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A summary of Aon's contingent contribution proposal 👇, which @UniversitiesUK is circulating for consultation with @USSEmployers. 1/
ussemployers.org.uk/sites/default/…
ussemployers.org.uk/sites/default/…
"For the Proposal, we assume that 29.2% is adopted [for the lower bookend, rather than #USS's 29.2%], although it is not clear that this is achievable with the USS Trustee." 2/
The first trigger would be set so there's no more than 30% chance that it's triggered. This is justified, among other things, by the fact that the prudent discount rate is already set at a 67% of success. So underfunding would occur in only 33% of scenarios. 4/
It would therefore not make sense to insist on a trigger with a more than 33% chance of being set off. 5/
Aon also notes that, given #USS's use of standard deviations in monitoring, "To be outside of the path the USS Trustee might reasonably expect due to normal market noise, one would need to have the trigger likelihood lower than about 16%. 6/
Aon also notes that, for Test 2, #USS defines 30% of less as a low probability. 7/
So #USS should not have cause to reject a trigger that is 30% likely. 8/
Might #USS, however, insist that a higher than 1% increase (e.g., their proposed 1.5% increase) be triggered by this 30% trigger? 9/
Aon's defence of 1% rather than 1.5%: "For a covenant that has been independently assessed by the USS Trustee advisers as “strong” – with good long-term visibility, it is preferable to make steady steps rather than risk over-reacting..." 10/
"... and to use the three-yearly valuation as the primary route for assessing contributions." 11/
Aon's defence of three 1%, rather than 1.5%, steps also involves an argument that #USS's upper bookend contribution level is too high, since it involves a 5% deficit recovery contribution (DRC), which is overly prudent in the context of the 2018 valuation. 12/
Aon proposes that DRCs be reduced from 5% to 3.5%, thereby reducing the upper bookend to within 3% of the lower bookend, and hence reachable via 3 stepped increases of 1% each. 13/
Aon notes that 3.5% DRCs are 'a little more prudent than simply scaling down the 2017 valuation contributions for the updated [lower 2018] deficit, however there must be a reasonable gap between the bookends for the Contingent Contributions to have “value”.' 14/
On Aon's Proposal, there would be a very low 2% chance that all three levels were triggered, for a maximum 3% rise. (I don't think they provide a quantification of the odds of two steps being triggered -- i.e., a 2% rise). 15/
In addition to the lowness of the probability of the trigger going off (<33%), it’s also important that the triggers go off only in circumstances that genuinely indicate TP underfunding that needs to be addressed. 16/
If a trigger was only 33% likely to go off, but this was based on the roll of a six-sided die coming up one or two, that would be an arbitrary trigger which serves as no indicator of underfunding. 17/
Aon is proposing that the trigger would go off if #USS's 'monitoring deficit' exceeds £10 bn. At present, this monitoring deficit is set as the gilts-plus expression of the discount rate set at the triennial valuation. 18/
A gilts-plus monitoring deficit is highly problematic, for the reasons I mention here: 19/
medium.com/@mikeotsuka/th…
medium.com/@mikeotsuka/th…
#USS, however, insists that only a gilts-plus technical provisions monitoring deficit would be sufficiently 'objective'. I criticise this claim here👇. 20/
In @UniversitiesUK's cover letter, they provide the following assessment of Aon's Proposal 👇, which strikes me as entirely sound. Rejection of this Proposal by @TPRgovuk, #USS, employers, or @ucu would be unreasonable & contrary to the interests of scheme members. 22/22 
CORRECTION: This👇 should read "rather than #USS's 29.7%".
I floated a similar suggestion here 👇. 2/
Given, as Aon notes👆, how close their current 30% trigger proposal is to the upper sensible limit of 33%, #USS would be highly unreasonable if they rejected a 30% trigger as too low a probability. 4/
I suspect, therefore, that if #USS resists Aon's trigger proposal as of insufficient "value", it will not be on account of a too low probability of a trigger being set off, but rather on grounds that a 1% increase per step is not a big enough increment. 5/
It is therefore especially important, as I explain in this new embedded thread👇, that employers register the strength of their support for Aon's proposed reduction of deficit recovery contributions from 5% to 3.5%, to reduce steps from 1.5% to 1%. 6/6
PS: See this embedded thread👇for some background information on the competing pressures that now constrain the available options.
