The University has undertaken a series of ‘town hall’ meetings on the matter of the pension, and the VC is currently going around Schools to discuss the matter in smaller groups. We offer here some bite-sized notes, from questions that have come to Leeds UCU, or which have arisen in such meetings.
Is the pension I have built up to date under threat?
No, absolutely not. By law, everything that you have accrued to date so far should be paid to you on the terms that were in effect at the time of contribution. So, for example, if you were paying in to the pension before 2016, then you still have a ‘final salary’ part of your pension that was calculated at point of the closure of that part of the scheme, and is growing in relation to inflation each year and will be paid out as part of your pension package in retirement, alongside the Career Average part that you have been accruing since. As with the switch from final salary to career average, any change to the structure of the benefit calculation that results from a valuation will take effect from a given future date.
Is the USS really in deficit?
Yes and No. If someone told you that Harry Potter really existed, you would think they were having trouble with reality, but you would have no difficulty agreeing that the character of Harry Potter existed. The deficit is a narrative too, a construction based on a set of real-world characteristics, but made up of a series of guesses about the future. By far the most significant one of these is the ‘discount rate’, which is the rate by which you might safely assume the contributions that we and employers pay will grow over time to cover the promise of the defined benefit pension. The USS have set this rate at something close to what they themselves admit has something like 1 in ten odds of happening: or in other words, they believe that there is a 9 in 10 chance of those assets growing much higher than that, but they won’t use those higher probabilities in the calculation of the deficit. What is more, the starting point from which future growth is calculated was set at 31 march 2021, which is to say right in the middle of an anomalous drop in the assets of the value as the Covid impacts upon the markets were hardest. As a consequence of this, the schemes assets are not predicted to reach £80bn in value until the early 22nd century, and yet that is precisely what they are worth today. This is why the UCU refer to these calculations as ‘excessively prudent’, or ‘recklessly prudent’. There are of course other factors that are used in these calculations: estimations of salary growth, estimations of longevity and so on.
As for the current health of the scheme, leaving aside speculation of the future and looking at what is currently materially ‘in the bank’, then there is no evident deficit. The money coming in to the scheme from contributions has always more than covered the money going out of the scheme in benefits; the assets of the scheme have grown to £80bn value in recent weeks, which is the equivalent of forty years of paying pensions out at their current size (in the last USS report, just under £2bn annually).
What does the surplus posted in the SAUL pension scheme tell us about the USS deficit?
The Superannuation Arrangements of the University of London (SAUL) pension scheme is the scheme that is most closely analogous with USS. It is a CARE Defined Benefit scheme. It has a similar demographic of membership. Recently, it posted a surplus in its 2020 valuation. So what this very plainly tells us is that the USS deficit has not been caused by market conditions, and has not been significantly impacted by the longevity of the demographic, nor any other aspect that is pertinent to our scheme. Anybody who claims these things now either simply does not understand how valuations are constructed or, worse, is trying to deceive you or deflect your attention from the core issue: the deficit is caused by the manner in which USS manages its assets and liabilities, and the manner in which it chooses to conduct its valuations. It is not the ingredients, it is the recipe.
How are UUK proposing to fix the ‘deficit’ and how does this compare to their past proposals that caused the 2018 USS strikes?
At the time of writing, April 2021, the UUK are consulting with employers on a proposal to reduce the Defined Benefit portion of our pensions, reduce accrual (you have to pay in for longer to gain the same benefits) and capping CPI revaluation (if inflation goes over above the set cap, the pension no longer increases in line with that inflation). This is broadly similar to what was being proposed, and rejected by members, in March 2018. Significantly, the rush to push through such a change before the scheduled increases to contributions in October 2021 implies that they are seeking to slash the value of our pensions by about 25% in order to prevent a 2.6% rise in employer contributions. Jo Grady has written to all members on this issue recently.
What are UCU proposing?
UCU have set out clear principles: Progressive contribution structures to enable low paid staff to join and stay in USS (which might involve, but is not limited to, conditional indexation of benefits, see next para); An end to the movement over the last decade to contribution increases and benefit cuts; A pension fund with more return-seeking investments, and ethical investments; Commitments from employers to 1.) covenant support 2.) USS governance reform 3.) lobbying for regulatory change.
Conditional Indexation: UCU, via their Superannuation Working Group (SWG), are also exploring the potential of restructuring benefits using Conditional Indexation. One key virtue of CI is that it would undermine the pull of over-prudence in valuations, and consequently could bring contributions down for all parties, possibly to 8% for employees. SWG would only recommend a form of CI that would be welcome to and of advantage to members. UUK are also exploring this and have been briefed on it. It is a system that would fit with what is expected of the scheme by the Pension Regulator. Because it implies a reliance on growth assets, it would remove the drive within USS to ‘de-risk’ the assets, which is one of the ingredients that lead to a deficit. As a consequence, a solution of this form could be an end to the cycle of deficit/reform/dispute. Conditional Indexation involves making the inflation-related increase on accrued pensions conditional upon the performance of the assets, and as such it represents a removal of guaranteed increases in value, but there are means of structuring such a scheme that compensates for the deflation in years of poor performance.
Should I consider opting out of the scheme?
We cannot give financial advice. For every £100 you contribute to the scheme, before tax, the employer contributes £200. The decision to opt out, then, is a conversation to have with your future self and family about whether you should take that net loss. Calculate what 21.1% of your current gross salary is (this is what your employer is currently paying into your deferred salary, your pension). Ask your future self if you should turn that sum down (and all its assumed growth) from your pension pot in order to retain 9.1% of your salary now. This also about the loss of the life assurance and other benefits that come with membership of the scheme. We have written an article on this matter here. We recognise that the potential increase of contributions to 11% this October will put a strain on members in their take-home pay, which is all the more reason to begin to get active on this issue now.
If the USS wanted deliberately to close the scheme, one thing they might do is find a means to increase the contributions to such a level that a significant number of members might consider opting-out.
What’s wrong with a Defined Contribution pension?
That depends on how well it performs. As the name indicates, the only thing that is known, defined, about a DC pension is how much you pay in; your contributions. You have no idea what you will earn in retirement from it as that will depend on how well the assets are managed by the pension scheme over the time until your retirement. It therefore does not offer the security of a defined benefit scheme such as the one we have as the majority part of our hybrid scheme, which, by contrast is one that tells you exactly how much you will get as a regular salary in retirement.
What is the difference between a DB and a DC pension in terms of inter-generational unfairness?
Firstly, any change to the pension benefit that is worse that what is currently being offered is inter-generationally unfair. The most logical way to fight for inter-generational fairness is to try to maintain the current level of benefits, so that future generations get the same as past generations. Anyone who argues for changes to the scheme that downgrade the benefits is not arguing for inter-generational fairness, though often they use that argument as a shield for their proposals.
What is the difference between a DB and a DC pension in terms of pay inequality?
Both DC and DB, sadly, hard-wire pay inequality; gender or race pay inequality means that the gap that is manifest in your pay packet is also manifest in your pension later in life, because your and the employer’s contribution to your future pension is a given percentage of your gross salary. This is one reason why UCU often state that fighting for fair pensions is a part of the broader fight for equal pay, and why we link campaigning for equality, and against casualisation, with campaigning to stop pension changes. Arguably, defined contribution pensions are even worse in manifesting gender and race pay inequality because the sum that is accrued in a DC pension will grow at a given percentage over time, and the smaller the amount invested, the slower and smaller that accumulative growth. This is then compounded in retirement when you have to use that invested amount to buy an annuity to create a regular income.
If USS members are unhappy with what the USS trustees are proposing, do we have a means of electing different trustees to better represent our interests?
No. The scheme offers very little in the way of accountability to stakeholders. Read more here.
What kind of pension do our colleagues in post-92 institutions have?
The post-92 sector pays into the Teachers’ Pension Scheme (TPS), offering a Defined Benefit (career average) pension. Contribution rates are tapered, from 7.4% for salaries up to £28,169 to 11.7% for salaries above £81,255. It is a public sector scheme, unlike USS which is a private scheme. We suspect that if detrimental changes are imposed for the USS Scheme, there will be pressure to do the same to TPS, and similarly for local pension schemes for support staff.