The USS changes are a 5% pay cut
Risk is not the only changeThe 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's 1% "match" (DB+M) up to the salary cap. Under the "match" you actually contribute another 1% on top of this.|
An alternative view is to look at what the changes mean to the value of your contributions to your pension pot each year. It is easy to calculate the contributions you make in a defined contribution (DC) scheme - it's the amount that you contribute. Under the proposed changes, the contributions total a little less than 21.25% of your salary: 13.25% from your employer and a little less than the 8% that you contribute (some of your contribution will go towards the insurance element such as death in service benefit). For the purposes of illustration, let's be generous and call it 21.25%.
It is harder to estimate what the value of the annual contribution to the defined benefit (DB) scheme is. Your employer currently makes an 18% contribution, but this partly covers the insurance elements and deficit reduction charges. You make an 8% contribution, but that does not mean 8% of your salary goes into the pot. However, HMRC have a simple method for calculating what the annual contribution into a DB scheme is: 16 times the increase in your annual pension plus the increase in your lump sum. In the current USS scheme we accrue 1/75th of our salary in pension and 3/75ths in lump sum each year. Using the HMRC method, this comes to 25.33% of salary if your salary does not change over the year.
So, by HMRC's simple method, the actual contributions made by you and your employer (26%) currently just exceed HMRC's notional estimate of the contribution to your pension (25.33%). But, under the proposed changes, the value of the annual contribution to your pension will be worth nearly 4.1% less, even though you will still be paying the same 8% of your salary!
Losing "the match"It's actually even worse than that. Currently you have the option to "take the match" and get an additional 1% defined contribution from your employer by paying an additional 1% yourself. This is being withdrawn under the proposed changes, so you will lose a further 1% of your salary before tax. If you currently "take the match" you will therefore be nearly 5.1% worse off.
What will you lose?
|Figure 2 The difference in annual value of the proposed (DC) and current USS pension schemes without (DB) or with (DB+M) the "match".|
What does that mean in cash terms? The graphs show the total value of the annual contribution to your pension up to the current salary cap (£55,500) under the different schemes (Figure 1) and the difference in value between the current schemes that include a defined benefit with or without "the match" and the exclusively defined contribution scheme proposed (Figure 2). For a postdoc on £30,000, the difference would be between £1,250 and £1,525 per year. For a member of staff at the salary cap the difference would be £2,266 or at least £2,821 per year if they currently "take the match". These sums represent the additional amount that HMRC think that you would have to pay into a pension scheme each year to bring the proposed DC scheme up to the same level of benefits you currently enjoy.
This is a 4 to 5% cut in your current pay and benefits package for most USS members.