I have received an enquiry from a member asking whether it is legal for USS to make the employers’ proposed changes to our pension. There are two issues:

1. Can they close the Final Salary scheme and force us into another one, and
2. Can they change our existing accrued Final Salary benefits to salary at scheme closure inflated with CPI benefits?

The short, sad answer seems to be yes to both, provided the proper consultation and governance processes are followed. Here follows my non-lawyer attempt at a longer answer.

There is some general advice to scheme operators from Pinsents.

Note the important comments in the fourth paragraph:

Even though a scheme has been closed to future accrual, in some cases
members may still retain a link to final salary. This means that although
they do not build up future benefits in the scheme, the pension benefit they
will eventually receive will be based on their salary at the date they leave
employment with the employer rather than their salary at the date of the
scheme closure. Again, checking the scheme’s rules is extremely important.

As I read the USS scheme rules, rule 79 applies, which in turn invokes rules 14 and 15. That  means that, if the scheme is wound up, the mechanism in the employers’  proposal (salary at scheme closure plus CPI) will apply.

There is some interesting (and continuing) case law from IBM about changes to  their pensions schemes; it is analysed here and here.

In a nutshell, the only way to preserve our pensions is to persuade the employers to withdraw their proposals.

Denis Nicole

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