Understanding Pensions Jargon

Defined Benefit and Defined Contribution schemes

In a defined benefit (DB) scheme, the amount of pension which will be paid on retirement is determined in advance, currently in the case of USS as a proportion (1/75) of the first £55,550 of salary for each year of employment. In USS, this takes place through the Income Builder section.

In a defined contribution (DC) scheme, the amount paid in by the employer and employee is set, and cash accumulates through investment until retirement. In USS, this takes place through the Investment Builder section. This yields a cash sum on retirement, that can be used to purchase an Annuity, but the eventual value of the pension depends on the investment performance of the money set aside in the employee’s pension pot prior to retirement.

Collective defined contribution (CDC) does not at present exist in the UK, but involves set contributions being paid into a common investment pot out of which pensions are subsequently paid. This enables the pooling of various kinds of risk between the members of the scheme, so as to produce more stable and predictable outcomes from a given contribution. The value of the pensions paid in the end should consequently exceed that in a DC scheme; but it ultimately depends on the performance of investments, as in an individual DC scheme.

Contribution rates

These are the proportion of each employee’s salary which is paid into the scheme or individual pension pot. There is usually one contribution rate for the employee (8% in USS) and one for the employer (18% in USS). The employee’s contribution is taken from their pre-tax pay, and the employer’s paid in addition to that pay.

Accrual rate

This applies only to a DB scheme. The accrual rate is the amount of retirement income earned for each year spent working. Under the current USS scheme the accrual rate is 1/75 of salary up to £55,550. This means that for each year spent earning £37500, for example, a USS member would earn £500 of pension. The accrual for all years of service is added together on retirement to set the value of the retired employee’s pension.

Salary Threshold 

USS is only a DB scheme on the first £55,550 of salary, meaning the maximum annual accrual is £740.67. Contributions above that salary point go into a DC pot. The “salary threshold” in this context is the salary point at which DB accrual stops and any further contributions go into a DC pot. Generally a higher salary threshold is desirable for scheme members, since other things being equal defined benefits are preferable to payments into a DC pot.

Lump Sum

Many pension schemes make a one-off tax-free payment on retirement in addition to paying a regular pension. This is often called the “lump sum”. USS pays a lump sum of three times earned annual pension value on retirement.

Indexation/Revaluation/Uprating 

Because inflation causes wages and prices to increase over time, earned DB pensions and lump sums are often “indexed” or “uprated” (i.e., increased in nominal money value) so their real value (i.e., purchasing power) is maintained even when prices increase.

USS is currently indexed to the Consumer Price Index (CPI), which measures the average price of a range of goods, up to a maximum total increase (a “cap”) of 10% per year. CPI increases above 5% are only half matched by USS pension increases, though, and are not matched at all beyond a 15% rise. This means that if inflation runs above 5%, the real-terms value of USS pensions decreases.

Indexation is a good thing for scheme members, and the lower any cap is set on uprating the worse for them. (Ideally, for members, indexation would be uncapped so any level of inflation would be matched by increased nominal benefits.)

Deficit Recovery Contributions

These are payments made into the scheme to cover an alleged shortfall between the value of assets currently in the scheme and those required to pay its commitments to existing and future pensions.

Death in Service and Incapacity Benefits

These are benefits paid to scheme members or their dependants in the event of the member dying before retirement or being unable to continue working due to ill health.

UUK

Universities UK, claims to be the representative organisation for the UK’s universities. In reality, it represents University management. UUK negotiates on behalf of employers regarding pay and pensions.

UCU

University and College Union; represents Academic and Academic-related employees in pay and pensions negotiations. Has other valuable functions.

 JNC

Joint Negotiating Committee – a panel of 5 representatives from each of UCU and UUK, with an Independent Chair (currently Sir Andrew Cubie). Responsible for agreeing settlements between UUK and UCU regarding changes to pensions and pay.

tPR

The Pensions Regulator is the public body that protects workplace pensions in the UK. Their role includes ensuring that a pension scheme is viable, and that both the interests of scheme members and the Pension Protection Fund are safeguarded.

USS Trustee

The Trustee is the group of 12 people on the board of USS. They include 3 members appointed by UCU, 4 by UUK, the remainder being independent, mainly from the financial sector.

“No Detriment”

This was UCU’s initial negotiating position, and involved refusing to accept any changes to the USS pension scheme which made the provision worse for members, either by reducing benefits or increasing employee contributions. In February the Union moved to a position of instead demanding that “a decent, guaranteed pension” (i.e. a substantial level of defined benefits) be maintained.

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