As you will know, in 2014 the employers proposed several changes to the USS pension scheme.After negotiations, some industrial action, and as a result further negotiations, an agreed schedule of changes is being put to scheme members, and those eligible to be members. We are now within a legally-required period of consultation which ends on May 22nd. I’d counsel against simply shrugging shoulders and figuring “this is a done deal”. During a similar period when the local pension scheme was changed, unions promoted an organised response and gained significant changes during the consultation. I won’t pretend that we could get everything repealed and return to a Final Salary scheme for all, but even at this late stage, significant alterations remain possible, and potentially thousands of Pounds of future income for all of us are riding on this.
I’ve heard that so far, the number of responses has been low. This will undoubtedly be interpreted by employers as general assent to the proffered changes. If you do not in fact assent, I would ask you to log a response. Please do feel free to pass this message on to colleagues who are not UCU members, but who are current or prospective members of USS. It is in the interests of all of us to have the number of responses as large as possible.
It’s not necessary to read all of the information below. I’ve simply listed some arguments for changes which you are free to use, or not, in your own feedback.
You can log in to provide a response at: https://www.ussconsultation.co.uk/members
To log in you will need your National Insurance number, your surname, and your USS member number. The latter is on the letter you received last month regarding the Consultation, and on your annual pensions statement. If you can’t find either of these, please contact email@example.com
Responses must be given by 22nd May 2015.
Probably the most effective means to achieve change would be if substantial numbers were to argue in such terms as “Feature X in the scheme is more important to me than feature Y, and I’d therefore prefer more of X even at the expense of less of Y”. Being realistic, the changes are being made to close a deficit, and so simple wishlists are more likely to be ignored.
The UCU National link below provides sample answers. Paraphrasing these will reduce the likelihood of contributions being dismissed as copied stock responses.
So let’s look at the changes and possible responses. I’ll keep to plain English as far as possible.
1. Change from Final Salary to Career Average scheme.
Some of you are already on the Career Average scheme and this affects you only inasmuch as the accrual rate (the amount of extra annual pension benefit, as a fraction of current salary, we get for working for another year) is changing. It pretty much is a done deal that the rest of us are moving to a Career Average scheme. However Career Average schemes are arguably better for those who don’t get large promotions late in their careers, particularly if the accrual rate is higher. Ours will now be set a 1/75th, which is better than the previous 1/80th but not as good as the best civil service scheme at 1/57th.
- It would be reasonable to argue for better accrual rates.
2. Protection of previous contributions.
Again this applies to those in the Final Salary section. The employers have argued that what we’ve accumulated in the scheme before the change date (31/3/2016) will be protected. Well, yes and no. Previous accrual will no longer be linked to our actual final salaries. Instead our “final salaries” will be calculated according to scheme rules (it isn’t always our “final” salaries, it can be the best inflation-indexed 3-year average out of the last thirteen years). These will then be held over as if we’d left the scheme by changing employer, and indexed by CPI until retirement. That seems attractive unless one realises that within the scheme, such salaries would be indexed, under the 13-years rule, by RPI. As we discovered during the 2011 pension changes, RPI tends to be 1% to 1.6% higher than CPI. In this case compound interest works very much against us.
- Demanding that the promise of “protection” of prior contributions be fully kept would be entirely justified.
3. Introduction of a Defined Contribution scheme.
For those on salaries above 55,000 Pounds (and this is also relevant to those who hope to be, and those under because of item 4), the pension contributions from that part of salary above this threshold will not go into the Career Average Scheme. Instead they will go into a Defined Contribution (DC) scheme. These schemes are different because rather than knowing how much pension we’ll get based on our salaries and how many years we’ve subscribed to the scheme, instead the money will go into a kind of individual investment pot. Such things are very common amongst private pensions and the pension due at retirement depends entirely on how well the investments have performed, and the state of the markets on the date of retirement (although most such schemes deliberately move money to safer investments in the years running up to retirement).
The employers have promised to raise the threshold by inflation until 2020. After that there is the risk that by lowering it, or by letting salary inflation overtake it by holding it steady, more of us will be moved into it. In this way more of the USS scheme can be steadily moved to DC, lowering the risks to employers (of deficits requiring higher contributions) by raising the risks to employee pensions (being lower than planned due to stockmarket performance). Many in UCU have argued that just as the introduction of the Career Average scheme was always intended as a Trojan Horse to move everyone out of the Final Salary scheme, this is using the same tactic to ultimately move us all to a DC scheme.
- It would be good defensive strategy to argue for more safeguards, such as a guaranteed uplift of the threshold against inflation, in perpetuity.
If we are to have a DC scheme, it’s reasonable to expect us to have some degree of personal choice in our investments. Certainly those concerned with Ethical Investment will know how hard it is to get a scheme to later change.
- If you want to argue for Ethical Investment choices, best do it now.
There’s also going to be some variation amongst us in attitude to risk. I’d expect there to be some sort of choice in investment options across the risk spectrum, but it hasn’t explicitly been offered. Similarly some of us, for whatever reason might want variation between UK/Abroad, Property/Bonds/Stockmarkets etc.
- This is a good time to argue for a reasonable choice of investment funds.
Another aspect of Defined Contribution schemes that is under discussion at government level, and could lie in our future, is whether we each effectively have individual pension pots or we have a Collective Defined Contribution (CDC) scheme. The details of this involve finance geekery (if fascinated see Mike Otsuka’s paper) but mainly amount to collectivising the more obvious risks (stockmarkets going up and down, longevity etc). Otsuka also makes cogent argument that such schemes also provide higher pensions for similar financial input, which is why the government are investigating them.
- Arguing for change towards CDC, at a point where government is investigating possibilities, may be effective.
4. Optional Additional Defined Contribution Section.
Those of us with salaries still under the 55,000 Pounds threshold will be permitted to put up to 1% of salary into the DC scheme, and employers will match these contributions. So it’s an AVC scheme with extra employer contributions. The more cynical will consider the point above regarding the extension of the DC scheme to all. Others may consider this a good deal, encouraging extra savings.
- The same arguments as for 3 apply, but those who consider this A Good Thing may wish to argue for matching contributions for more than 1% of salary .
5. Contribution Rates
These will move to 8% of salaries.
- To argue for lowering these, I’d definitely suggest trading off against disfavoured benefits
Deficit Calculation Methodology
Several statisticians in major UK universities, as well as analysts hired by National UCU have commented that the methodology used to calculate the deficit in USS is highly unrealistic and likely to grossly exaggerate the deficit. The details are high finance geekery, but a major point is that government Treasury rates are a main feature in the calculations at a time when these are being held artificially low by hundreds of billions of Pounds of Quantitative Easing. Lower interest rates mean higher deficits and of course rates are extremely low just now.
UCU negotiators have pressed this point to no avail, having not even received a substantive answer to such criticisms.
- Pressing for an independent analysis of the calculation methodology may assist in changing future valuations and and thus preventing further USS changes in 2017
This will of course apply only to a subset of USS members. Details of how these will be treated aren’t yet entirely clear, but some are given on the UCU website below.
- Pressing for continuity and fair treatment of AVC contracts already entered into, and possibly run, and yet to run, for years, is vital at this juncture. Those who already entered contracts will be aware that these were priced based on terms pertaining at the time. Forcibly changing the terms of these contracts would clearly alter those prices, and raise the question of whether members would be due compensation plus compound interest. Making it clear that we would demand this should contracts be unfairly changed should assist in concentrating minds.
University of Edinburgh