Pensions are safe if we don't stop working

Proposals to remove the retirement age should be good news for the academic superannuation pot, but Darrel Ince warns that there are downsides as well

September 30, 2010

The past two years have seen a bad-tempered tussle between employers and union officials over pensions administered by the Universities Superannuation Scheme (USS). Under the terms of this final-salary scheme, on retirement a university employee is given a lump sum and an annual pension based both on final salary and on length of membership of the USS.

The tussle ostensibly ended in July when the university employers' proposals - vehemently opposed by the University and College Union, which had put forward its own suggestions - were accepted by the USS. The employers' proposals downgraded the scheme, for example by insisting that new entrants to the USS have their pension linked to their average salary rather than their final salary.

On 29 July, the government made an announcement that negated much of the discussion that had taken place. It said that from October next year, anyone reaching the age of 65 will no longer be forced to retire.

In some ways this is good news for USS members, but the implementation of the government proposals will also have some significant effects on university employment that many will find distasteful.

Before looking at these implications, it is worth describing how a final-salary pension scheme is organised, and I will use the USS as an example. University employees pay 6.35 per cent of their salary into the scheme and employers top this up with a contribution equal to 16 per cent of their salary. This money is then invested.

Pension schemes invest vast sums in a variety of financial products: equities (shares to you and me); bonds (long-term loans to countries and enterprises); property (the USS owns part of the Milton Keynes shopping centre); and even companies (the Ontario Teachers' Pension Plan fund recently bought Camelot, the lottery company).

The money made from these investments, including the dividends paid on shares and the profits from the rents on properties, is used to pay members' pensions. This simple system has worked well for final-salary pensions until comparatively recently. Unfortunately, a short-term event and some long-term trends have made such pension schemes much less secure.

The long-term trend is that people are living longer. Hence the total amount of pension paid out during retirement is higher than it was a few decades ago.

Another long-term trend, which gained pace in the past 10 years, is that academic salaries have been increasing more than they used to. This means that the amount of pension at retirement will be larger.

The short-term trend - although perhaps cyclical trend is a better term - is that of financial volatility.

Shares were once owned by individuals and organisations who held on to them for the long term: they saw themselves as investors. Nowadays, with the exception of the pension-scheme holdings, most shares are merely the Monopoly money that barrow-boy financiers use to make short-term profits. In the hands of these gung-ho traders, stock exchanges are only one step removed from the worst sort of casino.

Because of these trends, many final-salary schemes are in deficit. They do not have the funds to pay out the full pension to all their members over a long-term period.

One of the pressures that I describe above - that of rising salaries - should ameliorate in the short to medium term. Although the UCU and other unions are pressing for salary enhancements this year, only a romantic would expect the increases of the past 10 years to carry on for the current life of this government.

The other pressure - that of retirees living longer - has been, at a stroke, almost negated by the eradication of the retirement age. This affects the USS much more than the increase in academic salaries.

Let us say that many academics decide to stay in work until they turn 70. Each year that they stay will ease the pressure on the USS fund to the point where, conceivably, the deficit can be quickly reduced and surpluses in the scheme will start to build again.

So the pensions future looks bright for academics. The government's announcement means that many staff who want to work past 65 can do so; moreover, their continuing to work will considerably ease the pressure on the pension scheme.

But let's not get carried away; the future may not be that rosy. Growing economic pressures on UK universities will mean that academic posts will be at a premium. The eradication of the retirement age will mean there will be even fewer vacancies than the small number we would expect during the current government's hair-shirt financial regime. My advice to anyone thinking of carrying out doctoral research or applying for a research fellowship as a preliminary to gaining an academic post is: "Don't bother."

What will universities do about the removal of the retirement age? A cynical reaction would be to revert to the old structure of the USS, cancel the agreement and then breathe a sigh of relief that they don't have to meet with the UCU again.

The employers could, however, carry on with the current changes. This is a likely outcome. There are two reasons why university employers would want to change the USS scheme. The first is that a body known as the Pensions Regulator periodically visits a pension scheme and evaluates its financial health - and next year the USS is due a visit. The USS is probably in deficit by a few billion pounds. Ignore the £17 billion figure bandied around in the press; this is a technical figure that assumes that all universities will go bankrupt at the same time and, moreover, go bankrupt immediately.

If the Pensions Regulator finds a deficit, it will ask for, and may even indirectly impose, changes to the scheme to downgrade the pension, for example by insisting on higher contributions from employers and employees. Some of the negotiations between the UCU and the university employers have been an attempt to head off the Pensions Regulator.

Another part of the negotiations has been associated with risk. A large proportion - much too large a proportion - of the USS funds is bound up in shares. These used to be a relatively risk-free investment, but since financial deregulation, any small piece of good or bad financial news rattles the City gamblers who then rapidly buy or sell their equity holdings, leading to an unprecedented long-term volatility.

The employers want to see much less risk with the pension fund and have, for some time, wanted the USS to move away from a heavy equities-based portfolio into areas such as bonds, which are less risky but make less profit.

I have made a very rough calculation based on the documents that the UCU and the employers gave me to help me research this article and I am more or less convinced that, assuming a retirement age of 65, the regulator could be headed off by the current changes to the USS, but the scope for reducing risk is very limited.

The university employers will, I suspect, see the removal of the retirement age as a golden opportunity to reduce the riskier components of the USS financial portfolio and will proceed with the current changes as well as taking a proportion of their investments from equities and transferring them to safer financial products.

One important facet of the removal of the retirement age is that, theoretically, academics could remain in work until they were very old indeed. How do you determine whether someone over 65 is up to the job and not blocking a vacancy that a research associate or successful doctoral candidate could fill? There comes a time when our mental faculties degenerate to the point that we cannot carry on. Some of us will recognise this and resign, but others will not.

Inevitably, assessments of staff will become formalised, impersonal and much more akin to an industrial performance-focused model. Moreover, this will apply to all staff. It would be illegal to have two assessment regimes - one for those over 65 and one for those under.

I used to be the head of computing at The Open University, and my management and assessment of staff invariably focused more on the counselling aspects. Because of this, I found the process enjoyable, and I genuinely felt I had a part in the career progression of my staff. Having to sift out who was ready for retirement, a duty that could well be imposed in the future, would have destroyed my relationship with my colleagues and as a consequence made my department less successful.

The government's announcement has blown a hole in the university pension changes as they stand. All the current USS calculations assume a fixed retirement age, as did all the changes introduced up to July.

It is clear that both sides need to return to the negotiating table. As a prerequisite, it would be worth one or both sides commissioning a survey of how many academics intend to continue past the current 65 limit. They might be surprised at the size of the number who wish to carry on.

There are two reasons for continuing in work. The first is the sheer enjoyment of the job. The second is financial security. The USS is a scheme that provides pension increases in line with inflation. In the past, this has been measured against the retail prices index. One of the changes in the USS scheme is that pensions will track the consumer prices index rather than the retail prices index. This usually trails a few percentage points below the retail index and would mean that in, say, 10 years a USS pensioner would see his or her payment decline to about 80 per cent of its previous value in real terms. There is thus an incentive to remain in post and draw a salary rather than collect a decreasing pension.

So, for academics and others enrolled in the USS, removing the retirement age is a double-edged sword. It rightly ends discrimination against a section of the workforce and makes the USS scheme much more stable, but on the other hand it may very well diminish the career prospects of those who wish to enter academia and lead to scenes reminiscent of the William Frederick Yeames painting And When Did You Last See Your Father? (imagine the dreadful image of And When Did You Last Contribute to the Aims, Aspirations and Mission Statements of this University?).

Clearly there are important issues here. I hope that both the UCU and the university employers will reconstitute the pensions negotiating committee to examine them. Not to do so would be grossly irresponsible.

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