Calculating the pensions pay-off

May 12, 2000

As an Association of University Teachers-appointed director of the Universities Superannuation Scheme, I have followed with interest recent exchanges in The THES on pensions.

Sarah Oates (Letters, May 5) makes the case for a defined-contributions scheme, but she is wrong to suggest that a tax-sheltered, money-purchase pension fund can be passed on to future generations. Most of it must be used to purchase an annuity within a prescribed time from retirement, with the possibility of providing an annuity after one's death only for a surviving spouse and/or dependants.

As Oates recognises, the key difference between a defined-benefit scheme such as the USS and a defined-contribution scheme is that the former imposes the risks preponderantly on the employer and the latter on the employee. Oates believes individuals should be able to decide for themselves whether to opt for a defined-contribution alternative.

But the central question is whether sufficient people eligible for USS membership would do better in a defined-contribution framework for it to be rightly asked of employers to put their money for any employee into a defined-contribution scheme and National Insurance contributions. If there were not enough such people, it would seem to me inappropriate to create the substantial infrastructure for arranging informed choice.

I do not think Oates's illustration has very broad real-world validity. People gauge the retirement income they need as a proportion of their disposable income shortly before retirement. Defined-contribution returns measured in that way will be lower if there has been upward salary progression over a person's career, especially if it is steeper near the end. Early retirement or a later start than Oates envisages would also devastate her projected returns; USS benefits are relatively much less affected. The administrative cost of a defined-contribution scheme would not help either. Any move to a less adventurous strategy as retirement neared would also make a big dent in returns if the markets proved buoyant at the time.

Bill Trythall. Department of history. University of York.

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