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Employers’ Proposed USS Pension Changes

For several months, we have been receiving hints that all is not well with the USS Pension Fund. Government demonstrates its lack of enthusiasm for Defined Benefit schemes such as USS by setting tough rules for their solvency. According to the rules, the assets of the scheme must cover the calculated future liabilities; this is perhaps reasonable, although the scheme can call in emergency on the Employers for further contributions. The real killer is that the future value of the USS assets is calculated based on gilt yields. These have been deliberately depressed by the government through Quantitative Easing. We all know they will rise when the government stops creating money but, in the meantime, a deficit can be conjured up to justify an attack on our pensions.

Here’s the main meat of the employers’ proposals:

  • The final salary section of the USS will be closed to existing members.
  • The final salary benefits that existing USS members build up before the date the changes are implemented will be calculated based on their individual salaries at the date the changes come into force and from that date on will be increased each year in line with the Consumer Prices Index (CPI). This means that benefits at retirement will no longer be linked to a member’s final salary at retirement.
  • All members of USS—both existing Final Salary and new—will join the career revalued benefits (CRB) section of the USS for future service.
  • Benefits in the CRB section will be based on the same accrual rate as now– members will build up benefits based on the stingy accrual rate of 1/80th of pensionable salary per year. Each year their benefits will be increased in line with CPI (guaranteed up to 5% with half of any additional increase in CPI up to 15% i.e. a maximum increase of 10% per year). This is, so far, the same as the CRB scheme already imposed on newer staff.
  • Benefits in the CRB section will only apply to salary up to a  salary threshold—a fixed upper amount of pensionable pay. The THES article suggests a £100,000 threshold, but our National Pension Officer thinks £40,000 more likely. This, as you see below, will hit many of us quite hard. Pay above the threshold goes into a Defined Contribution pension.

So, if you are in the Final Salary section, the big news is that benefits already earned will not be paid out as final salary but at inflation-corrected salary as of (probably) October 2015. Anybody with a reasonable expectation of being promoted after that date will lose a lot of value in the contributions they have already earned. And you also lose out on later contributions as CRB is much less generous.

If you are (unlucky and) already in the CRB section, you will lose because of the cap on Defined Benefit contributions.

I have tried to do some sums, based on somebody who reaches the top of Level 6 (Associate Professor) at the end of 30 years service. Here’s how it looks to me:

Scheme                Pension   Lump sum     Effective value of pot
USS Final Salary      22,300    66,900              £660,100
Current USS CRB       18,100    54,200              £534,700
Employer proposals    14,500    72,500              £486,400

I have tried to compute an overall value for the USS pension as a “retirement pot”. As you can see, a CRB member loses about £48,000 from her “pot” because of the worse treatment of pay over £40,000. If you ask, I’ll try to explain the calculations, but they assume an annuity comparable to the USS pension would pay 3.5% of the “pot” and that the Defined Contribution “pot” grows at 4%.

This is all horrible, but is currently only an employer proposal. Experience from 2011, however, suggests that the employers will be able to force it through the USS consultation process. If we want to stop it, we’ll probably need to take industrial action.

Denis Nicole

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