Short-changed on pension details

July 31, 2014

I could not help but be drawn to the contribution from the chair of the Employers Pension Forum last week (“A novel contribution”, Opinion, 24 July). After all, I had met Anton Muscatelli three-quarters of a year ago in the studio of BBC Two’s Newsnight.

Two things about his article strike me. First, he has changed his tune. Second, and more important, he is remarkably unspecific.

I recall how, on Newsnight, he said repeatedly that the Universities Superannuation Scheme’s deficit was merely a consequence of “volatility” – a term also used in the USS Members’ Annual Report 2013. Now, he recognises that something must be done – the deficit is “very substantial”. If action is not taken, it will be “more difficult for the USS employers to manage their resources and to prevent job losses” (raising fees might be another way of avoiding this, but we don’t want to go down this route).

But nowhere are the implications of the change for members made clear. It took the accompanying news story “Union clash looms as pension plans revealed” to show that a shift from a final salary scheme to the career revalued benefits system will probably cut pensions on average by some 10 per cent.

However, just as important is what the proposed reform will mean for benefits already accrued. We are told that any pensions already in payment or deferred in the scheme will not be affected by any changes implemented in the future, and past service accrued rights are protected by law. What does this mean?

One solution would be to uprate deferred benefits in line with the salary of the individual; a second would be to uprate them in line with the consumer price index.

Take someone who had already accrued a final salary pension worth £10,000 on the day when the final salary scheme was ended and who still had 15 years to retirement. If the £10,000 were increased in line with salary (say, retail price index plus 1 per cent), (s)he would receive a pension of about £11,600 in today’s (ie, inflation adjusted) terms on retirement. If the £10,000 pension were increased in line with CPI, that £10,000 would be worth only £9,000 in today’s money on retirement. The difference is more than 20 per cent.

USS members deserve to know what is happening. Is Muscatelli going to tell them?

Bernard H. Casey
Institute for Employment Research
University of Warwick


The question USS members are asking is why, given that their pension fund is highly solvent by normal standards, they are being told by Anton Muscatelli, on behalf of the employers, that, on the contrary, it is deep in deficit.

The figures show that the USS is immensely profitable: the latest annual report and accounts show an income of £2,585.4 million and expenditure on pensions in payment of £1,462.0 million, leaving a massive net surplus to invest for meeting future needs of £1,123.4 million.

Of course these figures tell only part of the story, and one must allow for future demands resulting from demographic changes, growth in membership and so on – the job of actuaries. Nevertheless, they surely indicate that there is currently plenty of headroom, which raises the question to which members deserve an answer from Muscatelli: how does an annual surplus become a deficit? Can we please be told?

Instead of giving a clear picture of how the accounts are likely to change in the future, he just announces that there will be deficits, without explaining the basis of their derivation. He, rather disingenuously, hints at arguments but does not turn them into reasons when he says: “People’s longer life expectancies and the current global economic upheavals make these challenging times for pension funds…”

In fact, the evidence is that longer life expectancies are a significant but still relatively small factor that does not threaten the survival of the USS final salary scheme: it simply requires minor changes in the rules. “Global economic upheavals” is a term so vague it could mean anything: perhaps it is intended to make members believe that the investment returns have been unusually poor. But investment returns to the USS compare well with the rest of the industry, and the fund’s assets have grown – so that cannot be the source of his growing deficit.

Muscatelli’s figures are smoke and mirrors. His is a flawed methodology for a number of reasons. And one of the most important, which Muscatelli does not mention, is the fact that the new methodology does not count income from contributions (£1,539.6 million – enough for all the pensions in payment).

Up until now the USS, like other pension schemes, has worked perfectly sustainably as a collective fund on a money-in-money-out basis. But this principle is now to be banned for reasons that can only be described as ideological: it is collectivist.

Dennis Leech
Professor of economics
University of Warwick

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Reader's comments (1)

I am not an economist so I defer to Professor Leech's expertise. However I do have some very concerns with his letter. (1) He say USS makes a surplus, no it does not. The subscriptions from us to pay for our future pensions. The current pensions in payment are all supposed to come from past subscriptions return on investments. USS is not a pay as you go scheme where current income pays current pension. You might not like it, but that is the law. The law came in for good reasons, companies made promises to pensions they could not keep. So when the company went bust, voila no pension for anyone. So now the health of the scheme is monitored so we all get what we were promised. You could argue Universities are not companies so should have had special dispensation but they did not. (2) How does an annual surplus become a deficit? 'Smoke and mirrors' No the very same actuaries that are demanded to analyse and predict it. Are they right? Who knows and erring on the side of caution is a good idea here. (3) What minor changes in the rules? My guess from the website run by Professor Leech is these are - convert to pay as you go - use different discount rates for future liabilities (ie assume the future is better in terms of bond yield) - invest in equities and assume better returns So my comments would be - pay as you relies on promises made by people in the future. Evidence suggests that people cheerfully break their word when push comes to shove. So for me I do not trust pay as you go. - I agree bond yields are very low and probably unusually, the question is how long will be they be so and to what level will they rise? Looking at the euro and UK economy, it seems unlikely they will rise very far or very soon. I'd take the chance that it gets better but not a whole lot. - Equities, forgive me if I am wrong but the attack on ideology at the end suggests disquiet over the market based economy. So why whilst opposing this, would we trust our pensions to the casino (sorry stockmarket). The average real return on stocks over bonds (risk premium) over a century is low, the period 1984-2000 was very unusual. Keynes dictum about solvency and irrationality comes to mind when thinking about stocks. Bonds are not safe either viz Greece - Criticising others for their attitude to risk is fine, if you are prepared to put your money where you mouth is and take the financial risk yourself. (4) Everyone it seems except the actuaries or the people who would have to step in if the scheme ends up in deficit, thinks final salary schemes are great and being closed for neoliberalism. Yet no one that I know has produced one example of a working open to everyone final salary scheme that remains stable and funded. Is everyone just a bastard or is there a problem with them? I say the problem is we are unable to accurately guess their true costs, they might be affordable they might not. A forty year time window between promise made and kept is too long and too uncertain. What do I want? A collective scheme into which we all pay (employee and employer) that averages payout pension over groups (ie ignores health, marital status etc) and over time (a rolling 10 year window). In this funded scheme you accept in advance that you might get a bit less or a bit more than someone else or that in a narrow sense you actually personally paid for but equally you get the insurance that if the stockmarket or bond market tanks on day you retire all is not lost conversely you do not win the lottery either. Roughly you get what is paid in plus the growth it achieves. I would taper the employer's contribution starting at 20 % to zero for salaries above 85K.


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