Imminent, drastic changes to USS pension schemes, including end of final salary scheme for currrent
Our pensions are being changed in a way that affects all of us in USS, including those of us currently in the Final Salary Scheme. That scheme will no longer exist after April 2016, and all of us currently in the final salary scheme will be moved out of a defined benefit scheme and into a defined contribution scheme. This new account will be an investment account with no minimum return, which means that there is no guarantee that it will not disappear in the next financial crisis. For anybody who has many years left before retirement, like myself, this will bring a drastic reduction in our pensions.
I ran the numbers using the USS pension modeller for my own salary with a conservative rate of increase, and my pension will decrease by 38% under the proposed scheme, relative to the current scheme, the one that we all signed up for. Under the best case scenario, where the new pension account is well-invested and actually exists when I retire, my pension will be approximately 28% less than under the current scheme. Please remember that I, like most of you, am currently on the final salary scheme, and we are all being pushed off of it from April 2016. What is happening is essentially a benefit cut of tens to hundreds of thousands of pounds each. Alongside this decrease are increases in employee contributions and decreases in employer contributions to our pensions (instead a larger proportion of employer contributions goes into a central deficit fund).
Several major universities (Oxford, Imperial, LSE) have commissioned independent analyses of the deficit that USS is using to justify this incredible reduction in benefits, and all of those independent analyses have criticised the USS projections as problematic and highly pessimistic. Nonetheless, USS is proceeding with these changes and has opened a consultation period during which members can comment on the proposed changes. This consultation period is essentially the last hurdle before these changes are implemented.
PLEASE TAKE THE TIME TO COMMENT ON THE PROPOSED CHANGES TO ALL OF OUR PENSIONS. The union, which represently only a small fraction of USS members, has already utterly failed to derail or substantially improve the USS proposal, and so the only possibility for improvement is for USS members to take the time to criticise the proposed changes. The end of the consultation period is May 22.
To make comments and model the effects of these changes on your own pension, go to the USS consultation site: www.ussconsultation.co.uk
The UCU has sent around a document with suggestions for comments that one can make on the scheme. I copy this below for further information. The responses to points 1, 9, and 12 are perhaps the most relevant for most of us.
There is a second evaluation of the pension scheme planned in 2017, and you can be assured that if these changes are accepted without substantial complaint, our pensions will be further slashed in that review.
Suggested responses to consultation questions from UCU:
The Employer Consultation on Proposed Changes to the Universities Superannuation Scheme launched on 16 March. Members of USS should have received a letter explaining how to log in to the website, www.ussconsultation.co.uk. However in the first week it was not possible for members to submit comments. The consultation is scheduled to close on 22 May. Members have been asking how they should respond. The response below has been collated, under the given question headings, by UCU branch officers in coordination with pensions experts amongst our membership. NOTE: The USS valuation methodology remains contested by the UCU and it is important that we continue to challenge this. If the same methodology is used at the next triennial valuation there will almost certainly be fresh demands for further reductions in scheme benefits. Note re: USS modeller: some colleagues have pointed out that the benefits modeller appears to:
make higher pension predictions than UCU's modeller (cf. http://defenduss.web.ucu.org.uk/whats-my-pension/) and
predict small losses for members in the Final Salary scheme.
On point (2), colleagues should note that the USS modeller assumes a CPI of 2.5% pa, and, by default, 2.5% salary increase per year, every year, until retirement. Since many staff find themselves stuck at the top of their grade for years, these are highly arguable assumptions. If you reduce the modeller's projection of future pay increases to a lower, more realistic level, you are likely to see substantial losses. To be frank, if there were no reductions in benefits, the projected deficit could not be addressed. Colleagues who recently joined USS on the existing CRB scheme will have to increase their contributions by 25%, from 6% of salary to 8.5%.
Suggested responses to USS consultation 1. Do you have any comments on the proposed change to end the link to final salary? I believe that this change represents a fundamental breach of the promise made to members of USS when they joined, namely that by accumulating a pension, they would eventually be entitled to retire on a known proportion of their ultimate salary. The USS website still extols Final Salary as the best type of pension scheme available:
‘This section of the scheme provides a "final salary" pension; regarded as the best type of pension that is available. It is paid for partly by your employer and partly by you, with the employer paying the bulk of the cost.’ (still available at http://www.uss.co.uk/SchemeGuide/FinalSalaryBenefitssection/joiningthescheme/Pages/default.aspx)
Members could be forgiven for interpreting such statements as representing a commitment to the preservation of the Final Salary scheme they joined. Even if one were to argue that the scheme could be lawfully closed in extremis, whereupon ‘Final’ salary would correspond to the member’s salary on scheme closure, members have a right to expect that such a closure would only take place when absolutely necessary. I do not believe that the scheme is in the deficit position claimed, and therefore I do not believe this change is necessary. Hence I believe that USS is breaching this promise made to members. Ending this scheme will have substantial negative consequences for staff in early-to-mid career, because future promotion after scheme closure will be ignored for the purposes of calculating their ‘final’ salary. Up-rating by CPI will cumulatively further cut the value of this pension, approximately by 1% pa relative to RPI. Capping CPI will have a further impact in conditions of high inflation, even over the short-term. These are substantive reductions in the future pension promise that are based on a deficit model that is not credible. I do not agree with the assumptions made in modelling the purported deficit. Average life expectancy has been overstated, salary inflation has been grossly overstated (the implication being to make Final Salary pensions very expensive), inflation overstated, the wrong discount rate used (based on gilts rather than investment returns), a controversial de-risking strategy (that will make underfunding worse not better), whereas the employer covenant has been grossly understated (only 17 years lifetime for the pre-92 university sector – why?). I believe that USS trustees, by failing to address the material failings in the actuarial projections are in breach of the Pensions Code in acting in a manner that is “excessively prudent” ” and therefore arguably failing in their fiduciary duty. By failing to publicly consult over the deficit model, and by failing to correct known errors in the model, USS trustees are failing to act in the interests of its members. First, valuing invested assets relative to gilts may have been standard practice in the private DB Pensions sector, but in an investment portfolio, assets are only meaningfully valued in their own terms. Yet at no time has USS been prepared to consult publicly on the valuation model. Further, the USS Trustee has failed to respond to detailed questions put to him by Profs. Hutton, Jacka, Saul and Haberman (http://www.maths.bath.ac.uk/~sw283/USSTrusteesDeficit21Nov2014.pdf) I note that the consultation document reproduces a pair of mutually-contradictory assumptions: future salary is predicted to rise, which assumes a strong economy to pay for it; scheme performance is predicted pessimistically, assuming an unhealthy economic forecast. I also note a repeated reference to further projected increases in life expectancy, which seem both biologically and economically implausible. Sadly, the life expectancy of USS members has not increased substantially since 2011. Finally, I do not agree with the proposal to ‘de-risk’ the scheme, as this locks in low rates of return long-term, which is damaging and potentially further destabilising. The pensions code states that it is the duty of the trustees to ensure that there will be enough money to pay the pension promises in the future. The decision to shift investments from higher return equities to lower return (but less volatile) gilts does not make it more likely that they will be able to achieve that. In fact quite the reverse: it increases the risk to the scheme. The second way that “de-risking” in the broader sense will take place is the removal of Final Salary and the reduction of the Defined Benefit scheme, both of which shift the risk onto USS members. “De-risking” actually increases risk for members. 2. Do you have any comments in relation to the proposed treatment of transfers in for final salary section members? I note that it is proposed to end all transfers in to the scheme. No justification is provided for so doing, so it is impossible to comment further, other than to note that this will inevitably reduce the attractiveness of the UK HE sector to new staff from outside. I believe the burden of proof is on USS to justify such a change, and I reserve my right to respond to an actual argument. 3. Do you have any comments in relation to the proposed treatment of Money Purchase and/or Added Years Additional Voluntary Contributions (AVCs) for final salary section members? I believe that irrespective of the small print when members signed, those members which purchased Added Years AVCs did so in the reasonable expectation that they were purchasing additional years towards their actual final salary. The changes will mean that instead these will be valued in the same way as their ‘final’ salary contributions, which, whether constituting a breach of contract or otherwise, is certainly a decision not to make good on the Pension Promise. Therefore my objection is linked to (Q1) above. 4. Do you have any comments in relation to the proposed treatment of transfers in for current and prospective CRB section members? I note that it is proposed to end all transfers in to the scheme. No justification is provided for so doing. I believe the burden of proof is on USS to justify such a change. This proposal may disadvantage colleagues in other schemes, such as SAUL, TPS or the NHS scheme in the future, but these staff are not being consulted. 5. Do you have any comments in relation to the proposed treatment of Money Purchase and/or Revalued Benefits Additional Voluntary Contributions (AVCs) for current and prospective CRB section members? It appears that these benefits will be much less attractive than before, leading to their potential wind-up. Given that members will be induced to invest in the Defined Contribution scheme and get their 1% contributions matched by the employer, this seems even more likely. 6. Do you have any comments on the proposed new career revalued benefits section of the scheme? Compared to the existing Final Salary scheme, were CRB to return the same average level of return (i.e. costs to USS being equal), we can compare the two schemes by considering two staff members who retire on the same salary point at the top of a scale. Under CRB, staff who face few barriers to promotion (or were appointed at a higher salary), would have a higher pension than staff who faced barriers to promotion during their career. We already know there is a chronic Equal Pay problem in HE. One way this is manifest is in barriers to promotion. Women, BME staff and staff from working-class backgrounds tend to face these types of barriers, either due to stereotyping or by being offered contracts with limited opportunity for promotion. These differential impacts mean that all things being equal, CRB schemes have a negative impact on Equality compared with Final Salary. In essence, the CRB scheme reinforces existing pay inequality by introducing new pension inequality. This is one reason why until very recently USS themselves claimed that Final Salary was widely agreed to offer the best type of pension provision. However, the new proposed CRB scheme does not pay benefits at the same rate as the Final Salary scheme. Overall, it pays out lower benefits and costs more. This is clear in USS’s own modeller, once you reduce the default assumption of continuous annual salary growth of 2.5% to a realistic figure. And indeed, were CRB to pay out more, then the purpose of the current exercise, i.e. reducing the benefits to address the deficit, could not be achieved. 7. Do you have any comments on the proposed level of the salary threshold or the proposed approach to the revaluation of the salary threshold? I am strongly opposed to the introduction of the proposed Defined Contribution scheme. See Q9 below. I believe, therefore, that the threshold for contributions should be as high as possible, and that the threshold should be up-rated annually by a rule that guarantees that neither changes in the demographic distribution of USS members nor inflation could undermine the principle that this was a small element of an overall DB scheme. One way this could be done would be by establishing a second rule based on a percentage of USS members, and by combining this and the CPI rule, such that the threshold would be uprated by whichever were higher. 8. Do you have any comments on the proposed application of the salary threshold for part-time employees? I believe that the proposal is the correct interpretation of pro-rata for the purposes of the scheme. 9. Do you have any comments about the proposed creation of a defined contribution section for employer and member contributions on salary above the salary threshold (£55,000 as at the implementation date)? I believe that the case has not been made for the proposed Defined Contribution scheme. Absent from the consultation documents is any statement of justification for the creation of the scheme. There is also no explanation of the proposed mechanism or costs. There is no proper explanation of the risk that members will be exposed to in participating in such a scheme. As participating in any stocks-and-shares investment portfolio is necessarily a risky financial investment, and as there is no stated minimum rate of return, I would argue that this must be an essential element of the consultation, to avoid falling foul of UK law on mis-selling financial products. The introduction of the Defined Contribution scheme will shift the risk of poor investment returns onto individual USS members, and it is proposed that individual members will be responsible (have ‘flexibility’) for their own investment portfolio. This is about the worst way to provide a ‘pension’ for any individual, as many in private sector pension schemes have already found. If a DC scheme could be properly justified and consulted over, it would be possible to pool risks amongst scheme members: this would be termed a Collective Defined Contribution scheme, and would clearly be preferable. However, ultimately, the entire point of a pension scheme is to pool the risks and manage the portfolio – this is what a Defined Benefit scheme is. 10. Ahead of any further engagement by the trustee about the defined contribution section, do you have any comments on the range of funds to be provided (including the default fund), the charges payable by members, or any other aspects of the defined contribution proposition? I believe that the DC scheme, like all parts of USS, should be ethically invested. I believe that there is a significant temptation in creating the Defined Contribution scheme to offer investments that are legal but potentially unethical and then offering them the ‘choice’. Moral concerns aside, I would point out that by definition if one offers a range of choices knowing that some of these would be unacceptable to some members, then one is in fact offering a far narrower range of choices. 11. Do you have any comments on the options the trustee should make available for members as to how they might use their defined contribution account at retirement or upon leaving the scheme? No. 12. Other/General Comments The Trustee has failed to show that the supposed deficit has any real basis (see comments in response to (Q1), above). The wild change, “volatility”, in the calculated deficit, from about £13bn in March 2014 to £20bn in December 2014, with no corresponding change in the membership, contributions, assets, or pensions payout, underscores the truth that this valuation method is so variable as to have no predictive value. Its volatility indicates that it offers no basis for a fundamental change in the USS scheme. The justification for any such change must be clear and demonstrable to the scheme members. I reject any proposed changes until a satisfactory and agreed valuation which proves the need for change is offered and openly debated.