Blog: Busting USS pension reform ‘myths’

Employers respond to ‘scare stories’ around proposed changes to USS pension scheme

October 22, 2014

In recent weeks the sector has seen a considerable amount of speculation surrounding the employers’ proposals to reform the USS pension scheme.

There are some startling myths: the idea that the circa £8bn deficit is not a problem, that any change is unnecessary and even that the proposals are part of a plot to prepare the sector for full privatisation.

Such scare stories hide the truth:  unless we reduce the very real risks and stem the increasing cost of providing USS benefits, the scheme will rapidly become unaffordable, for members and employers alike.

For the avoidance of doubt, under the employers’ proposed reforms:

  • The final salary section would close to future benefits, with existing benefits protected and calculated using pensionable salary and service at the date of change.
  • Future pension for all members would build up in the career revalued benefit (CRB) section on earnings up to a salary threshold – proposed to be £50,000.
  • Pension on salary above the threshold would be provided in a new defined contribution (DC) section.
  • All members would also have the option to pay an additional 1 per cent of salary into the DC section, which the employers would match.

These proposals are the result of a thorough analysis, which included modelling the potential impact on scheme members.

Projections indicate that around two-thirds of current members would continue to build up their whole pension on a defined benefit basis with optional additional DC savings.

This week we have published modelling to illustrate how these proposed changes might affect your pension. The figures have been calculated by USS using assumptions about future salary progression and investment returns that have been jointly agreed in discussions between UCU and the employers.

However, there are potentially damaging misconceptions that should be dispelled. These include:

  • Institutions with lots of higher paid staff would contribute less under the proposals. Actually all employers would pay the same rate, increasing their contribution from 16% to 18% of total salaries.
  • Longer-standing USS members’ final-salary benefits face the axe. Existing benefits would be protected at the point of change and calculated on pensionable salary and service at that date and increased each year in line with CPI. All members would build up future defined benefits in the career revalued section on their salary up to £50,000.
  • DC benefits are poor for higher earners. The DC benefits being offered above the threshold include an employer contribution of 12 per cent. Together with the employee contribution of 6.5 per cent (and the 1 per cent matching if the member chooses to pay this as well) benefit provision above the £50,000 is generous.
  • Newer members face the prospect of their retirement benefits being slashed. The reality is that any new members earning less than £50,000 would receive the same benefit as they would if they joined the scheme today. In fact they would be better off if they chose to additionally pay into the 1 per cent matched DC element. The significant DC contribution above £50,000 means that in many cases even higher earning new members should enjoy broadly the same level of benefits as previously, with some members likely to be better off in the under the reformed scheme.
  • The normal funding rules should not apply to USS as the university employers could always bail out the scheme. The USS is a private occupational pension scheme and as such falls under the remit of the Pensions Regulator. It has to meet certain minimum levels of funding, a test which it currently fails to the tune of around £8 billion. It is unavoidable that a recovery plan has to be agreed that would remove the deficit over a reasonable period.

Sweeping the scheme deficit under the carpet is not an option. If the stakeholders fail to agree on reforms, the trustees will be compelled to increase contributions to a level that would be unsustainable for members (at 12 per cent) and employers (at 25 per cent) alike.

After that, the conversations would not just be about ‘how can we change the scheme?’ but ‘where can we make cuts (most likely in staffing) to meet the additional costs of USS?’ or even ‘how much longer can USS survive?’

Employers and the UCU will continue to negotiate throughout the autumn with the aim of reaching an agreement. We all want USS to remain an attractive, affordable and sustainable scheme for members and employers. But to get to that point, we need to start with the facts and I hope the USS modelling will help members with that.

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Reader's comments (6)

I do not understand why UUK, USS and UCU are all apparently incapable of building a modeller/calculator which would allow us all to find out what the consequences of the proposals are. Selected "career profiles" inevitably lead to the suspicion that they have been chosen to be favourable to the argument being made. Especially as the future of the scheme is moving towards a much more "individualised" savings account system, I don't see how anything short of a personalised calculator is of any use. It doesn't help either that the parties concerned are so busy producing what to most of us is simply partisan and contradictory information about not just the implications, but the substance of what is being proposed.
Quite! Notice the comparison is now with the existing CRB, which has been criticized extensively as inadequate, particularly as it provides a lower pension than the TPS. Even though the CRB started 'new' in 2011, a large element of the employers' contribution goes to the reduction of the deficit in the FS scheme, not to new pension benefit accumulation - see the 'Schedule of Contributions' on the USS site. Why is there this matched 1% optional DC contribution? It's at most 1k a year, 40k max even for a whole career in USS, and most likely a lot less, which isn't really very much for a DC fund. Either they don't expect much uptake, thus saving costs but using it to beef up their pension predictions, or they do, so the cash is there, and it would be fairer to simply put the lot in to improve the CRB scheme for all members. The 12% employers' contribution for the over-50K DC scheme is actually more generous than it seems, as there is no deficit-reduction element in it. And the first bullet-point is clearly wrong - or else there's a 4%/6% for over-50K parts of salaries going somewhere?
The second bullet point is wrong. Existing benefits would only be increased each year in line with CPI up to to 5%, then half CPI to 15%, and 0 after 15%. A period of sustained inflation above 5% could therefore result in pensions being eroded away.
First Actuarial LLP have now provided a pension calculator to estimate how your existing benefits and future pension could be affected by the proposed USS changes:
Just to add to the comment regarding the second bullet point, it's important to note that under the current employers' proposals, benefits earned prior to October 2011, which are currently increased each year by uncapped CPI, would be retroactively affected as they too would become subject to the capped CPI rates with efefct from the date of change. A period of sustained inflation above 5% would therefore result in erosion of pension value.
On the second point too, it would be helpful if the USS could confirm that the benefits calculated at the point of change would not be subject to the actuarial reduction in the region of 4% per year before standard retirement age which would apply were the member to actually retire at that point. This sounds complicated, but it is important. A member can obtain a pension forecast for the point of change. But small print says this is subject to actuarial reduction, which, if you are 55, could be over 40%.

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