Thread by @MikeOtsuka

I've just stumbled upon SAUL's latest actuarial report. Recall that SAUL is a pension scheme almost identical to #USS, except that it has invested much more successfully.👇 1/
medium.com/@mikeotsuka/wh…

Recall that at SAUL's last full valuation (as at 31 Mar 2017), they were 102% funded, w a £56 million surplus. The 31 Mar 2018 position was pretty much unchanged: £59 million surplus, equivalent to a funding level of 102%. 2/

How has SAUL done during the following 12 months? First, recall that, during that period, #USS's funding position fell from 94% to 92% funded. This is in part because their well-paid (>£1,750,000) investors fell short of their self-imposed benchmarks👇. 3/

https://twitter.com/MikeOtsuka/status/1163343453469777930

By contrast SAUL's funding position has improved: "at 31 March 2019 the surplus was £104 million, equivalent to a funding level of 103%." This was partly down to the "higher than expected investment returns" their investors achieved.👇 4/4
saul.org.uk/api/1.0/downlo…

Further comments on SAUL, based on information that's come to light since I wrote my👆blog post in Sept 2018. Recall that in that post, I quoted from SAUL's 2017 valuation👇re their success in hedging interest rates (i.e., falls in gilt yield) & inflation. 1/

SAUL's 2018 annual report reveals that, as of 31 March 2018, their level of hedging against falls in the gilt yield had improved from 82% to 91%👇. 2/

SAUL was therefore very well protected against the large drop in the gilt yield since late 2018👇. 3/

2018 report says "SAUL uses leverage to hedge the interest rate and inflation risk associated with the liabilities whilst also aiming to add to growth returns." This is in line w/ this blog post👇of mine, whose title is self-explanatory. 4/
medium.com/@mikeotsuka/sa…

See also this further Twitter thread on USS versus SAUL, w a focus on USS's failure, versus SAUL's decision, to hedge interest rates. Click👇& read upward. 5/5

https://twitter.com/DeltaDrift/status/1167370298032906246

More interesting information about SAUL, from their latest Annual Report, which they released in early October👇. 1/
saul.org.uk/#/page/saul-an…

As noted👆, whereas #USS's funding position deteriorated from Mar 2018 to Mar 2019, SAUL's funding position improved during that period. #USS's underperformance was due in part to their failure to hedge against the fall gilts (interest rates)👇. 2/

https://twitter.com/MikeOtsuka/status/1163343752632647680

By contrast, SAUL's good performance in 2018-19 was due to their decisions to hedge against interest rates (gilts) & inflation. 3/

More generally, SAUL attributes their strong funding position (modest but growing surplus) to their decision to hedge interest rates & inflation over the past several years👇. 4/

As I note👇, outgoing #USS CIO Roger Gray acknowledges the superiority of SAUL's hedging approach to USS's investment decisions in recent years. 5/

https://twitter.com/MikeOtsuka/status/1183272187744210944

It is on account of the fact that SAUL's excellent investment decisions have generated a surplus, whereas #USS's much poorer decisions have generated a deficit, that #USS's required contributions are now so much higher than SAUL's. 6/

The two schemes provide very similar DB benefits. SAUL's inflation revaluation is less generous than #USS's, but SAUL's DB is on all salaries, whereas USS has a salary threshold. 7/

For such similar benefits, SAUL's contribution rate is 6% member, 16% employer, versus #USS's 9.6% member, 21.1% employer👀, and potentially rising. 8/

SAUL is able to charge so much less than #USS because they're able to fund future pension promises out of the surplus they have generated, on account of their past success in investing👇. 9/

As noted👆, this is only a short-term solution. The surplus will eventually be depleted if they carry on as is. For a longer term solution, SAUL will be shifting its portfolio into growth assets with higher expected returns👇. 10/

In other words, they will be 're-risking' their portfolio somewhat, in stark contrast to #USS's decision to de-risk their portfolio. 11/

Important to note, however, that SAUL will be re-risking a portfolio which is currently much more de-risked than #USS's. SAUL's current portfolio is c. 50-50% growth assets v bonds & other liability matching assets, whereas #USS's current portfolio is c. 2/3 growth 1/3 bonds. 12/

It is on account of their decisions to de-risk their portfolio in past years, where this has paid off handsomely in returns, that SAUL is now able to shift slightly towards growth assets from a 50-50% baseline. 13/

#USS, by contrast, dug the scheme into a hole (deficit) by choosing to de-risk towards 50-50% at the wrong time -- during the next 20 years, as opposed to SAUL's decision to do so during the past 10 or so years. 14/

Both @USSEmployers & @UCU need to constantly remind #USS that it is on account of their poor investment choices, relative to SAUL's, that USS is now charging so much more than SAUL for comparable benefits. 15/

@USSEmployers @ucu Both @USSEmployers & #USS need to stop blaming the expense of their contributions on general economic conditions & investment climate, given that SAUL has coped much better in the same hostile conditions. 16/16

@USSEmployers @ucu So I asked Twitter how credible former #USS CIO Roger Gray's excuse was that #USS was too big to hedge interest rates via leveraged fixed income derivatives as SAUL did👇... 1/

https://twitter.com/MikeOtsuka/status/1198934996733562880

@USSEmployers @ucu ...and a Senior Financial Sector Expert for the IMF who once routinely did $1 bn swaps for the Bank of Canada says not very credible👇(also read tweets below). 2/

https://twitter.com/Kiffmeister/status/1198951660829192198

@USSEmployers @ucu ...as does a smiley face bean counter from the school of hard knocks who sounds like he knows what he's talking about👇. 3/

https://twitter.com/DeltaDrift/status/1198971345767456770

@USSEmployers @ucu Can anyone else out there confirm or disconfirm? Maybe @dsquareddigest, @toby_n, or @wbmosler? 4/4