The USS changes affect rank and file members disproportionately


In a previous post I showed how to calculate the cost of making up the loss of benefits under the proposed changes to USS using HMRC's method for valuing contributions to a defined benefit pension scheme. For those calculations I covered salaries up to the current salary "cap" of £55,500. In this post, I extend the calculation to cover colleagues whose salaries exceed the cap, right the way up to VC or Principal levels showing that the proposed changes are actually neutral for salaries around £250,000!
Above the salary cap, employers currently pay 12% in defined contributions while members pay 8%. Under the proposed changes, the member contribution will remain the same while the the employer contribution will rise to almost 13.25%. Contrast this system with e.g. the NHS pension scheme where the ability to pay for benefits is factored in and the higher salaried members pay up to around 15%. The effect of the different contribution rates can be seen in Figure 1. Above the salary cap, the increased employer contributions above the cap mean that the lines start to converge.
Figure 1. The annual value of pension contributions. The graph shows the values of the annual contribution to a pension under the proposed USS scheme (DC, actual), the current USS scheme (current, HMRC method) and the current scheme including the employer's 1% "match" (current+M). Under the "match" you actually contribute another 1% on top of this.

Mid ranking salaries worst hit

You might expect that the proposed changes would share the burden of fixing the apparent problems with USS progressively based on the ability to pay, or at the very least equitably. In fact, as can be seen in Figure 2, which shows the additional annual  contributions you would have to make to buy the lost pension benefits, the pain falls unequally on members whose salaries are below the salary cap.
Figure 2 The difference in annual value of the proposed (DC) and current USS pension schemes without (current) or with (current+M) the "match".
Expressed as a percentage of salary, the effect is flat for those below the salary cap, but gradually decreases for those above the cap (Figure 3). This is a sure sign of a system that is not progressive.
Figure 3 The difference in annual value of the proposed (DC) and current USS pension schemes without (current) or with (current+M) the "match" expressed as a percentage of salary.

Losing the match hurts everyone

The loss of "the match" is a real pay cut for everyone, even the most highly paid. For everyone who currently, or might in future choose to take the match, this is a 1% pay cut.

VCs and Principals feel no pain

It's notable that at around £250,000, for those not taking the match, the changes are actually neutral. I'm not sure how many VCs and Principals are actually still in USS, but if they are, apart from the additional risk in the value of their pension that they are being asked to shoulder along with the rest of us, the proposed changes do not disadvantage them at all!


Comments

  1. Brian Smith26 February 2018 at 02:45

    Grounds for a challenge under equalities legislation given that women are typically paid less than men?

    ReplyDelete
  2. Brian Smith26 February 2018 at 03:18

    According to USS figures used by AON in modelling the the future pensions that might be expected under the DC scheme, 50% of USS members' salaries lie between £35k and £55k.

    ReplyDelete

Post a Comment

Popular posts from this blog

4.7+% cut, squeezed middle, indexation broken - is the ACAS deal any good?

Image
Breakthrough - of a sort UCU have this evening (13th March) posted the deal negotiated with UUK at ACAS . The proposal on the future of USS to be put to the union tomorrow is that defined benefits are retained for salaries up to a lower cap of £42,000 , but at a reduced accrual rate of 1/85ths . In return, members will pay an additional 0.7% and employers 1.3% . The 1% "match" will be withdrawn . I'll show what this means in terms of annual pension contribution value later, but first there is an even more bitter pill hidden in this deal. Indexation broken A key part of any defined benefit pension scheme is that the benefits should be indexed so that they keep up with the cost of living, otherwise inflation will erode their value and leave them worthless. You could actually be better with a defined contribution scheme (of the right value) than a defined benefit scheme that is almost certain to lose value. The ACAS agreement includes the line " Indexation and rev...
Read more

The USS changes are a 5% pay cut

Image
Risk is not the only change The change in who carries the risk for providing your USS pension, employer or employee, is a huge issue, but not the only one. The proposed changes also represent a definite and quantifiable cut to pay and benefits. It can seem difficult to quantify what the effects of the proposed changes to USS will be for an individual. The models produced usually try to estimate what the pension you will eventually receive will be under different scenarios, but while these all show that the proposed changes will reduce pensions substantially when and if you get to enjoy them, there are many variables that make these predictions difficult to realize for each individual. An alternative view - annual contributions Figure 1 The annual value of pension contributions. The graph shows the values of the annual contribution to a pension under the proposed USS scheme (DC, actual), the current USS scheme (DB, HMRC method) and the current scheme including the employer...
Read more