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More on the £19bn solution to the 2018 #USS valuation. £Xbn = long-term reliance on employer covenant = extent to which the assets in the pension fund in 20 yrs time are allowed to fall short of the assets required to fund a low risk gilts+0.75% self-sufficiency portfolio. 1/
The greater £Xbn, the less 'de-risking' of the portfolio from 'return-seeking assets' such as equities & property into bonds & bond-like assets is required, under #USS's understanding of their Test 1. 2/
.@Sam_Marsh101 & I have argued that #USS misunderstands their own Test 1 -- i.e., what I have labelled their 'large & demonstrable mistake'. But in this thread, I do not call into question #USS's understanding of Test 1. Such challenge awaits Phase 2 of JEP. See👇. 3/ 
In an attempt, as sketched on p. 53 of JEP report above👆, to work within #USS's current Test 1 valuation methodology, JEP proposed the following 2 adjustments to Test 1 in their Phase 1 report: 4/
i. Increase Test 1 reliance on covenant from £10bn to £13bn
ii. Delay onset of 'de-risking' by 10 years
5/
ii. Delay onset of 'de-risking' by 10 years
5/
In their March 2019 webinar to members, #USS offers the following explanation for why they can't delay the onset of de-risking for 10 years & why they instead need the full 20 years👇. 7/
(This raises the question: given this alleged difficulty with de-risking over less than 20 yrs, why did #USS propose a 10 yr delay in their Sept consultation document? Did they simply fail to notice this problem back then? Lack of due diligence?) 8/
A 2nd surprising twist is that #USS also reminds us that the trustee had originally proposed £19bn reliance in their Feb 2017 consultation but that employers had rejected this👇. 9/
I argue in this thread 👇that £19bn reliance, ON ITS OWN, & in the absence of other investment-risk increasing JEP proposals, is within the increased risk appetite that employers confirmed they now have, in their autumn consultation on JEP. 10/
To back up the above claim re £19bn being w/in their current risk appetite, I note that in the autumn employers embraced 4 risk-increasing proposals that would reduce the contribution rate to c. 26% & turn the TP deficit into a slight surplus. 11/
By contrast, increase of reliance to £19bn, on its own, would reduce contributions to c. 27.5% and still involve a slight TP deficit. Hence, when measured in terms of effect on contribution rate & TP deficit/surplus, £19bn on its own is within employer risk appetite. 12/
If reliance is increased to £19bn, little or no de-risking of the current return-seeking portfolio would be required. #USS has recently objected👇 that, were we to remain invested in the current portfolio, it might be too volatile to manage in 20 yrs time. 13/
PS: See p. 38👇of the Sept 2017 valuation document for a summary of #USS's consultation over Test 1 reliance on employer covenant in Feb 2017. 1/
Blue-highlighted point 5👆indicates that the trustee's view of employer's capacity for risk was as high as Test 1 growth in reliance pegged to general salary (£19bn). The 'feedback' from employers was to elicit their 'risk appetite' within the limits of this maximum capacity. 2/
This feedback is reported on p. 40👇of Sept 2017 consultation document. To the deep disappointment of @ucu & scheme members, @UniversitiesUK @USSEmployers indicated risk appetite of only £13bn (CPI) growth in reliance. 3/
.@UniversitiesUK must now leave #USS, @ucu, & scheme members in no doubt that the autumn consultation on the JEP implies @USSEmployers risk appetite at least as high as "Trustee's view on capacity for risk" of £19bn reliance. 4/
.@UniversitiesUK @USSEmployers must provide this assurance in order to establish that it is not on account of greater conservatism than #USS regarding investment risk that the contributions #USS require to fund existing DB benefits are as high as they will shortly announce. 5/5
