Union clash looms as employers’ pension plans revealed

Employers propose scrapping final salary scheme to cut USS deficit

July 24, 2014

Source: Alamy

Hot button issue: the University and College Union says it is ready to ballot branches about ­walkouts if pensions are reduced

Universities are set on a collision course with unions after confirming that they want to scrap final salary pensions offered by the sector’s biggest scheme to reduce an estimated £13 billion deficit.

Under the plans, about 130,000 higher education staff who currently pay into the Universities Superannuation Scheme’s final salary scheme would be moved to the career revalued benefits (CRB) scheme (or career average benefits scheme) that was introduced for new entrants in 2011.

Writing in this week’s Times Higher Education, Anton Muscatelli, vice-chancellor and principal of the University of Glasgow and chair of the Employers Pensions Forum, which represents Universities UK, GuildHE and the Universities and Colleges Employers Association, says that “more change is necessary to ensure that the sector is able to address the deficit”.

Professor Muscatelli says employers want “an extension of the [CRB] section to all active members and the closure of the final salary section”.

However, the change could result in an effective pay cut of 10 per cent as CRB pensions are far less generous in terms of employer contributions, one sector expert has warned.

Pensions consultant John Ralfe, a former head of corporate finance at Boots, said the annual cost to institutions of providing a final salary pension was 19.9 per cent of pay compared with 11.3 per cent for CRB, based on USS figures released in 2011. Changes in interest rates since then had increased the 8.6 percentage point difference to close to 10 points, he said.

The proposed reforms could lead to a repeat of the strike action in 2011 over similar plans to end final salary pensions for all. The University and College Union is ready to ballot branches about possible walkouts.

Radical change needed

The announcement from the Employers Pensions Forum – which follows draft options drawn up by the fund’s trustees – comes midway through a consultation with employers about the affordability of pensions provided by the USS, which Professor Muscatelli writes is suffering a “very substantial deficit”.

Radical changes are required, he says, to reduce the risk in the scheme in order “to avoid future unaffordable contribution increases for both employers and members”.

The Employers Pensions Forum was considering CRB benefits “to be provided up to a specified salary threshold, with an additional defined contribution element being provided in respect of salary above this threshold”, he adds. This would ensure that “all members would retain a core defined benefit, with more significant benefit changes applying to the scheme’s higher earners”.

The Employers Pensions Forum declined to provide further details of a possible salary threshold or the contribution rate above the cap, but private sector employers that have ended their final salary schemes have typically set it at about £100,000, said Mr Ralfe.

He said that for someone on a salary of £150,000, “if the cap is fixed at £100,000 with a 15 per cent contribution above this, you would earn a career average on £100,000 and then 15 per cent of £50,000 – £7,500 – paid into a separate defined contribution pot”.

This scheme significantly reduced the risk of providing massive pensions to high earners (some in the sector will currently pick up pensions worth more than £100,000 a year), he said.

“High earners do not benefit as much as low earners, so it is more egalitarian,” he explained.

Jim Naismith, professor of chemical biology at the University of St Andrews, who has studied the USS, said he thought that the biggest losers will “most likely be those under 50 not yet promoted but who go on to be promoted”.

He said a “key question” was whether staff would have the option of the top-up defined contribution being paid immediately by employers as salary. “For higher paid staff, if they are to take responsibility for themselves then surely they should be given this choice.”

Professor Naismith added that the few details available about the new scheme showed it was “politically well judged”. “It gives a guaranteed base and divides staff, further undermining solidarity,” he said.

The Employers Pensions Forum said a valuation of the USS’ deficit, due to be announced this autumn, would shape its proposals, which would then be submitted to the scheme’s joint negotiating committee, which includes unions.

“Employers will undertake a consultation with employees on proposed changes to benefits early in 2015 before final decisions are made,” it added, but said it would make the case for change before then.

A UCU spokesman said that it had challenged the methodology used by the USS to value the scheme’s assets, which it believed is “flawed and has resulted in an inflated deficit prediction”.

The approach adopted by the USS board had created “a need to introduce overly radical detrimental changes for members”, he added.


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Reader's comments (5)

We (USS Members) could save a fortune if the USS pension scheme could be transferred lock, stock and barrel to the government backed TPS scheme. We would have to pay more in contributions but we would get a reasonable defined benefit pension when we retire. Given that the government is still short of cash I'm sure that they would welcome the immediate injection of USS's assets into the Treasury's coffers even if it cost in the long term.
But Joe Gluza the Teachers Pensions will be moving to a CARE scheme from next April 1 2015. The normal retirement age will be aligned to the state pensions age and the higher level of pensions contributions by members will continue (e.g. 10.1% TPS vs 7.5% USS). Can't see the benefit of that. Nor can I see the Treasury taking on the accumulated and projected deficit incurred by the USS.
Joe, really? I would imagine the government (of whatever stripe) will royally do over people in the TPS scheme sooner or later. The track record is pretty clear, war widows, SERPS etc etc. At least we have real money for now, it is not promise dependent upon politics. Politics is about votes, a geographically dispersed relatively small group who can be demonised are ripe for this sort of 'shared sacrifice'. Ask yourself nurses or pensions for 'professors' which way do you go? How would they do us over, easy change the law, impose some sort of tax, change indexing, delay payment etc etc. Ralfe holds the £100K, my guess is the cap will be significantly lower than this around 75 (above the Professorial minimum). Since the cap can be held to CPI or RPI or Wage drift (which ever is lower each year) you can gradually shift more people into it. By doing it 'stealthy like', they slowly boil the frog. (Notice the weasel words about the employer contribution for the higher component, no way is it going to be 16 % as now). Why start at 75K? Most staff currently earn less than this, so most will not initially be greatly affected (Divide and rule). CRB will make younger less well paid academics very much worse off, but it is a slow burn process, new staff are already being slowly burned. Starting out by hammering the well off (>75K) but not super well off (>130K +; VC's etc are all out of USS) is likely to be relatively popular with the bulk of lower paid staff (everyone hates Professors & Deans who earn 75+ anyway). The employer contribution (affordability test) for the top up can be set at my guess a max of 10 % and be 1:1 with employee contribution (hope most staff stay at 6.5 % as now and then you can save even more!). This will save a decent bit allowing the employers to shore up at no cost to themselves USS (essentially they would save at least 6% of all salary paid above 75K, changes in NI make this even more attractive to them). Another big plus is that starting at 75K means the frog boils more quickly, less time before inflation does it work to bring the cap down to cover all Professors. The real joy is that they can hide the savings by paying them all as extra top ups in USS for now. In other words, they will pay 16% of salary somehow, no net difference. "Strengthening the fund for the future" at no additional cost, so for five years we will see salary costs etc stay the same "See, it was not about cost saving". However, CRB as Ralfe and other point out is cheaper in the long term, the salary top up can as I showed be much cheaper by reducing contributions and letting cap drag salary. If nothing else changes then as the hole in USS is repaired costs will fall. Voila, savings on salary (ie pay cut for us) but by then too late to strike. The real beauty (and this is the bit I like) by being generous now in 'safety first, shoring up our shared future' then when the economic cycle turns then USS final salary will probably be in surplus (its the nature of final salary schemes, causes wild swings). Who gets surplus? Not us.
USS Members are likely to end up paying 10% contributions into a CARE scheme (which is a DB scheme) which is much inferior to the TPS CARE scheme. TPS doesn't need a London Investment Office and highly paid Investment Managers whose bad bets in the past have brought USS to its current state. Joe
USS members should not accept that the final salary scheme should end as a 'fait accompli'. Provision was made during the 2011 settlement for future increases and since then the global economy has improved and stock markets soared. My fear is that apathy and a general lack of knowledge of pensions will allow this to be railroaded through even though it will probably be the most detrimental change to their T&Cs that most members will experience in their careers. I hope UCU organise a more effective campaign than they did for the last pay rise. Most members would have to be on strike for a very long time for it to equal what they will lose through these changes.


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