Saunders Leitrim | 3 April 2018
Lecturers' grievances are obvious, but the pensions system has been threatening to collapse for some time. The Medusa has investigated the perfect storm which led to one of the largest strikes of recent decades.
Originally published in Issue 1, at the beginning of the strike, Saunders Leitrim’s investigation of the the underlying causes for the walk-out remains the only article in the Glasgow student press which seriously examined the issue - and didn’t just repeat picket-line cliches. One should understand gilt yields, the effect of the brexit vote, quantitative easing,“last-man standing” schemes and the Pension Protection Fund before one even pretends to tell people what’s going on. This is the only article that even mentions these things. Read on for an honest stab at why the strike happened - and the best way to support it.
This week’s walk out has been described as one of the largest strikes in 30 years by one University and College Union member at the meeting to discuss student support. As a result, many believe it has a good chance of success. But as a national issue with consequences for the entire university sector, we would do well to see the strike and the proposed pension cuts that triggered it in their wider context. Planned changes to the University Superannuation Scheme (the pension plan of choice for most academics, and the largest in the British private sector) prompted walk outs in 2011 and 2014, making it as persistent a problem for academics as under attended lectures. The proposal to change the USS into a defined contribution scheme stems from the £12.5 billion deficit between the current size of the USS’s portfolio and its liabilities (that is, the amount to be paid out as pensions in the future).
Why is it that a deficit exists in the first place? The reasons for that are almost as difficult to comprehend as the 12.5 billion figure itself, but as with a lot of issues like this, the overall state of the economy has a huge influence. A useful source of information on this particularly daunting aspect of these events is the correspondence of Frank Field MP (Chair Elect of the Work and Pensions Committee) and USS chair Sir David Eastwood. In a letter dated August 21st 2017, Sir David blames a fall in gilt yields for the discrepancy between what the pension scheme promises to pay retired academics and what it will, in fact, be able to pay. Gilts are British government issued bonds and the value of pensions depend greatly upon them. Since the financial crisis of 2008, investors have sought to put more of their money into gilts because of their relatively low risk compared to other investments; the increased demand for gilts led to a reduction in their yield, thereby lowering the amount one could expect from a pension.
By the end of January 2015, gilt yields had fallen to an all-time low - 1.68% - after almost seven years of high demand. After a short recovery, the shock of the 2016 EU referendum arrived. When the Leave vote triggered a run on the pound, the amount one could expect to earn from British government bonds was severely decreased. With the pound plummeting and FTSE 100 stock losing value, the Bank of England thought the economy needed some shock therapy. The interest rate was cut to 0.25% and the bank went ahead with £70 billion worth of quantitative easing- by buying UK bonds. The effect was to once again force gilt yields down to a new historic low of 0.90%.
It is for the above reasons that a surprising amount of middle class pensioners ended up voting Remain in the referendum; they were aware of the possible threat to annuities posed by uncertainty and snap decisions from central banks. These are a handful of the reasons that led to the deficit in the USS that has triggered the strike.
And just in case you think Sir David was merely making excuses for his own incompetence, it’s worth noting that pension deficits are too common a problem for many sectors of the economy. Frank Field’s career as Chair-Elect of the Work and Pensions committee is a good indicator of this: he was the one who oversaw the investigation into the BHS debacle, after all. Sir Philip Green left the former department store with a pension black hole worth £571 million, and later we had the collapse of Monarch airlines (also investigated by Field), which ended up with a similar gaping pension deficit. It was the government backed Pension Protection Fund that picked up the tab in these cases, shelling out huge amounts of money to protect the livelihoods of pensioners. Although both of these examples also involved unscrupulous asset stripping, which obviously isn’t the case with the USS, it is surely significant that unpayable pension schemes are becoming a recurring issue across the economy.
The most recent in a growing line up of debt induced tragedies that come with a wide pension deficit is recent collapse of Carillion. Its own shortfall nearly doubled from £317m in 2015 to £587m in 2016. As a result, 28,000 retirees currently receiving pensions from Carillion’s 13 pension plans have had payments and benefits cut, with questions being asked in parliament. As with BHS and Monarch, the PPF is now responsible for picking up the pensions tab, this time to the tune of an estimated £900 million. Although, as the USS covers a number of employers rather than a single company, it would of course be wrong to draw an exact analogy between the lessons of BHS, Monarch and Carillion: in fact, it would be alarmism of the lowest order to suggest the same sort of thing could bring down the entire university sector (the USS acts a “last man standing” scheme, meaning it won’t go bust until all employers on the books go bust), but with news like this becoming increasingly frequent, it’s understandable why Universities UK wants that £12.5 billion deficit under control. And it’s worth keeping in mind that the USS’s nature as a multi-employer scheme in representing Universities UK institutions means disagreements among member employers are entirely possible. Already the Medusa has heard that the heads of some universities (such as Oxford, Cambridge and UCL) are more willing than others to go ahead with pension cuts.
It might be necessary at this point to take a closer look at the role the Pension Protection Fund has in all this. It was established under the Pensions Act 2004 as a statutory corporation with the intention of taking over insolvent pension funds. Though a state-created entity, it is funded by a levy on its member schemes, which then become eligible for its support in the event of insolvency. Now, as a sort of guaranteed insurance, the Medusa wonders if the PPF could be distorting the actions of investors by acting as a failsafe for any dodgy financial activity they might indulge. Like the bailouts the banks knew they would get - no matter how irresponsible they were with other people’s money - the PPF may be contributing to an attitude of carelessness by those running pension schemes. Deficits can grow and grow for all you care, as long as it won’t affect the money in your own pocket.
If that is the case, anyone with a shrinking pension held by a PPF backed scheme would have justifiable cause to be angry, though it’s hard to see exactly what striking could achieve if it were the case. It seems to be yet another depressing trend in our economy to which everyone (not just academics) will have to submit. By way of illustrating that point, we can look at the increasing number of union disputes triggered by proposed changes to pensions that also have at their root a growing deficit. As well as the UCU’s strikes of 2011 and 2014, last year the Communication Workers’ Union had disputes with both Royal Mail and British Telecom over pensions. The dispute with Royal Mail lasted for 10 months, after a similar proposal to that made by Universities UK - that its employees change to a pension scheme with fewer benefits. The changes were thought necessary because of a projected increase of £1.26 billion in the amount Royal Mail would be expected to pay in future pensions. Though the union negotiated a 5% pay raise for postal workers, eventually the changes to pensions were accepted.
Over at British Telecoms, in an attempt to encourage workers to switch to a less expensive scheme, the company told workers it would be contributing less money as an employer to pension pots, with the aim of shrinking its own deficit.The decision to change its pension plan was even taken to the High Court, where the case was lost. Though good news for BT employees in the short term, the company’s £14 billion pension deficit still hangs over it, putting it in a precarious situation indeed. Sooner or later the gap will have to be plugged, but how? At the moment, it’s that same unanswered question that has the UCU and Universities UK at stalemate.
One answer of course (the one that triggered the UCU’s vote to strike) has been proposed: that the direct benefit aspect of USS be scrapped. The changes pushed by Universities UK to fix the deficit would entail cutting the pension of new employees by 40%, and lecturers across the board could see £208,000 less as a result. Because of the attractive nature of the USS compared to other pension schemes, many suggest that any changes would see a reduction in future recruitment numbers, with prospective academics being lured away into other fields by bigger sums of money. So crucial is this to the success of institutions of higher education that 1000 academics have signed an open letter condemning the proposed changes for this very reason.
But as the above should make clear, pension deficits can cause their own damage if left unchecked, so action must be taken. While it cannot be judged here whether the proposed solutions from Universities UK are sensible or adequately take into account further consequences, it would be unreasonable for the UCU to expect pensions to continue in their current form: forces well beyond the influence of Universities UK have caused this mess, and though the union is well in its rights to press management to do the utmost for the welfare of its employees, changes will have to be made.
If the strike goes ahead on the demand that the USS be preserved just as it is, then it’s difficult to see how it could be reasonably supported. But if the demand is that deficit reduction not be used as an excuse for keeping academics from their due, then the action would be entirely justifiable. If Muscatelli et al. are indeed worth the six figure salaries that keep landing them in the news, then they should prove it by ensuring their staff can weather this storm by sustaining as little damage as possible.
Of course, if academics and staff don’t pay for the pensions shortfall, then it’s hard to imagine how the cost won’t fall to students instead. A rise in fees could well be a result of a fully preserved USS: as I say above, the gap must be plugged somehow. Of all the available options facing those whose unenviable responsibility it is to navigate this problem, foisting the cost of pensions onto students would be the most unfair. It would amount to the young paying the old an annuity they could never hope to expect themselves, not at all defensible in the current climate of high living costs and even higher debt.
At the moment, there’s also the risk of the strike becoming politicised by certain campus groups. The formal meeting held last week to discuss student support of the strike was attended by around fifty students, among whom were quite predictably the GU Marxists and the GU Anarchists. By supporting the walk out in their official capacities as societies, they send a clear message that their aims are the same as the striking lecturers. Whilst The Medusa cannot conjecture what, in their hearts of hearts, academics hope to achieve with this strike, we are perhaps on safe ground in saying that having the backing of people who (by definition of those preposterous labels they give themselves) want a revolution, is an effective way for reasonable demands to be lost among other, more vague and extreme aims. What is at heart a disagreement between employees and employers over a pressing issue should not be trivialised by being subordinated as yet another cause to further the “struggle”. It would only serve to push the strike away from a more moderate position, to the disappointment of all involved. The duty of the UCU is of course to protect the interests of its members (as we;re sure they don’t need a pokey student rag telling them), but in doing so they must also contend with the changed economic realities that have forced us to this unfortunate point.