The Higher Education pensions dispute: a perfect storm of neo-liberalism, marketisation and austerity

The current dispute between the University and College Union (UCU) and the representative body of the employers, Universities UK (UUK), is over imposed cuts to pension benefits. According to the UCU, the annual retirement income of academics will be reduced by 10 to 40 percent. This is on top of real-terms pay cuts of 19.5 percent since 2009/101http://www.ucu.org.uk/circ/pdf/UCUBANHE14.pdf, while surpluses in UK Universities have gone up from £1.85 billion in 2014/15 to £2.34 billion in 2015/162Ibid. The accounting model changed in 2016/17 but the sector continued to secure considerable surpluses..

The dispute is more than about pensions though: on the surface, it appears to be a debate about the justification for changes to pension benefits, but beneath is a fundamental argument about political economy and the further push toward a privatised and marketized higher-education sector. Within the sector, within universities, decisions are being made without sufficient democratic scrutiny from members of staff and the wider community. Moreover, many academics may be unaware of the economic underpinnings of what appears to be conflict over pension affordability and university staffs’ pay and conditions. I set out here the underlying political and economic issues that are driving policy in government and that have led to the decision to cut pension benefits. I hope you will see that the pension cuts are the symptom of a deeper malady. I wish to show that the inherent threats to higher education are way beyond being about the comfort of academics in their retirement. And that anyone who believes strongly in the value of scholarship, research and learning should show solidarity with the striking members of the UCU.

I begin with some background to the dispute over pensions and the role of my institution, the University of Cambridge, which along with Oxford has taken a particular stance. I follow this with a quick summary of the economic context. Finally, I bring these elements together and demonstrate that we are in the conditions of a perfect storm for higher education. The underlying debates about the projection and level of risk in the pension fund are connected to government economic choices.

Finally, I argue that universities have a moral duty and should not simply accept the political and economic orthodoxy, rather than acquiescing to the parochial rationality of neo-liberalism and marketization.

Background to the dispute

The Universities Superannuation Scheme (USS) was valued at £41.6 billion in 2014 and £60 billion in 2017. The most pessimistic valuation leaves the pension fund with a shortfall of £5.1 billion in 2017. On the other hand, a best estimate valuation suggests a surplus of £8.1 billion. The question of whether there is, in fact, a shortfall depends very much on the model used to calculate future liabilities, growth and risk. An important factor in this is what is deemed to be an acceptable level of risk. Universities have been particularly keen to reduce the level of risk and a strategy of “de-risking” has been adopted. Equities, are higher risk investments than government bonds or gilts but offer higher returns. However — and I shall explain why in the next section — gilts offer a much lower rate of return than equities. Between 2011 and 2017 the percentage of the USS fund that has been in equities has reduced from 55 percent to 37 percent. While the amount invested in gilts has gone up from 13 percent in 2011 to 31 percent in 2017. Reducing the level of risk leads to a reduction in the rate of returns and is a factor in the pessimistic valuation of the USS fund.

It is the issue of risk that is central to the current dispute. According to Michael Otsuka, who analysed the results of the employers’ consultation over USS3https://medium.com/@mikeotsuka/oxfords-and-cambridge-s-role-in-the-demise-of-uss-a3034b62c033, only a minority (32 percent) of employers were looking for changes to the way in which contributions are set and assets and liabilities calculated. In other words, most employers were happy with the scheme as it stood. However, 73 percent of Oxbridge institutions (which presumably includes constituent colleges as well as universities) were opposed to the current arrangements.

The USS is based on last-man-standing mutuality which means that should all the universities go bust the liabilities would be passed to the last remaining universities. This means that Oxford and Cambridge, as the richest institutions, would bear the liabilities in the unlikely event that the other universities went to the wall. This also assumes that government would not intervene should the whole of the higher education sector go in to complete meltdown.

Otsuka points out that in their submissions to the September consultation on USS both Oxford and Cambridge expressed concern about the level of risk in the last-man-standing scheme. Cambridge objected that:

The University (and the other financially stronger institutions) continues to lend its balance sheet to the sector, which contains the cost of pension provision for all employers. In a competitive market for research and student places the University would be concerned if this appeared to be having an adverse effect on the University’s competitiveness (by allowing competitor universities access to investment financing or reducing their PPF costs in a way that would not be possible on a stand-alone basis).

Within this, Cambridge acknowledges that higher education is and will remain a competitive ‘market’, there is no sense in which Cambridge characterises itself as a public institution there to provide a universally available service in collaboration with the rest of the sector.

This also became evident to me when the government were trying to hurry through the Higher Education and Research Bill at the time the General Election was announced in April 2017. I approached the Conservative Member of Parliament, in whose constituency my Faculty sits, with objections to the Bill. Heidi Allen MP explained to me in her response, that the University of Cambridge had already been in touch with her to explain that they were happy with the Bill as it stood. I am aware how Cambridge, and most likely Oxford too, are seemingly sanguine about the marketisation of higher education and are preparing themselves to exist in this environment.

USS have reacted to a minority (42 percent), of whom, according to Otsuka, Oxford and Cambridge are the most prominent and hawkish members. The majority, however, were happy with the current levels of risk. The UCU describe how on the 23 January 2018, Chair of the USS Board, Sir Andrew Cubie, used a casting vote at a meeting of UUK-UCU Joint Negotiating Committee to remove Defined Benefits from all members of USS. The USS now transfers to a Defined Contribution scheme, where all contributions are placed in an individual investment portfolio. The risk is entirely transferred to contributing members of the USS. It also means a reduction in pensions of between 10 and 40 percent, particularly affecting younger entrants to the scheme.

The national economy does not work like a big family home

It is a common belief that a national economy works much the same as a household; that income must at least equal outgoings and preferably income must exceed expenditure – for that rainy day. Yet, there is a major difference between household economics and a national economy. In a household economy, expenditure is independent of income, one or both can change without really affecting the other. In a national economy, government income or taxation is dependent on its spending. The reason for this is that government spending is the only means by which currency can be introduced into that economy. Government spending creates currency, taxation effectively destroys it.

Within a national economy, all deficits and all surpluses must sum to zero. To understand this, imagine if there were just two people in a national economy. If one person has a surplus, i.e. they have more income the outgoings, the other person must be running a deficit, they must have more outgoings than income. The sum of deficits and surpluses is zero because there is a fixed supply of currency. Now imagine adding more people until there are 60 or 70 million, the sum of deficits and surpluses must still be zero for a fixed supply of currency.

By convention, nations divide economies into three sectors: the public sector (government spending and taxation) the private sector  (households and businesses) and ‘overseas’ (imports and exports). The sum of public-, private- and overseas-sector surpluses or deficits must sum to zero. The UK has an overseas deficit, we are a net importer, so currency is leaving the UK4It is not really leaving the UK, more accurately it means there is domestic accumulation of Sterling as a consequence of overseas trade.. We have a public-sector deficit, government spends more than it receives and the private sector is in surplus, households and businesses have more income than expenditure. It is important to realise that this is an aggregate surplus across the whole private sector, it is just the wealthy individuals and businesses that run a surplus, while poorer households are running a deficit and accumulating debt.

The austerity measures of the last eight years were intended to reduce public-sector deficits. Reducing public-sector deficits while maintaining an overseas trade deficit reduces private-sector surpluses and puts more of the poorer households and businesses into debt. The wealthy are then able to lend their accumulated wealth to the poor profitably.

Austerity uses a household analogy to justify reducing public-sector deficits, where in reality it increases the debts of the less well-off and the wealthy can the profit by lending. Indeed, it is preferable for the wealthy to profit through lending rather than investing in productive business and enterprise. If the poorer are in debt, they will be reluctant to spend, so aggregate demand is reduced making business investment riskier and less attractive.

Austerity is an exercise in trickle-up economics and the poorer are paying rents (that can be rents on property or money) to the rich. This leads to an accumulation of currency and creates a demand for government bonds or gilts as a low-risk means of saving. This is also referred to as the national debt, which is not really debt, but savings. The high demand for gilts (and so-called high national debt) reduces the returns on them. In an investment-led economy, money invested in gilts would more likely be invested in businesses, because government spending and investment increase aggregate demand and the risk of business investment is reduced.

Neo-liberalism: choice and competition

Neo-liberalism is closely aligned to austerity, it is based on the belief that the free market is the most efficient means of exchanging goods and services and that competition results in lower prices, efficiency and improved productivity. A further characteristic of neo-liberalism is the transfer of public services, utilities, nationalised industry and public transport to the private sector. The first moves toward neo-liberalism in the UK were in the 1970s. In 1976, Denis Healey, the Labour Chancellor of the Exchequer, accepted a loan from the IMF, attached to it were conditions that forced austerity, i.e. reducing public-sector deficits. When Margaret Thatcher came to power in 1979 public assets were sold off to individuals and investors, including public housing, utilities and public transport for example. At the same time, there was increased financial liberalisation which facilitated more lending. Outsourcing and private finance expanded through John Major’s premiership and was further extended by Tony Blair during the New Labour government. While it might seem that privatisation reduces the size of the state, the state is still required to fund public services such as health, education, prisons and transport infrastructure Privatisation presents an opportunity for businesses to profit from the provision of public services. Importantly, losses and risk are largely underwritten by the state. The provision of public services by the private sector is an attractive investment: in a period of austerity, with low aggregate demand in the private sector, investing in public service provision with socialised risk, is very attractive.

A further lucrative low-risk investment is the financing of capital projects in the public sector, so-called Private Finance Initiatives (PFI), Public Private Partnerships (PPP) or Private Placements where an institution issues a bond to raise finance.

Privatisation, marketisation, neo-liberalism and austerity are beams of the same sun. They don’t happen without political will and citizen consent; the neo-liberal project has to be lobbied for and promoted. The project has many outriders, think tanks such as the Adam Smith Institute, the Institute of Economic Affairs, and Policy Exchange, all funded by business and wealthy free marketeeers (sometimes transparently but quite often opaquely), to assemble evidence, create arguments, lobby and advocate, through the media, the benefits to the public of choice, competition and private-sector efficiency and innovation. Of course, this is driven more by a fundamental need for capital accumulation, than it is out of a concern for the provision of quality public services. Though the neo-liberal project attracts its enthusiasts and disciples who espouse the benefits of autonomy, individualism, efficiency and innovation.

Neo-liberalism and austerity have been central to growing economic inequality , in addition, the privatisation of public services has contributed to a growing democratic deficit, a powerlessness over the conditions of the community, where service provision is provided by an unaccountable public service . There is a growing inequality in the access to public services, where the principle of universal provision is replaced by an increasing amount of part or wholly private-paying services.

A perfect neo-liberal storm in higher education

The pension issue in the UK’s higher education sector is a perfect storm in the progress of privatisation and marketisation. There are two aspects. Firstly, poor returns from government bonds (gilts) mean that a low-risk investment of the USS pension fund in bonds give returns lower than the consumer price index. Other types of investment, such as equities, are higher risk because of the low aggregate demand in the economy. This is a consequence of austerity and the attempts by successive governments to manage the economy by balancing the books i.e. by reducing the public-sector deficit. Austerity leads to deflationary conditions with low aggregate demand in the economy and high demand for low-return low-risk government bonds. This makes the USS fund vulnerable to pessimistic valuations and to anxious evaluations of risk.

Secondly, the government continues to pursue an outsourced, privatised and marketized model for public services. This is driven by a capitalist lobby that seeks to maintain and expand a rentier economy. The introduction of student loans, tuition fees and subsequent increases are all part of the commodification and privatisation of higher education. The Higher Education and Research Bill that was hurried through before the general election in 2017 further embeds the consumerization of higher education, with the creation of the Office for Students and providing opportunities to establish challenger institution to increase competition in the sector.

The government claims that the reforms introduced since 2010 have resulted in more disadvantaged young people entering higher education, but the evidence suggests that there is an uneven distribution, with disadvantaged students more likely to take up places in less prestigious institutions5https://www.tes.com/news/school-news/breaking-news/new-figures-reveal-dearth-poor-students-russell-group-universities. Further competition and marketisation in higher education will lead to greater inequality, as institutions are forced to compete for the most university-oriented students, generally those from backgrounds with high social, economic or cultural capital.

Higher Education institutions have increasingly adapted to the neo-liberal reforms . This has seen the emergence of ‘New Public Management’ of ‘new managerialism’ as a hierarchical system of control and performativity. The cultural shift is away from democratic governance and collegiate professionalism to executive decision making principally drawing on management accounting and metrics. The disciplining and performative and managerial cultures lead to conformity and undermine academic freedoms except for, say, a few at the pinnacle of elite institutions.

Conclusion

I hope I have demonstrated the connection between the pension dispute, the introduction of student loans, the privatisation and marketisation of higher education and our current national economic policy. For me, as I take part in UCU’s action over the pensions, it is not just about being comfortable in my dotage. I love my job, I love the environment in which I work and I love working with students. There are so many achievements that my institution and the UK higher education sector, as a whole, can be proud of and with which it has led the world. So my motivation is to prevent public education from sleepwalking into becoming a further fragmented and inequitable system. A system that treats students as consumers and undermines scholarly inquisitiveness and the pursuit of ideas, ideas whose inspiration might arise from unusual and unconventional lines of inquiry. The performativity of neo-liberalism fosters a conformity, a narrowness and too often the safe and mundane.

I say we are sleepwalking, because it feels like this here in Cambridge, decision making has become concentrated with a few, no doubt highly-skilled and rational managers. That same rationality appears to have usurped the University’s democratic governance. Of course, it makes sense to reduce the University’s liabilities and exposure to risk to attract private finance, it makes sense to make the University competitive internationally and of course, there is logic in reducing staff pay and conditions to maximise surpluses. But these are rational judgements based on an acceptance that austerity and neo-liberalism are a) necessary and b) the only choice of political economy. It is not the only choice and, as I have argued, austerity is a political choice and not an economic necessity and in accepting it as though it is, we, as a University, make a moral choice. Or worse, we dispense with moral deliberation and accept that growing inequality and a deepening social crisis in society is simply a cost, a risk that can be put into and evaluated in our management analysis. If a university fails to accept its moral mission and fails to engage in genuine democratic moral deliberation over what society should look like, then it has failed as an institution. It may have secured private investment and have good metrics, but, nonetheless, it has failed.

The reason I take action as a member of the UCU is to encourage the higher education sector — and especially the elite institutions — to take responsibility and offer moral leadership. And not to acquiesce to those who look to perpetuate a rentier economy. Universities must offer a robust independent voice based on independent scholarship and promote the same moral purpose and critical thinking in their students.

Finally, I ask: colleagues, students, parents and communities please stand in solidarity with the striking members of the UCU.

References

Radice, H. (2013). How we got here: UK Higher Education under neoliberalism. ACME: An International Journal for Critical Geographies, 12(2), 407–418. https://acme-journal.org/index.php/acme/article/view/969/823
Stiglitz, J. (2012). The price of inequality. Penguin Books.
Piketty, T. (2014). Capital in the twenty-first century (A. Goldhammer, Trans.). The Belknap Press of Harvard University Press.
Harvey, D. (2011). A brief history of neoliberalism (Reprinted). Oxford Univ. Press.

Privatising the universities: the real agenda of the Higher Education and Research Bill

Much like the privatisation of state schools, which I have written about previously, the Coalition Government between 2010 and 2015, and the Conservative Government from 2015, have accelerated the marketisation of Higher Education. A process that began under the previous Conservative Governments under John Major and Margaret Thatcher and continued by New Labour between 1997 and 2010.

You see, neoliberalism has been a dominant political economy since the 1970s. Neoliberalism is a special kind of freemarket capitalism, that extends beyond the traditional domains of capitalism, the factory for example, to what were previously nationalised or public services, the Post Office and Royal Mail, British Rail and domestic energy supply. The expressed benefits of privatising and marketising these services was that competition would lead to greater efficiency, better value and a smaller state.

Neoliberalism has been such a successful manifestation of capitalism (for some), effectively a state subsidised private sector businesses with, by-and-large, something of a monopoly, the private sector has been creeping into to many other public services. The Multi Academy Trusts that run schools are private companies, prisons too are outsourced to private companies like G4S. There was even an attempt to sell off Land Registry lately. Now we are starting to see similar happen with universities.

It is not obvious, because it is not always easy to see the emergence of private from the public. That is, it is not always clear when an organisation is based on private or public capital. The Multi Academy Trusts are private limited companies with a charitable status, and do not make a profit in theory, though many of them generate surpluses. They do not exist in a genuine freemarket, they often have a local monopoly and they are regulated by the state. But for all intents and purposes their quasi-private market status works in the same way as any corporation underpinned by private capital. They are largely autonomous from the state, and state and local democracy, they have customers (parents and children) who have a certain amount of market choice and they provide a service that is codified and quantified by public assessment.

One of Karl Marx’s most important observations was that capitalists, or those that have access to private capital, are obliged to accumulate more capital. By capital he means money, goods or means of production that are engaged in the process of production and sale of goods and services. Accumulation is not simply down to the vice of greed, it is due to the existence of the market, if the capitalist does not accumulate capital at the same rate as the competition they will fail. Capital obliges capital accumulation. Capital, is not just about accumulating money it is more often than not the expansion and replication of existing means of production.

Now, we have observed this in schools over the last few years, large academy chains have grown very quickly and in some cases (see for example Ark Schools) have expanded into overseas projects and spin-offs in this country.

In universities the marketisation and privatisation process began in the 1990s. Ron Dearing was commissioned by the Secretary of State for Education, Gillian Shephard, in the Major government in 1996, to report on Higher Education and consider how it might develop in the subsequent 20 years. It was hear that Dearing proposed that students should pay 25 per cent of their tuition fees. In 1998, Secretary of State for Education, David Blunkett, in Tony Blair’s New Labour Government, introduced student loans with means-tested tuition fees. Student grants of £1710 was replaced by income-contingent student loans.

This is ground zero on the march toward privatisaton and marketisation of universities. Blunkett effectively created a market by making students customers. This changes the dynamic, subtly, students are buyers and have choice where they spend their money.

This was strengthened in 2005 when New Labour gave universities the right to charge tuition fees of up to £3000 per year. When the coalition government came to power in 2010 this was increased to £9000 per year. Where Higher Education had been paid for through government spending it was now being paid for through private debt. It was argued this promoted widening participation in universites, while minimising public spending. This argument is disingenuous in my opinion, it disguises the forces of neoliberalism that underpin the marketisation of Higher Education (you can see the economic argument for this in a previous blog).

This brings me to the Higher Education and Research Bill which, if it passes through parliament, will further cement privatisation in Higher Education. If public and private is considered as a continuum, this is turning the dial up. Firstly, the introduction of private challenger universities will introduce greater competition into the Higher Education ‘market’. Some argue this is a good thing: shake things up a bit, put complacent universities on their toes. Fine, but Higher Education is so much more than simply purchasing knowledge and skills. It is a time for young people to explore and innovate, for students to question themselves and the world. If it is reduced to buying a ‘commodity’, it undermines so much of this. Furthermore, the introduction of the Teaching Excellence Framework (TEF) serves to commidify this experience, the metrics will lead to a race to optimise on narrow outcomes. Worse still, universities will be competing on the outcomes of parochial measures. It will contort Higher Education from providing rich, stimulating and provoking experiences to the acquisition of defined knowledge and skills. Within the TEF metrics courses will score more positively if they are linked to employment. This has the potential to undermine subjects that do not have a direct link with the world of work. These course may disappear, or be reconfigured for employability. This is at a time when we need graduates to develop creative and divergent thinking informed by the broadest study of diverse disciplines.

Of course, I have to admit, this is likely to have little impact on so-called elite universities such as the one I work in. Certainly not to the extent that it will have in many of the newer universities, where it is going to be a much tougher competitive environment. My previous university committed itself  to neoliberalism, it became observably more managerial and hierarchical, as well as expanding by opening campuses in other countries.

I concede that there are things that could be done to improve Higher Education and the quality of teaching and learning in it. But privatisation is the wrong answer.