, I explain why @GuyCoughlan's rejection of @Sam_Marsh101's asset projections based on 26% contributions is unsound. b/
medium.com/@mikeotsuka/te…
medium.com/@mikeotsuka/te…
But, as I note in 13/ to 21/21 above, even if we grant the soundness of @GuyCoughlan's objection to projections based on 26%, his objection does not apply to projections based on 29.7%. c/c
