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Is it the end for USS final salary pensions?

Proposal to shift all active members to career average system to tackle ?13 billion deficit

May 22, 2014
Jack Grove

Source: Alamy

Looking for a solution: the USS is considering bringing the final salary pension to an end in favour of a career average calculation

Final salary pensions look set to be axed by the Universities Superannuation Scheme as part of radical plans to fill an estimated ?13 billion deficit.

Under draft proposals drawn up by the fund’s trustees and circulated to employers, academics and other university staff will no longer be able to contribute towards pensions where retirement income is based on a worker’s last wage.

Instead, all active members of the USS – about 150,000 in total – would start to pay into schemes where benefits are calculated on a career average basis from 2015-16.

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In addition, the final pension received under the career average system would be cut by 6 per cent under the proposals, Times Higher Education understands.

Promised benefits accrued up to 2015-16 would not be affected by the changes, which will end the two-tier system introduced in 2011 when final salary pensions closed to new joiners, but were preserved for existing members.

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Those more modest proposals sparked walkouts at universities in 2011, with the latest plans likely to provoke calls for similar industrial action.

“Although disappointing, it is also no surprise that closing the final salary scheme is an option being posed by the USS,” said Michael MacNeil, head of bargaining at the University and College Union.

The union would be speaking to the employers over the coming weeks to “ensure the scheme remains sustainable and attractive”, he added.

A USS spokeswoman said it was “premature to discuss any specific proposals”, but it was likely that “higher contributions and/or other responses will be required” to address the deficit.

The plan to end so-called “gold-plated” pension deals has been circulating within universities for several weeks, with employers set to unveil their own suggestions at the end of June or in July.

The proposals – believed to be the favoured set of options under consideration – were seen by 色盒直播 at a briefing for employers at the Universities Human Resources annual conference held near Warwick last week.

It follows the latest triennial valuation of the USS pension fund, which is said to have had an ?8 billion deficit at the end of March, up from almost ?3 billion in 2011, according to indicative results mentioned at the briefing.

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However, it is believed that trustees want to go further than simply plugging the deficit and “de-risk” the fund by buying more lower-risk, lower-yield investments and selling some of its higher-risk stocks and shares, which make up about half of its assets.

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That would depress asset income and increase the deficit, but put the scheme on a surer financial footing.

Once longer lifespan assumptions are also included, it would push the deficit to about ?13 billion and require employers to increase their contributions from 16 per cent to 25.1 per cent (with employee contributions rising from 7.5 per cent to 12.3 per cent) in order to preserve the final salary scheme for existing members and clear the deficit within 15 years, trustees say.

Employers are said to have dismissed those contribution levels as “unsustainable”, saying they could pay about 16-18 per cent. But to keep employer and employee contributions roughly the same as the present level, the USS has advised that the link to final salary is broken, with everyone moving to the less generous career average scheme.

Independent pensions adviser John Ralfe – who last year warned that the USS’ deficit needed urgent attention – said the changes were required because the USS backed down from moving to career average for all members after the last triennial valuation.

“This is what was proposed in 2011. Even if it happens now it may be too little, too late [to clear the deficit],” he said.

However, any changes to the USS scheme, which is due to officially announce its deficit in September, will need to be agreed by employers and the UCU via the Joint Negotiating Committee for Higher Education Staff.

A spokesman for the Employers Pensions Forum, which represents Universities UK, GuildHE and the Universities and Colleges Employers Association, said employers “are still at the stage of considering options, not making proposals”.

If the plans go ahead, however, university staff will face a double blow on pensions, with employee contributions set to rise by 1.6 per cent in April 2016 owing to government pension changes, which will affect all UK workers.

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jack.grove@tsleducation.com

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Reader's comments (6)

#1 Submitted by Jim_sta on May 23, 2014 - 8:25am
Quelle surprise! This has been on the cards for at least 10 years and several people tried to warn colleagues this would happen in these comment pages. As one of the many cassandras I hope some people did try to increase their pension saving. This outcome is simple arithmetic. Thanks to employer machinations and Union incompetence, younger staff and as yet to be promoted staff are going to be hugely worse off. This is an almost zero sum game, so who wins? Anyone who retired 2005 to 2018, anyone who got to retire early on full pensions and anyone with a late promotion. These people are getting a bigger pension gifted by the losers. Oh yes, the other big winner the fund managers over at USS who paid themselves well. What on earth were UCU doing over USS, oops I forgot they were worrying about tobacco etc shares. From a tactical point of view John Ralfe misses the point, the timing is perfect. By prolonging the two tier system, the employers have a crisis ( In fact, if you've got a moment, it's a twelve-storey crisis with a magnificent entrance hall, carpeting throughout, 24-hour porterage and an enormous sign on the roof, saying 'This Is a Large Crisis'.) and therefore a cast iron reason to act (USS final salary is dead, you can't beat arithmetic). Moreover the two tier has damaged solidarity. Even better, in the long term, the magnitude of the crisis means they can lock in now a shockingly bad scheme.
#2 Submitted by Jim_sta on May 23, 2014 - 10:27am
Just to add a bit about USS fund mangers paid themselves well with poor performance. The employers who finally lost patience with this and demanded something be done about the London Investment office. An algorithm that tracks indices costs much less and will outperform the vast majority of 'stock picker' experts over any five year rolling period once their fees are deducted. So why don't we use an algorithm, it has a series of fatal drawbacks, it does not buy you a nice lunch, it does not fill up your diary with important meetings, it does not need compliance managers nor does it give presentations about social responsibility. Why did we not see this coming? I think because it was an employer pays model, so the assumption was if it ran aground the employers would bail it out. While true in a narrow legal sense, too few seemed to realise that the reality was if it ran aground then employers would obviously dump on us, the staff (as they have). Much better would have been for us (the people whose money is in the scheme) to have been pushing hard for cheaper and better performance, to have fought to end early full pension retirements, to have tried to stop late promotions draining the fund etc 15 years ago when the it was clear there were challenges ahead. The newspapers were full of final salary scheme closures then we needed to pay more attention. USS final salary was always going to end but it would have been fairer and better for the younger less well off ones to have done this years ago. Instead worth reading (I think its still on the UCU website), their pension expert three page assessment years ago that USS was not in trouble that it would return to surplus etc. Given the deficit is now ?8Bn, perhaps we can have our money back from this expert. I speak as a winner from this system, every year it staggers on, I get better off and those coming in get worse off.
#3 Submitted by Jim_sta on May 23, 2014 - 2:15pm
They also pay multiple undlsclosed fund management fees and the deal with LIO was expensive. Its not just the USS in house salary bill that matters. Most active fund managers charge around or over 1%.of the sum under management.
#4 Submitted by patricktissington on May 26, 2014 - 9:43am
I signed up for a final salary scheme and I'd like to have my contract honoured please. Isn't that the way legal agreements work?
#5 Submitted by Jim_sta on May 27, 2014 - 2:50pm
Hi Pat, Fair point but we have no legal right to accrue future DB pension rights. They cannot take what you have earned up to the point it stops (however by changing from RPI to CPI etc, they can erode the value). The test cases for this were all fought long ago. We can go on strike and try to persuade employers to change their mind, however all new staff are on the new scheme we are divided and ruled If you have substantial service in USS, you probably got it at a discount (the deficit is about 30% depending on measure used), it is the people after you that will probably be paying for the mess via lower salaries. What many people in these comment pages tried to make clear years ago was the difference between what we want and what was likely to happen (and therefore give people time to think about their future). John Ralfe has been banging the drum for years about DB schemes. Like him or not, it is us the mushrooms who suffer when the schemes end, not USS big wigs, fund managers or Universities. In a comment thread one person two or three years spelt out in plain english the impact of changes in NI for employer contributions, this would alone would have spelt serious problems for USS. If you read this you might have gotten five years heads up on the changes ahead. If you only read UCU, USS and employer literature and made your plans assuming you would continue earning USS final salary benefits until retirement it is probable your retirement will end up significantly different if you are under 50. Two reasons 1 your current final salary pension when the scheme ends is frozen and uprated by a RPI & CPI mix, this lags average wage growth in general so the 'real' value to you will be less. The longer to retirement the more 'erosion, if you are not yet promoted then that future is lost. 2 The new scheme is much less generous, in terms of actual real payout.
#6 Submitted by JohnnyTallywhacker on June 2, 2014 - 3:02pm
Another problem, for those of us who are not 'academics', is that when we reach a certain level in the grand scheme of pay banding, we are told we must transfer to the USS pension scheme. This is detrimental in several ways, as most Universities ran and some still run their own local scheme, which is not a 'pensions club' member, so the transfer is never on a year for year basis, ratios of 5 local to 1 USS are not unknown, not a fair exchange, and always treated as a new member. If like my employer they have taken the opportunity of a pensions holiday, using OUR pension money to pay for fripperies and awful architect designed monuments to stupidity, in the mistaken belief the 'fund' is doing well enough without them contributing, the pressure to move over, to reduce their risk when our pensions are due because of the shortfall they allowed to occur, gets even greater. I for one find myself stuck in a situation of either taking a small pay rise, by going for a higher graded job, difficult to accept when doing so will lose me most of my existing final salary pension, for a far worse alternative, or staying stuck at the top of band with 1% a year (-15% in real terms now as I've been stuck 7 for years).

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