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USS reforms seen as ‘radical attack’ on pensions

UUK’s proposed hybrid scheme could result in losses of ?20,000 a year

September 18, 2014
Jack Grove

Source: Alamy

Retirement incomes for many academics could be cut by up to half under plans now being considered by universities.

Although employers have already announced their intention to end the final salary scheme offered by the Universities Superannuation Scheme, the scale of pension cuts outlined by Universities UK may shock the sector as they go much further than anything imagined by unions or pension experts – increasing the likelihood of strike action next year.

Financial modelling carried out by pension consultants Barnett Waddingham for Times Higher Education suggests that some academics would lose about ?20,000 a year in retirement income if the new scheme goes ahead (see box below).

In a consultation document now circulating in universities, UUK explains it would seek to replace the current final salary and career revalued benefits (career average) schemes with a more affordable “hybrid” that is “targeted on scheme members with the lowest incomes”.

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In this scheme, some 150,000 higher education staff who currently pay into USS would instead contribute towards the new scheme to help the USS close its estimated ?7 billion funding gap.

But under the proposals circulated by UUK, employers would contribute only 16 to 18 per cent of pay up to a salary threshold of “no less than ?40,000 per annum” into a defined benefit scheme.

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Above that income level, institutions would pay only 12 per cent of pay towards pension costs, with employees contributing 6.5 per cent of salary at all pay points, although employees are likely to be asked to pay more in future, the consultation paper says.

Money paid into the pension scheme above the salary threshold would be paid into a defined contribution (DC) scheme, which typically offer far lower pension payouts than defined benefit schemes.

Younger academics in the final salary scheme will be hit hardest, particularly if they expect to reach the higher pay bands of professor or senior management later in their careers.

Academic staff already in the less-generous career average scheme would see reductions of up to about 10 per cent, although losses would be smaller for those who do not climb the career ladder.

Michael MacNeil, head of bargaining at the University and College Union, whose representatives are meeting to discuss the reforms in Manchester on 19 September, said many members would regard the plans as a “radical attack on pensions”. UCU will contest the methodology used to value the fund, he added.

A UUK spokesman said its consultation would end on 22 September and it would use employers’ responses to develop its plans. UUK was currently in discussions with UCU, with whom it formed the USS Joint Negotiating Committee, which would publish its plans for wider consultation early next year, he explained.

Edmund Cannon, reader in economics at the University of Bristol, who has studied the USS, said it was clear that the benefits would need to be cut, but the UUK plans are highly contentious.

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“It’s now about who will take the pain – these proposals hit hardest those who previously did well out of the scheme, which were higher earners,” he said.

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Dr Cannon continued: “Some people will take some really big hits here – they are not just losing out looking forwards, but also looking backwards as the accrued benefits that they thought were secure will now be lower than expected.”

Under the UUK proposals, benefits for past service for existing final salary members would be calculated based on their salary at the date of the USS changes and uprated only in line with the consumer price index of inflation.

“That is the least generous possibility that the USS could impose,” said Dr Cannon, adding that it should consider linking benefits to future average earnings increases or even honouring the final salary link on past service.

Paul Hamilton, partner at Barnett Waddingham, which is holding a free conference on pensions in Manchester on 4 November, said the shift towards a defined contribution scheme was a “sensible way” to reduce the risks faced by employers regarding potentially unaffordable future pension payouts.

jack.grove@tesglobal.com

Not much to look forward to: example pension forecasts under the existing and new hybrid schemes from UUK

Professor Smith earns ?80,000 a year, he is 47 now and works to 67.

  • Existing final salary scheme: ?43,400 a year pension + cash lump sum of ?130,200
  • New hybrid scheme: ?38,000 + ?130,200

?5,400 a year less (down 12.4 per cent)

Dr Blue earns ?40,000 a year. He is 37 and is in the final salary scheme. He is promoted to professor in one jump at 57, earning ?80,000 a year, and retires at 67.

  • Final salary scheme: ?42,200 pension + ?126,600 lump sum
  • Hybrid scheme: ?21,800 pension + ?63,300 lump sum

?20,400 a year less (down 48.3 per cent)

Dr Weston earns ?30,000 a year, is 37 and is in the final salary scheme. He ends career aged 67 as a senior lecturer earning ?45,000 a year.

  • Final salary scheme: ?23,700 + ?71,100 lump sum
  • Hybrid scheme: ?21,100 + ?63,300 lump sum

?2,600 a year less (down 11 per cent)

Dr Jones earns ?30,000 a year. He is and in the Career Revalued Benefits scheme introduced in 2011. He follows Dr?Blue’s salary progression, earning ?40,000 at 47, promoted at 57 to professor and retires at 67.

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  • Existing CRB scheme: ?24,100 + ?72,300
  • Hybrid scheme: ?21,000 + ?72,300

?3,100 a year less (down 12.9 per cent)

Source: Barnett Waddingham.

Case studies: assumptions made

  • all join USS at age - no other pension benefits and no allowance for additional voluntary defined contribution (DC) contributions.
  • ages mean ages at the date the changes are implemented
  • all figures in current terms (effects of price inflation are removed)
  • salaries grow in line with CPI inflation, other than the increases for promotion stipulated
  • the proposals are implemented in line with the UUK consultation document, with the salary threshold set at ?40,000
  • where pensions are purchased from a DC pot, this is done at current market annuity rates
  • the impact of increased member contributions is not considered
  • the value of the DC pots assumes an average return of 3 per cent above (CPI) inflation
  • no allowance for tax charges, either income tax on the pension, or the lifetime allowance
  • all benefits are taken at 67, and benefits with a lower retirement age are increased based on the current USS late retirement factors.

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Reader's comments (7)

#1 Submitted by Jim_sta on September 18, 2014 - 8:27am
It would have been better to have she as well he! In non-academic terms we are getting done over royally. This is what people tried to warn would happen, that the USS crisis would get so big we would all get this treatment. USS should have been reformed years ago, in its current form it redistributes wealth from the lower earning younger staff to retired and close to retired higher paid staff. The transfer was hidden because some chose to believe the employers would make good the deficit when all the evidence was they would not and hey presto! Never mind the war on arithmetic continues I see. The numbers given assume a 3% return above CPI, this is a heroic assumption. USS went bust on 2 % . In reality the numbers above will be worse (much worse) for all concerned. However our friend Professor Smith does the best because s/he is closest to retirement. For him/her the erosion of accumulated benefit is less and s/he has the most in USS. Its the Dr Blue's who are the biggest losers.
#2 Submitted by francescamiddleton on September 18, 2014 - 12:49pm
This is slightly grim reading - but I only wanted to comment, as mentioned above, on the rather striking gaffe of these all-male case studies. Which of course begs the question - how do the numbers stack up for Dr Pink and her career break or Professor Boot, who after moving institutions three times just like Professor Smith only ended up with her salary in the low 70s? Who are the winners and losers there?
#3 Submitted by Jim_sta on September 18, 2014 - 1:38pm
@Francesca Middleton In the very narrow area of the changes to pension scheme Most likely Dr Pink will do worse. Dr Pink's promotion will come later in her career so she is a bigger loser. Professor Boot depends on how long she was Professor. If her salary was stable for a while she joined she will lose out but not as much as Dr Pink. USS is in trouble because it could not generate returns 2% above RPI. It might do in the future it might not. No one knows. The hybrid scheme has some fairness. Everyone who is paid more than ?40K is being handed a 5% cut on any salary over this amount, in the end cutting the salaries of Professor Smith and Boot is probably overdue. I would have put and fixed the cap at the bottom of the Professor scale. On the portion of salary above Prof minimum (68K) cut top to 7%, an across the board 10% cut in salary above the Prof minimum. For the few salaries above ?90K, eliminate pension top up altogether on that portion above 90K (17 % pay cut). One solution to Dr Pink is offer to generously match (4:1 employer:employee) top up for those with career breaks paid for by savings at the top end. Provided all the savings made go into making the career average scheme more generous for the lower paid than currently planned there could yet be some progressive outcome.
#4 Submitted by tim.... on September 18, 2014 - 4:14pm
In Australia, Academics debit of 7% salary + 14% employer top-up into a simple investment fund, over which we have control. I much preferred it to the UK system of "defined" benefits. You can direct this money in a mix-and-match fashion toward international stocks, domestic commercial property, green, ethical, cash, bonds, etc, with high-risk/high long-run return portfolios available for those who prefer that. So simple, you know exactly where you stand, have a stake in making things work. Most importantly, and unlike the current UK system it is not subject to retrograde reviews, halving (wow!) or otherwise modifying your benefit. Given "defined" benefits are merely goals, not legal commitments, I'd say a change to an investment model would beneficial. Most Aussie academics are seeing a very nice outcome from this model. If you're curious, more info here http://www.unisuper.com.au
#5 Submitted by Jim_sta on September 18, 2014 - 4:24pm
@Andrew Goudie Let me state the current proposal from the employers are a disgrace, we are getting robbed. However QE has saved people from an even deeper recession, look at the EU. QE does transfer wealth from savers to borrowers by avoiding deflation. So what would you do withdraw QE, have deflation? Economists I read and understand (Wren-Lewis, Krugman) suggest low interest interest rates are the norm for a long time. In fact they urge more borrowing and more stimulus to stoke inflation to further transfer wealth to those who will spend not save. USS was in trouble way back as are all final salary schemes. There used to be long threads about it under the old 色盒直播S. It is not that USS is in principle unaffordable it is that it and FS schemes are unpredictable. No one is prepared to bet on them now, because they by design have to make predictions about interest rates, stock markets and life expectancy way in the future. As Keynes said the market can remain 'irrational" longer than you can remain solvent. How long will QE last? There is a good reason for the pessimism of the actuary, as over optimistic predictions meant that if a company went bust and the scheme was in fact in deficit, ordinary workers were the victims. Its why we have the PPF, (which charges USS a fee) Further Government have increased taxes (NI changes) on generous pension schemes in order to promote pension schemes for the less well off. What matters is how much you will get from your employer put into a pension plan and what smoothing is done. The rest is arithmetic. Final salary Professors are going to get less than they once did. I totally oppose the money being 'saved', rather I support it being transferred to support younger colleagues in the new scheme on lower pay and with career breaks who are being treated shockingly badly.
#6 Submitted by RB on September 18, 2014 - 9:13pm
I have to admit, Jim, that your prognostications from 2011 have turned out correct. I was hopeful at the time that fund performance would be better than the mediocre it's turned out to be. Indeed, it's fortuitous that the triennial reviews didn't take place in 2003 and 2009 at the stockmarket bottoms - if so, USS would have been put on a more sustainable course a long time ago. The real problem is as you say - FS schemes are just too generous to the winners in promotion. CRB as it now is is also unfair - you get the same 1/80 in inflation-adjusted terms whether it's your first year or fortieth year of employment. There's nothing in the scheme which allows for the length of time that it's invested. Nobody will like this suggestion, but it would be fairer to drop the accumulation rate to 1/100 and uprate by say CPI+3% annually. You'd catch up after less than 10 years, and your early-career contributions would be worth a lot more. The UCU bumpf gives a pretty fast timetable for USS implementing any changes. I suspect this is because the employers want to get it out of the way before the end of NI contracting out in 2016 (1.4% extra employees, 3.4% for employers, in case that's escaped anyone). The pension legislation gives the employers a statutory override to allow then to adjust contributions or benefits to compensate themselves, up until 2021 to implement. They will make concessions in the current negotiations, and then take it back later.
#7 Submitted by Stephen MacNeice on September 21, 2014 - 7:24am
"They will make concessions in the current negotiations, and then take it back later. " Sounds good!

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