Avoiding future shock

September 11, 1998

Pensions in higher and further education are undergoing their biggest reforms in 20 years. Harriet Swain reports.

Tomorrow's academic OAPs will retire into a new pensions world thanks to a thorough overhaul of university pension schemes that is under way now.

Changes were set in motion by a recommendation from Sir Ron Dearing's committee of inquiry that, in the long term, all new staff in higher education should become members of the Universities Superannuation Scheme.

Under current arrangements, most academic staff in new universities and higher education colleges are covered by the Teachers' Pension Scheme, which also applies to school teachers and further education lecturers. Only those in the old universities belong to the USS.

Non-academic staff are covered by local authority pension plans or local schemes run by the old universities. Some staff involved in medical or nursing schools are covered by the National Health Service scheme.

Over the past year, a working group has been considering detailed changes to the TPS, including the possibility of scrapping a single scheme for schools, further education and higher education in favour of separate schemes for each sector.

The Department for Education and Employment and the Government Actuary's Department are assessing the assets and liabilities of the separate sectors before considering the arguments further.

The idea of a pension scheme dedicated to all higher education staff was first mooted six years ago when the binary line ended. But it was decided that the cost of buying all the TPS staff into the USS would be prohibitive.

Recently, the topic has become more urgent because of a series of mergers between institutions and the increasing movement of staff between old and new universities.

A change to TPS rules on early retirement, introduced last year, also played a part by highlighting differences between the schemes. It meant that employers rather than the TPS became eligible to pay the additional costs of staff retiring early. The USS is responsible for paying these extra costs in the old universities.

Lecturers' unions fear this will mean that TPS members who want to leave are less likely to be offered early retirement, while USS members could become more vulnerable in restructuring.

In principle, both the Universities and Colleges Employers Association and the Committee of Vice-Chancellors and Principals favour Dearing's recommendation for a slow move towards a single pensions scheme for all new higher education staff. However, they are still discussing the issue.

The USS is consulting on whether a new entrant to higher education should mean someone who has never taught in a university before, who has never held a full-time post or has simply been promoted into a new post.

It will also need to consider whether to concentrate first on expanding the scheme horizontally to recruit staff from new universities or vertically to include non-academic staff from the old universities.

Meanwhile, new government legislation could force the scheme to become more open to casual and part-time workers. A green paper on the reform of pensions is planned for later this year, and one of its key aspects is expected to be stakeholder pensions that employees can carry with them from job to job. European legislation, in the form of the social chapter to be implemented late next year, is also likely to promote the pension rights of casual and part-time workers.

The Association of Colleges explicitly wants a separate funded scheme for all staff working in the further education sector.

It says the sector does not have enough influence on the TPS because it makes up only 11 per cent of its membership. It is worried that further education will have to bear any extra costs of improvements in benefits designed principally to solve recruitment problems in the schools sector. The AoC also argues that present arrangements give employers no control over pensions for most non-teaching staff, who are covered by the local government pension scheme.

But teaching unions warn that they could lose benefits by transferring to a new further education pension scheme, which would be relatively small and could therefore face funding problems.

The Universities Superannuation Scheme

The USS provides pensions for academic and academic-related staff in old universities. It has about 133,000 individual members: 77,000 are contributing and just under 30,000 are pensioners. The rest have deferred payments or have left teaching.

Money paid into the scheme is invested, and pensions are paid from this total sum. USS managers are debating whether to support a money-purchase scheme - which pays pensions out of savings, is easier for people to take from job to job and gives employers more security - or the current salary-related scheme, which is based on years of service and final salary.

Staff are pressing for changes to pension arrangements, which pay pensioners an 80th of their final salary for each year's service plus 3/80ths as a lump sum. They would prefer to receive 1/60th and the right to commute part of this into a lump sum. This would mean employees with less than 40 years' service could get their full pension.

Similar discussions are taking place in the TPS.

Employee contribution: 6.35 per cent, of which 0.35 per cent goes to a supplementary section to meet the costs of death in service or retiring through permanent ill health.

Employer contribution: 14 per cent.

Member institutions: 0, including all the old UK universities, the schools and colleges of the universities of London and Wales, all the colleges of Oxford and Cambridge universities and 124 other institutions.

Value of scheme: Pounds 13 billion Benefits: similar to those in public-sector schemes and index-linked, with extra benefits for death in service and ill-health retirement. A full-time employee who joins aged 25 or less and earns Pounds 30,000 upon retirement aged 65 with unbroken service will receive an annual pension of Pounds 15,000 (at today's prices) and a Pounds 45,000 lump sum.

State Earnings Related Pensions Scheme

People earning and in no private or occupational pension scheme are automatically members of the State Earnings Related Pension Scheme.

This covers annual earnings of Pounds 3,300-Pounds 28,130 and is based on a percentage of average national earnings. As USS and TPS members are automatically contracted out of SERPS, they pay lower NI contributions.

Personal pension plans.

These are generally costlier and less generous than occupational pension schemes because they lack the same economies of scale and do not include employers' contributions.

Workers would need to pay at least 20 per cent of their salaries into a personal pension to reach the total contributions of a scheme such as USS. A variant of the personal plan is the stakeholder pension, expected to be proposed in the government's pensions green paper. It would merge private pension flexibility with an employer's and worker's contribution.

The Teachers' Pensions Scheme

The TPS covers teachers and lecturers in schools, colleges and new universities. It has about 1.2 million members: 558,300 contributing and 380,400 pensioners.

Money paid in by employers and employees pays for current pensioners.

Employee contribution: 6 per cent

Employer contribution: 7.2 per cent

Member institutions: 3,335 including colleges, schools and local education authorities

Value of scheme: in 1996-97 the expenditure on benefits was Pounds 3.2

billion; income was Pounds 1.8 billion

Benefits: very similar to those under USS.

Basic state pension

The basic state pension is paid on top of occupational plans.

The full pension works out at about Pounds 3,300 a year for a single person and Pounds 5,200 for a married couple.It is paid after about 35 years for women and 44 for men if they have a full contributions record. It is scaled down for fewer working years. It will be equalised to 44 years' service for men and women born on or before October 6, 1954.

Postgraduates living solely on a grant are ineligible for a state pension. Part-timers who earn less than Pounds 64 a week pay no National Insurance and are also ineligible for a basic state pension.

Additional voluntary contributions

Members of occupational pension plans can make additional voluntary contributions by topping up their scheme or via free-standing additional voluntary contributions bought elsewhere.

The official university insurance company is the Prudential, but others are available. As pension contributions are tax deductible up to 15 per cent of salary, top-ups are usually a good idea.

CASE STUDY 1

Tim Blackburn, a post-doctoral research assistant at the Nerc Centre for Population Biology at Imperial College, realised he was not in a pension scheme only when he found cash left over from his research grant.

It turned out that the extra money was supposed to have paid his pension contributions.

In the end, the windfall went back to the research council. But it made him determined not to miss out again. He joined the Universities Superannuation Scheme at the age of 29.

His late entry means that he will miss out on four years' worth of pension contributions.

Now aged 32 and on his fourth two-year contract, he is satisfied with the benefits that the USS promises to provide, including the flexibility to take it with him should he move jobs. However he does not spend much time worrying about what he will get when he retires, and he has decided not to make additional voluntary contributions now.

The idea of receiving just half his salary on retirement and then only if he has worked for 40 years does concern him.

CASE STUDY 2

Paul Giess, a lecturer in environmental science at the University of Wolverhampton, began his career as a member of the Universities Superannuation Scheme.

Dr Giess joined the USS nine years ago, when he got the first in a series of fixed-term contracts at Imperial College, London. After three one-year contracts and a three-month extension, he took a job at Wolverhampton and joined the Teachers' Pension Scheme.

Transferring his pension was not a problem, although he lost three to four months' worth of contributions in administration charges. His employer's contribution will be less but the benefits roughly the same.

Now 30, he has also been paying 4 per cent in additional voluntary contributions to bring his total pension contributions up to 10 per cent of his salary. When he bought a house two years ago, he suspended the AVCs for six months.

"I haven't thought much about the benefits I will get when I retire," he says. "But I realised it was important to start as early as possible and I started making payments as soon as I could."

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