USS pension reform plan an ‘undesirable’ and ‘retrograde’ step

Pensions expert criticises Universities UK’s ‘outdated’ proposal to end defined benefit scheme for almost 200,000 staff

November 23, 2017
Source: iStock

Plans to scrap pensions that guarantee a certain level of income to UK university staff in retirement have been branded an “outdated” and “retrograde step” by a world authority on pensions design.

Nicholas Barr, professor of public economics at the London School of Economics, described Universities UK’s proposal to end the Universities Superannuation Scheme’s defined benefit plan as “undesirable” because it ignored more sophisticated pension models that would share risk between employers and pension members.

The University and College Union will shortly ballot its members on strike action, which would hit about 50 leading universities in February, over the plans unveiled on 17 November. About 190,000 staff in mainly pre-92 institutions are covered by the scheme. Sally Hunt, the UCU’s general secretary, called it “the worst proposal I have received from universities on any issue in 20 years”.

UUK said that the proposed switch to a defined contribution (DC) plan, in which incomes depend on the performance of funds invested in the stock market, was required to “ensure the scheme remains sustainable and secure for the long term”.

However, Professor Barr, who has advised the UK, China and Sweden on pension reform, told Times Higher Education that a “move…to a DC plan would be retrograde in ignoring a risk-sharing design that can go a long way towards protecting employers” and “is a move to a design that is becoming outdated”.

“An increasing trend is a design that shares risks between employers, workers and pensioners,” explained Professor Barr.

These rules can “include an increase in employer contributions, an increase in worker contributions, a reduction in the accrual rate and – crucially – provision for ‘catch-up’ if the subsequent recovery of the pension fund permits,” said Professor Barr of the more flexible model.

However, independent pension expert John Ralfe described the UUK plans as “the right thing to do and the only thing to do” in the face of rising costs of providing pensions and the USS’ reported deficit, which recently increased to £7.5 billion, up from £5.1 billion in September.

Earlier this month, Bill Galvin, the USS’ chief executive, told the Financial Times that staff and employers would need to pay in an additional £500 million a year to maintain the current benefits.

Several university economists and statisticians have disputed the existence of the deficit, claiming that UUK’s plans are based on an unnecessarily gloomy modelling system.

Sam Marsh, a teaching fellow at the University of Sheffield’s School of Mathematics and Statistics, said “an unnecessary and costly de-risking of investments is causing manufactured deficits” and “by USS’ own admission, the scheme is in good health, provided universities are prepared to stand behind the current investment portfolio”.

“It is perhaps fitting, in a post-truth era, that a fund with a best-estimate surplus of over £8 billion is deemed fit only for closure,” said Dr Marsh, who called the UUK proposal “as outrageous as it is shocking”.

At present, the USS operates a hybrid scheme in which defined benefit pensions can be accumulated on salaries up to £55,550, with earnings above this threshold directed towards a defined contribution scheme.

A reduced pension offer by the USS risked a brain drain from UK academia, Dr Marsh added.

“With universities focused exclusively on financial risk, they have taken their eyes off the risks that lie elsewhere,” he said.

“A significantly downgraded pension offer will see increasing pressures on the best staff to look elsewhere, pressures that will be felt acutely by those international staff already being made to feel unwelcome in the UK.”

While the UCU’s Ms Hunt has warned that the proposals would “effectively destroy the USS scheme” and that industrial action could lead to “disruption on campus of a kind never seen before”, Alistair Jarvis, chief executive of UUK, said that failure to act could “undermine the sustainability of some institutions”.

“The option of no reform would be a dangerous gamble that employers are unwilling to take,” said Mr Jarvis.

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Reader's comments (2)

I sympathetic as this will seriously reduce future generations’ retirement incomes...but where will the brain drain go? My understanding is that university pension provision is getting worse worldwide. A simpler solution is to move to an up-and-coming post-92 uni. Well there must be at least one.
This doesn't seem to add up. There should be more representation of members on boards. Any private independent firm who stands to benefit from this change financially should not be involved or comment on this decision-making process. I can see some have here!