9 reasons to be cheerful about your pension

Economist Andrew Oswald counsels against despair over the Universities Superannuation Scheme reforms

March 15, 2015

Source: Alamy

I love thinking about pensions. For those who do not, here are nine facts that I hope you might find useful in mulling over the future and that of your Universities Superannuation Scheme pension. For the most part, they seem to me to be happy facts.

First, start with ageing. You are likely to be on the planet about 11 years longer than your longest-lived grandparent. No guarantees: please do not come back to haunt my attic if you get what statisticians whimsically call a bad draw from the distribution. But lifespan is still increasing nearly two and a half years every decade. Hence, as was explained to us recently by a lively group of greying Nobel prizewinners at a scientific meeting on ageing held in the city of Stockholm, 68 literally is the new 57. One biologist pointed out that the majority of young females living in Stockholm at the moment will live to be 100. It is a new world.

Second, this is good news. Most of the extra years will be healthy ones – despite what is occasionally claimed by people who have not looked at the health data. In case you do not know, the men and women who currently report the highest levels of happiness in British and American surveys are those in their mid-seventies.

Third, for these reasons, I would urge you, if I may, to get into the habit of subtracting the number 11 from everything you ever hear, and everything you ever think, about age and ageing. In effect, we’re a decade younger. It is really hard to envisage this. We have been so conditioned by our upbringing and by remembering our grandfather sitting in his armchair. Even I still ask myself whether I will retire in my sixties, like my dad did, but logically I know that that is mad and old-fashioned thinking and I have to snap out of it. That would be like retiring in your fifties. So go across to your mirror right now and notice how cute you look in those jeans.

Fourth, it is therefore obvious that the USS needed to be altered. An extra reason, which is perhaps not so widely understood, is the remarkable one that the UK stock market has not risen in value since the year 2000. That was not predicted or predictable. So the returns from our invested USS funds have been awfully small, and we have to adapt to that.

Fifth, this proposed USS settlement is probably a decent compromise. The moral issue is one for those who work on the ethics of intergenerational transfers. But in terms of arithmetic, this settlement will do.

Sixth, there is much to be said for the idea that base salaries up to £55,000 will be treated more generously in the new pension era. The rich are good at surviving anything, and they can choose various strategies if they earn more than that.

Seventh, it is likely that future UK governments will speedily withdraw lots of the current tax breaks on pensions. So you might want to start saving more right away. This may sound less positive, but the new form of ISA is a good deal.

Eighth, one implication of the new scheme is that pay rates in academia will have to rise. In particular, because the giant losers in the rewritten USS pension rules are the really high earners such as business school professors and vice-chancellors, any labour economist will look at these new pension numbers and think: wages will eventually have to go up a lot for those kinds of individuals. In 2015, that probably sounds far-fetched, and it will admittedly take years to grind through. But mark my words: a decade or so from now, it will probably not be possible to get vice-chancellors for much less than half a million a year, and quite a bunch will likely earn a million. The old USS pension scheme made a vice-chancellor’s job tremendously attractive. That is gone. Something will have to offset it unless we are to have second-raters in that incredibly taxing and important job.

Ninth, it is excellent that there remains an element of knowing what your pension amount per year will be (or in the jargon there remains partly a “defined benefit” scheme). Lots of evidence in behavioural science and economics suggests that people do not plan properly for their pensions and know little about how to invest lump sums wisely. A giant advertising industry exists in our country to try to get us to forget that in 2041 we will need money to buy the sauvignon for the back of the two-person sea kayak. I look forward to being in that back seat. But not yet. I am subtracting 11 right now.


Read Times Higher Education’s full analysis of what the USS reforms will mean.

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Reader's comments (7)

I'm not sure all of these are positives for most people, especially 7 and 8. Even the increased longevity and later retirement age is not good news for postdocs who only get a chance at tenure when someone retires.
I can't help feeling that Professor Oswald might have overdone the happy pills. In my field, newly appointed lecturers are typically 30-35, and may have little by way of existing pension contributions if they are returning from the US. Assuming they make career grade (senior lecturer/associate professor) they might , if they are lucky, work until 60-65 before the university has a post REF restructuring exercise and decides to trade them in for a younger model. Your optimism has little relevance to my experience of academia and where it is going in the UK.
USS in its soon to be ex form, is a massive perk for the well paid. Those who make the most out of it are (1) Those on high salaries paying less than 60p for each pound (Ni is cheaper) they put in; the other 40 p + coming from tax. Then add a tax free 16 % and NI (until recently) employer top up. Fortunately Labour, Lib Dems and finally Tories have realised handing huge sums in tax free savings to the highest paid has to end. There are clearly more important and worthwhile things to spend the money on. Everyone paying 40 % tax is highly paid (they are in the top 20 % of earners), some are more highly paid than others. (2) Those who get promoted late in life, scooped the pot. Those suggested by Phil who do not get the big promotion (to Professor) are the big losers; they get smaller pensions that they pay more (as a proportion of their income) for. To love USS as a fetish has been to ignore the injustice such a scheme represents. The new CRB scheme is most generous to the lowest paid, we can argue it should be more generous but to fight for the rights of those earning above 55K to get a better deal is (to me) like fighting for Imelda Marcos to have new set of Nike trainers. Point of fact earning above 55K puts you at or just below the top 10% of UK earners; surely a definition of the most well off in society.
Jim, I agree with your first two points. However, I don't think the CRB is that good. In real terms, the cash value of your pension will about 25% more than the contributions made, irrespective of the time between the contribution and taking the pension. That means that there is only a small rate of investment gain on the early contributions, whereas over an investment period of several decades there ought to be a considerable increase. On the other hand, the uplift is the same for contributions made the year before retirement, when the salary is likely to be larger. Once again, taking from those on modest salaries and those who leave the scheme, and giving to the high-flying lifers. Secondly, DC schemes have a poor reputation because employer contributions tend to be much lower than for DB schemes. 12+8% is pretty generous in that respect, particularly when one recalls that the cost of new CRB accumulations is only about 19% total - the rest goes on bailing out the FS. If interest rates rise, the cost of CRB accumulation drops, whereas the employers' 12% to DC is fixed. The amount going towards the deficit is the surplus over the cost of accumulation in the CRB case, but fixed for the time being at 6% for the DC (above the 12%). Once again, this favour the higher paid.
@RB Its a good point about the way CRB operates. In reality it should revalue contributions to reflect this and disfavor lifers. I also agree with your main point, but UCU do not understand pensions. If they took the 18 % up to 55K, plus we made a 6% contribution, 24% a year will build a decent pension, almost certainly better than CRB. Its willful ignorance not to understand this. Five year smoothing should prevent huge losers or winners. The pension fight is a funny one, the marxist UCUleft (who I think are very and admirably consistent) campaigning strongly to save FS to bring down the neoliberal austerity state to the benefit the top 10 % of society's earners.
@jim_sta Jim, its a little patronising to describe the UCU as the marxist left, not least because it implies the same of its members. Not in my experience remotely true. Why shouldn't individuals who have achieved at the highest level (academically) and tolerated job insecurity for a decade+ not have salaries that are in the top 10%? Moreover, your comment and much of the debate about academic pensions misses the issue I raised above, i.e. that many of the best qualified post-docs returning form the US to take up academic posts in the UK in their thirties have little or no pension contributions at that point, and an uncertain period during which they might be able to make contributions. You might well say... so what?. However, in the long term academia will appear an even less attractive proposition to the brightest and best ...best because we now penalise those who achieve the most (i.e. due to the 55K pension threshold). Find me a successful company that would consider capping pension benefits for its high flyers and I might just accept that the changes are even vaguely rational.
@Phil Smith UCUleft is not UCU, UCUleft is closely aligned to the SWP and is to a first approximation marxist. High flyers are doing extremely well,, the whole giving top people even more is tearing society apart. Surely we do not want a system that disproportionately hands the best rewards to those who already have enough. The new system spends slightly more on the younger post-doc coming from the US than the old crusty professor. As to the comparison to the US, you should have a look at what is happening to FS schemes in the USA. The USA does not use FRS17 (measure of funding), many schemes assumes a real rate of return of over 6 % and many States (most Universities are State institutions) are overturning and modifying pensions. Very few State Universities offer a better deal than the new scheme. Many US FS schemes have blatant unfairnesses, time delay vesting which means that contributions only become meaningful after long service (known as robbing PDRA's, people with multiple short term contracts etc . I worked in the USA, there are better reasons to work there or the UK than the pension scheme. The economist has several good articles on US schemes.

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