4.7+% cut, squeezed middle, indexation broken - is the ACAS deal any good?
Breakthrough - of a sortUCU 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 The 1% "match" will be withdrawn.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 brokenA 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 revaluation: capped at CPI up to 2.5%". Therefore, if the government's favoured lower inflation measure exceeds 2.5%, the value of benefits accumulated in the scheme will fall in real terms.
How likely is inflation to exceed 2.5% when the Bank of England is tasked with targeting 2%? You may have noticed that quantitative easing (printing money) and the fall in the value of the pound due to Brexit have pushed CPI to over 3% in the last year. The Bank's forecast (Figure 1) for CPI published in November 2017 shows that they expect 2.5% to be very close to the most likely figure for CPI in 2019 and 2020 with a nearly 50% chance that it will exceed that value. Thus it is highly likely that the value of the pension benefits accrued under the new scheme will fall in real terms.
The statement is actually ambiguous. This indexation cap will almost certainly replace the current one (CPI up to 5%, (5+(CPI-5)/2)% up to 10%) on all benefits in the scheme. Your past benefits are not safe. This is what is meant by "risk sharing". Changing the indexation regime for previously accrued benefits is getting into legally dubious territory.
|Figure 1. November 2017 inflation forecast from the Bank of England|
Less than a 5% pay cut - for mostThe retention of a defined benefit component to the pension is an important aspect, but the reduced accrual rate and increased contributions mean that the value of it is significantly reduced. I showed previously how to use HMRC's method to calculate the value of your annual contributions into a pension scheme. If you do this you can then work out how much extra you would have to contribute into an alternative pension, or as additional contributions into USS investment builder, to make up the difference.
The decrease in benefits is shown as a percentage of salary in Figure 2. This figure includes the additional 0.7% contribution you will make into the scheme. For members with salaries up to the new £42,000 cap, it "only" amounts to a 4.7% cut if they currently take the match (1% less if they don't).
|Figure 2. Effect of the UUK, UCU and ACAS agreed proposals on pay and benefits expressed as a percentage of salary.|
The even more squeezed middleFor those between the new £42,000 and old £55,500 caps, and even into the heady heights of Professorial salaries, the situation is worse. If you are currently at the £55,500 cap, the ACAS agreed proposals are as bad in percentage terms as the UUK ones. As with all the proposals so far, those with the highest salaries, and the most ability to pay, are affected least in percentage terms. Given that females are over-represented in the lower salary bands, I'm amazed that this has not been challenged on equality grounds.
How much will you lose?Figures 3, 4 & 5 show the value of the annual contributions made to pensions under the various schemes that have been proposed, and the difference between them. Note how closely the ACAS agreed scheme matches the previous UUK proposals, but remember that you will also be paying and additional 0.7% of your salary in addition to the sums shown in the graphs.
|Figure 3. The value of annual contributions to the pension schemes proposed.|
|Figure 4. The difference between the value of annual contributions into USS under the various proposals for members who do not take the match. Note that under the ACAS agreed scheme, members will have an additional 0.7% of their salary deducted in addition to numbers shown here.|
|Figure 5. The difference between the value of annual contributions into USS under the various proposals for members who do take the match. Note that under the ACAS agreed scheme, members will have an additional 0.7% of their salary deducted in addition to numbers shown here.|