We’ll be posting commentary and analysis of the dispute as it progresses. For the latest updates see: www.ucu.org.uk/strikeforuss. Our Pensions Officer Richard Farndale has prepared a very clear slide presentation on the proposed changes, and we have a detailed leaflet addressed to Cambridge staff here.
On January 23 Universities UK published a press release entitled “Proposal agreed to reform USS Pensions”. The “agreement” is the decision to impose a UUK proposal (details here) in the face of opposition by UCU negotiators representing all USS members, thanks to the deciding vote of the Joint Negotiating Committee chair, Sir Andrew Cubie. The below outline of the proposed changes makes clear what is at stake for USS members and why major strike action is necessary.
The present scheme
Each USS member presently pays a pension contribution of 8% of their pre-tax pay, and their employer a further 18%, on the first £55,550 of their salary. In exchange for this, for each year’s service a member earns an annual pension of 1/75 of that year’s salary in retirement. They also receive a lump sum of 3/75 of the same at the point of retirement. Both of these payment are uprated with the Consumer Price Index. A member with 38 years’ service can thus expect a pension of just over half of their real-terms career average salary (albeit with years on a salary over £55,550 counting as only £55,550 for this purpose), plus a lump sum of three times this figure.
Above the £55,550 threshold, members continue to pay 8% of salary into their pension, but rather than being tied to defined benefits this money goes into a personal investment fund. (Members have a choice of USS managed schemes in which to invest.) Above the threshold, the employer contributes a further 12% of salary into the individual employee’s fund. The eventual value of these funds depends on the performance of the relevant investments. Within the general pension rules, the member is able to draw on their fund in retirement however they wish. There is, however, no guarantee of any specific eventual value of the fund or income from it in retirement.
The UUK proposal
The UUK proposal is to abolish the first, defined-benefit (DB) scheme and replace it with the second, defined-contribution (DC) scheme for all salary points, albeit with an employer contribution rate of 13.25%. This employer contribution rate is greater than the 12% currently paid on earnings over £55,550 p.a., but it is considerably less than the 18% presently paid on earnings below that threshold. The position of USS is that the difference is accounted for by fund management costs and deficit reduction expenses, presently paid for out of the 18% employer contribution, but to be separately covered by employers under the new scheme. It is, however, highly questionable whether this arrangement represents good value for scheme members.
Impact on USS members
The effect of the proposed change would be threefold.
First, it represents a comprehensive transfer of risk from university employers collectively to individual USS members. Under the current scheme, if USS investments perform worse than expected and are insufficient to cover earned benefits, employers are legally required to provide the funds necessary to ensure pensions are paid. Under the new scheme, if investments do badly, individual members will simply suffer a worse retirement income.
Second, the expected value of retirement benefits will be sharply reduced. The future value of investments is of course uncertain, but all analyses (including the university employers’ own) predict a reduction in the eventual retirement income of USS members of at least 10% and up to 40%. This equates to a total loss of between £60,000 and £200,000 for a typical member. A member of the engineering department, Gábor Csányi, has designed a helpful web calculator that can be used to estimate the potential effects of the reforms on your own pension. (The calculator does not constitute financial advice.)
Third, the changes will have a sharply regressive effect on the distribution of costs and benefits within USS. At present, for salaries above £55,550 the employer contribution to each member’s DC fund is set at 12% (rather than 18%) so as to free up funds for paying down the scheme deficit. Under the proposal, all members will have the employers’ contribution to their Defined Contribution fund held down (to an only slightly higher 13.25%) in order to cover the supposed deficit on already accrued benefits. This means that newer members, due to receive worse pensions, will be subsidising the better pensions of longer established members of USS. It is the university employers who have the legal obligation to fund the scheme’s pension liabilities if its assets prove insufficient. There is no justification whatsoever for these alleged liabilities to be covered by reducing contributions to younger USS members’ pension funds, as is proposed by UUK.
A regrettable necessity or a political choice?
Although these changes have been imposed on grounds of affordability, the basis on which the unaffordability of current benefits has been calculated is opaque, and where it can be discovered highly questionable. (See The USS valuation and the question of affordability.) There is no convincing financial case that reforms on this scale are necessary.
Read this summary of what is at stake. Here is a letter in the Guardian, signed by more than 700 academics, arguing that strikes are the right response to the proposed changes and to the growing marketisation of universities. Signatures are still being collected: add your name to the list.