Analysis of the new deal – why the devil is in the regulations

 Hello again, here’s an expert view from #strikeDad on the latest offer. It is as many of us suspected that it’s the regulations which are the difficulty, and they must be addressed. Also the constitution of the panel is a challenge.

“The undertaking to keep the status quo until April next year must be regarded as progress but you must not let it lull you into a false sense of security.  The risk is that UUK will then be able to say that they gave you every facility to settle when what they will really have given you is every assistance short of actual help.

 As Dennis Leech warned in his letter to Sally Hunt, there is no point in a joint body reviewing the whole thing if they are going to be bound by the same rules as bound the scheme actuaries; they will just end up in more or less the same place. The wording refers to ‘An Expert Panel… agree key principles to underpin the future joint approach….to the valuation of the USS fund’.  But the principles of valuing a pension scheme are well established and it is not these principles that are at issue: it is the discount rate that should be applied. I strongly recommend that as a precondition to any investigation you have a clear understanding that any valuation will not be bound by discounting at the gilt rate but will allow what Curtiss and Wilkinson in their letter to the FT describe as discounting at the real world rate. If you cannot get this then you should not agree to going to the next stage. If you can get it then a triumvirate of professors of finance, economics and actuarial science should be more than capable of dealing with matters thereafter (but see below about a lawyer).

 The reasons for changing the basis of discounting are clearly set out in Curtiss and Wilkinson’s letter and apply equally to all schemes.  For USS there is an additional element, to which Dennis Leech has already made reference, namely that, unlike most schemes that are sponsored by a single employer, yours is sponsored by some 350 entities whose liability is joint and several.  This distinguishing feature may become important if there is concern over the question of precedent.  Other schemes will be watching this exercise with interest and the Pensions Regulator may be concerned about the current rules being undermined (although I still maintain that they should be scrapped).  I have not so far suggested including a lawyer on your team because the rules as they stand do not seem to admit of any other interpretation – if they did someone would have found it by now – but it may become an issue if someone is looking at a way of distinguishing your case so that it cannot be used as a precedent for single employer schemes. This is where a lawyer could come in.

 If you can get agreement to a real world discount rate you will be pretty well home and dry, but you cannot afford to let the issue be ducked at this stage.

 I see two other matters that need to be watched.  First the question of a Chairman.  This will obviously need to be someone with a good understanding of pensions accounting but an eminently qualified candidate such as Dr. Wilkinson would probably be rejected on the grounds that he has already nailed his colours to the mast.  It will be no easy task to find someone who is sufficiently knowledgeable and who can escape a charge of bias one way or the other.  Secondly, tucked away at point 7 is reference to the statutory responsibilities of the trustees.  This could derail the whole thing and probably requires a political solution.  You may recall that I dealt with this in my letter to the minister when I suggested that they be given a hold harmless on this issue. “

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