By Mikael Fevang.
No student at Aberdeen could have possibly avoided hearing about the disquiet surrounding the proposed reforms to staff pensions. Essentially, members of the UCU are protesting against the changes made and proposed to the USS — the multi-employer pension scheme for most of the University’s staff. In short, the staff is (understandably) discontent about facing higher contributions coupled with potentially lower expected pay-out once they retire. The reason for this is a shortfall in funding that finally caught up in the scheme’s accounts, exacerbated by the fact that the USS is primarily a defined benefit scheme.
Overconfidence in historical projections of investment returns and changes in demographic factors, like average lifespan and fertility rates, are the likely culprits. Adding insult to injury, the present economic climate of low-or-negative interest rates makes the quest for yield increasingly challenging for pension fund trustees and investment managers. According to a recent survey published by Mercer, a staggering 73% of UK defined benefit schemes had negative cash-flow in 2019 —a number that is expected to rise in the future. Consequently, contributions must increase, pay-outs must be slashed, or schemes reorganised to defined contribution.
However, these funding issues are by no means exclusive to the USS. In fact, the underfunding of defined benefit schemes is a global issue attracting attention from both vigilant regulators and worried retirees-to-be. While I sympathise with the UCU members in isolation, it is important to analyse the wider societal consequences of defined benefit schemes as there is more to this than workers being snubbed for lucrative pensions by incompetent bankers.
Among the most concerning consequences is how defined benefit schemes can be considered enablers of corporate mischief, environmental destruction and misallocation of capital. The schemes’ necessity for high and stable yields in order to meet their fixed future liabilities (the pension pay-outs) force them to invest where such high yields can be found, regardless of ethical concerns. Take, for example, the USS’ biggest equity holding — the Dutch oil company Shell—and juxtapose that with the scheme’s self-proclaimed adherence to ESG principles. Scrolling through the list of their biggest equity investments, you will find more oil companies (Equinor), tobacco companies (British American Tobacco), enablers of global tax evasion (UBS and HSBC) and weapons manufacturers (Raytheon). Quite contrasting to the USS’ “belie[f] that our members want to retire into a world characterised by a healthy environment, vibrant economy and peaceful society […].”
Beyond their regrettable attempt at greenwashing, I cannot blame the USS for investing like they do. It is an unfortunate fact that it is mainly companies like the aforementioned that manage to produce the stable, long-term profits necessary to fund generous defined benefit plans. Why that is, is a potential topic for another essay. Regardless of intention, the USS and other struggling pension schemes are forced to invest in destructive companies to fund their promises. There’s an interesting irony to it—to ensure a comfortable retirement in the future, money must be channelled into business ventures that actively harm it.
Another troublesome consequence of defined benefit schemes’ requirement for high yield is that it appears to affect dividends at investee companies. As they require high dividends to stay afloat, they use their shareholder clout to increase the dividend pay-out ratio—extracting profits that could otherwise have been reinvested in the company. Some companies even take this to the extreme and fund dividends and share buy-backs with credit. This pressure to generate short-term profits to fuel dividends hurts both companies and the wider economy in the long run, making the necessary transformative change to sustainable and long-term business impossible.
So, there is nuance to the question of pension reforms stretching beyond the trope of greedy financiers versus exploited workers. Either retirees—present and prospective—must accept less lucrative and shorter pensions, or divestment from destructive business ventures and extractive shareholder practices will be difficult. This is worth considering before you support pension strikes.