The price of security - UCU proposals are also a significant cut

In previous posts here and here I showed how to calculate the cost of making up the loss of benefits under UUK's proposed changes to USS using HMRC's method for valuing contributions to a defined benefit pension scheme, and the effects of the proposed changes on scheme members. UCU have tabled an alternative set of proposals in advance of the negotiations as ACAS tomorrow (Monday 5th Macrh) and here I have modelled their effects on member similarly. 

The UCU proposal

UCU's proposal is focused on keeping the defined benefit (DB) element of the pension, which is crucial for USS members to be able to predict what their pension will be with confidence and to avoid the pitfalls of managing drawdown from a pension fund since individuals don't know when they themselves will die, but a large fund like USS can rely on actuarial estimates of longevity to determine how long their members will live as a population. Thus the UCU proposal retains defined benefits up to the current salary cap of £55,500, but at a reduced accrual rate of 1/80th of salary per year instead of the current 1/75th. This accrual rate is presumably also to be applied to the lump sum, so it will be 3/80ths instead of 3/75ths. For this level of benefit, UCU appear to have accepted that contributions need to be increased somewhat to keep the regulator happy, so employers will pay 2.7% more (20.7%) and employees 1.4% more (9.4%). It's not clear from the announcement what would happen above the salary cap. Presumably, the contribution rates into the defined contribution (DC) part of the scheme are proposed to remain the same (12% for employers, 8% for employees). The proposals also don't mention "the match", so let's assume that may also be withdrawn to make life easier for the Universities.

Effect on value of annual contributions

Figure 1 The annual value of pension contributions. The graph shows the values of the annual contribution to a pension under the UCU proposal for USS , the current USS scheme (current, HMRC method) and the current scheme including the employer's 1% "match" (current+M) up to the salary cap (£55,000). Under the "match" you actually contribute another 1% on top of this.

If we apply HMRC's method for calculating the annual contribution into a DB scheme (16 times the increase in your annual pension plus the increase in your lump sum), the UCU proposal implies a combined contribution of 21.75% of salary for the DB part of the pension as compared to 25.33% currently (Figure 1). So, under UCU's proposed changes, the value of the annual contribution to your pension will be worth approximately 1.6% less, or 2.6% if you currently take the match. This compares favourably with the 4.1% or 5.1% hit under the UUK proposals. However, this is still a real and quantifiable pay and benefits cut and we have not yet accounted for the increased contributions members will be making.

Increased deductions mean a 3-4% pay cut

Although members would be accumulating pension more slowly than under the current scheme, they would actually be paying more for what they get. The employee contribution up to the salary cap would rise 1.4% from the current 8% to 9.4%. This additional 1.4% will be deducted from your salary and so, when combined with the 1.6% decrease in the value of your annual pension accumulated, this amounts to a 3% cut in your pay and benefits package, or 4% if you currently take the match.

What will you lose?

Figure 2 The annual difference to members between the UCU proposals for USS compared to the current scheme. The values shown are the difference in the notional (HMRC method) annual value of the current and UCU scheme benefits combined with the 1.4% increase in employee contributions. The second line (+M) shows the difference for those currently taking the "match".

Figure 2 shows the combined losses (decreased value of annual contribution plus increased deductions from pay) that members would suffer under the UCU proposal.  The situation is not as bad as under the UUK proposals and the benefits are as defined, indexed linked, relatively certain annual pension and lump sums, but the losses are still very substantial. For a postdoc on £30,000, the difference would be between £900 and £1,200 per year. For a member of staff at the salary cap the difference would be £1,650 or at least £2,200 per year if they currently "take the match".

Is the UCU proposal fairer?

A serious issue with the UUK proposals was that the burden fell most heavily on USS members with salaries up to the £55,000 cap. The full details of the UCU proposals are not yet available, but assuming that they propose no changes to the DC part of the scheme above the cap, everyone above the cap loses at least as much in cash terms as those at the cap, and more if they currently take the match. However, expressed as a percentage of salary the losses are smaller than for members below the cap, so the UCU proposals remain least disadvantageous for the highest earning members of USS. Would a reduction in the employers' contribution to the high earners' DC portion of the scheme enable the increase in deductions from lower earning members to be smaller?