Top-up pensions contributions

May 5, 2000

Perhaps it is time for a radical rethink of the Universities Superannuation Scheme (THES, April 18, 21, 28), one that embraces both the concerns of USS chief executive David Chynoweth about stability and a growing interest in cashing in on more lucrative, albeit riskier, investments. With some innovative planning and new flexibility, British academics could choose to stick with the USS and relatively modest returns or embark on a different type of retirement scheme.

In the United States, university educators also have a retirement scheme with contributions from their universities. The programmes under the Teachers Insurance and Annuity Association and the College Retirement Equities Fund (TIAA-CREF) are defined-contribution schemes. Thus, the individual puts in part of his or her salary, the university matches a certain amount and then the individual decides how the money should be invested.

TIAA-CREF provides information on several different funds, ranging from ultra-conservative money market funds to riskier stock funds, from which the individual can pick. But rather than accumulating years of credit, the individual actually accrues money in an individual account - which can be taken as an annuity or in a lump sum at retirement.

The rewards are enormous, and thanks a great deal to a healthy US stock market, many lecturers are retiring as millionaires. The cost to the individual is about the same as in Britain, the cost to the universities are generally far less than in Britain and the rewards are far, far greater.

For example, if a lecturer earning Pounds 25,000 a year retires after 40 years of service, under current USS regulations he would receive a pension of Pounds 12,500 a year plus a lump-sum payment of Pounds 37,500. But if he had invested 6 per cent of his salary, had that amount matched by the university for 40 years and garnered a 7 percent return above inflation, he would have a lump sum of Pounds 656,000 upon retirement. (This example assumes a level rate of pay, assumes the money accumulates tax-free and reports the results in pounds valued in the year 2000.) An 8 per cent annuity would return Pounds 52,480 a year - more than four times the amount under the USS fixed-benefit plan. And let us not forget, while the USS pension ends with the death of the retired person, a lump sum accrued over 40 years can be passed down to heirs, used to buy a house, and so on.

Most of the argument about the USS has focused on whether individuals should expect slightly larger defined benefits, particularly given the surplus in the system. Not surprisingly, Chynoweth is not keen to promise to distribute large amounts of money. He cannot be - his primary obligation must be to conserve the funds in the pension scheme against various catastrophes, including a large dip in the stock market. But individuals can take that risk. And individuals should be given that choice.

Would it be possible to create a dual system in which academics could switch from the defined-benefit scheme into the riskier, but probably more lucrative, defined-contribution scheme? I would suggest the following basic guidelines:

* Any academic who switched to the defined-contribution system would put in 6 per cent, matched by 6 per cent from the universities. Better returns and the lack of a need to fund the USS infrastructure should make up for any shortfall. The types of returns possible are shown above. Contributors would retain their ability to make pre-tax contributions

* The university system would ask for bids from major investment firms and authorise a handful to provide defined-contribution schemes (in essence an expansion of the existing system of providing additional voluntary contributions under university retirement schemes)

* Any academic who chooses to switch to a defined-contribution scheme would need to complete a course on pensions and investments before being allowed to opt out. In addition, the academic would need to study and sign a set of release forms to show a basic understanding of investments.

All players in the academic retirement game could win. Individual academics would gain greater freedom of choice - along with greater responsibility - for their retirement investments. Second, universities could free up badly needed cash by lowering their contributions. Finally, the USS would be able to serve those who want a conservative defined-benefits pension scheme, while the more entrepreneurial pension holders could go elsewhere.

Sarah Oates Lecturer, politics department University of Glasgow

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