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

Many universities will have had members receive letters from USS recently regarding a tax issue with those who bought Added years AVC’s during the USS PiP year 2011/12 (which ran to March 31st 2012).   This is a complex issue.

As it appears that there was very little consultation or publicity regarding these changes we thought we’d provide you with a helpful summary of the key points.  (please note the information below is courtesy of Edinburgh UCU)

Who Is Not Affected?

Folks who have cash Additional Voluntary Contributions (AVC’s) from Prudential. People who bought their Added-Years AVC’s from USS before April 1st 2011.

What’s Going On?

HMRC recently ruled that they would, for tax purposes, include all the added years contracted for in an Added Years AVC within the tax year they were contracted.

Huh?

If you bought five Added Years contracted to be paid for over ten years, the taxman isn’t counting just six months of it in each of the ten tax years, but all ten, plus the one year you normally accrue, within the year you took out the AVC.

Why Is That a Problem?

Up until April 1st 2011, the tax allowance for pensions was 255,000 Pounds. In the current tax year, that dropped to 50,000 Pounds. So now you don’t need to be rich to get hit with a tax bill for pensions.

So What’s Happening?

This all appeared at rather short notice given that the end of the USS pension year is March 31st. To prevent anyone getting hit with a tax bill, the University Pensions Office has withheld the March AVC pensions contribution from the March salary.

How Does That help?

It prevents you being hit with a tax bill if you stop your AVC contract this year, and restart it next year. That’s because then only the Added Years you actually bought in 2011/12 would be counted towards tax, and not all the future years you contracted to buy.

Won’t Stopping The Contract Lose Me My Inflation Protection?

USS have said they’re willing to restart contracts in April for those who contact them early enough (within three months of receiving their letter from USS) and that they’ll honour the terms of the previous contract. So if you took out the original Added-years AVC contract before October 1st 2011, you’d have had the full inflation protection built into it, and USS will keep that if you take up the option to restart the contract from April 1st 2012.

But We’ll Have The Same Problem Again Next Year?

Minus one year’s contributions, yes, if you take out the same contract.
However, USS are also offering a tweak to the contract where you’ll be liable each year only for the added years you actually buy in that year.
All other features, including inflation protection, will remain the same. So if you take that option (within three months of receiving your USS letter) then the problem won’t repeat.

So I should do That Then?

Pensions are never quite that simple. The fly in the ointment here is that it could be that you’d really want to take the tax hit for 2011/12, particularly if that tax hit is low, or even zero.

Why Would I Want To Take a Tax Hit?

Because then you’d have paid off the tax for your entire Added-Years AVC contract, and it’d never be counted against your 50,000 Pounds annual limit again.

That’s a Good Thing?

Your normal accrual of pension (one year per working year) counts against that 50,000 annual limit. Nearer retirement, you might want to start putting aside more money into a cash AVC, which also counts towards the annual limit, and essentially you’d want as much leeway as possible to save as much as possible in your last few working years.

Eliminating the Added-Years AVC from future tax liability would give you some extra leeway. Besides, the government could bring that 50,000 Pounds limit lower in future years, so any extra leeway gained now could turn out to be a very good thing later.

Right. So How Do I Know If I’m Affected?

USS are currently doing calculations for the folks who they believe may be affected and sending out letters with details. After you see those calculations, you can make a decision.

What Decision?

You have four options:

A) Let the contract for 2011/12 lapse with the missing March payment, and let our Pensions folks know quickly in April that you want to restart the contract in 2012/13. USS will restart the contract on the same terms with one less year to go. You’ll have missed one month’s payment but otherwise things will continue as before.

B) Do as in (1) but on the new contract offered by USS which has the tweak to ensure this won’t happen every March.

C) Let the local Pensions folks know that you wouldn’t have to pay tax anyway, and you’d rather just keep the contract going from when it started in 2011/12. That way you’ve taken the whole tax hit (of zero or some small amount) already and have given yourself some leeway in your annual limits in future. A double contribution would be taken from your salary in April to make up for the missing March contribution.

D) Quit the AVC contract, in which case it will have ended on February 29th 2012, with whatever Added Years you had already bought. Hopefully this isn’t all so much trouble that people would want to do that.

Whichever way you want to go, you do need to tell the folks down at the local Pensions office. Wait until you see your calculations from USS though.

What If I Want to Do My Own Calculations?

I’m assuming for the following that you now have your letter from USS.

1) Get your “Final Salary” for the date 01/04/2011. This is given at the start of the second “Schedule I” calculation in your USS letter. (for year 2011/2012)

2) Get your “Years of Service” at that date from the same place.

3) Multiply that “Final Salary” (1) by 19. Divide the result by 80 and then multiply by the “Years of Service” (2). You may need first to convert the days into a decimal fraction of a year by dividing them by
365 and adding the decimal fraction to the number of whole years to give Years of Service as a real number.

4) Index the result in (3) by CPI. This was 3.1% in 2011/12 so multiply
(3) by 1.031 This gives you your “Start Value” for the year 2011/12.

5) Get your “Final Salary” at 01/04/2012 is given from the start of the first “Schedule I” calculation on your USS letter.

6) Take the total number of Added Years you contracted for last year.
(this will stated on your contract). Then add the service accrued on
01/04/2011 (2) to this. Then add 1 to that total (assuming you’re full-time). This gives you the Years of service accrued on 01/04/2012 for tax purposes.

7) Multiply the final salary from (5) by the Years of Service from (6).
Divide the result by 80 and then multiply by 19. This gives you your “Closing Value for the year 2011/12

8) Subtract (4) from (7). Then add in the total cash you’ve put in to any cash AVC’s (that’s into the Prudential USS one and into any stakeholder or other pension funds). You don’t need to add in interest or dividends, or capital gains from these, just the cash you put in.

This gives you the total used for tax purposes in 2011/12.

9) If that total is less than 50,000 Pounds, then you’re fine. There’s no tax to pay.

10) If it is above 50,000 Pounds then all is not lost, because you can use the unused parts of the 50,000 Pounds allowances from the previous 3 years.

11) The used portions of your 50,000 Pounds allowance for each of the years 2008.2009; 2009/2010; and 2010/2011 are given at the end of the relevant “Schedule I” calculations in your USS letter. To get the unused tax allowance for each year, simply subtract each used allowance from 50,000 Pounds.

12) Total up the unused tax allowances for years 2008/2009, 2009/2010, and 2010/2011.

13) If the spare allowances from those three years are greater in aggregate than however much you went above 50,000 in 2011/2012, then you still have no tax to pay.

14) Finally, if you’re *certain *you have no tax to pay (and by my calculations someone with a “final salary” of 50,000 Pounds would need to be buying 13 Added Years as well as the four years they normally accrue over the four years to cross the 200,000 Pounds total) then you could tell the local Pensions people that you wish to continue your contract as originated in 2011/12.

If you decide to do this, and you did need to use some allowance from previous tax years, then USS will later write to you saying that you have gone over the 2011/12 annual allowance limit and ask whether you want to use past years’ allowances to cover this. Provided that you haven’t used them for another pension, then you need simply inform them that you indeed wish to do so.