Some simple maths that show your pension is perfectly affordable. And worse, being used to pay for employers’ past underpayments.
Check you pay slip, today the combined employee and employer pension contribution rose to 30.7% (9.6% from you and 21.1% from the employer). USS wants to increase this further in October 2021.
Below we explain the reality that the contributions are more than sufficient to cover the benefits, are paying down the employers’ guarantee. And worse still, employers and USS are playing a long game to destroy your defined benefits pension.
The simple math
For every £1000 you earn, £307 is put into the pension fund (£96 from you and £211 from the employer).
For this 30.7% you get an annuity of 1/75th once you retire until death (£13.33 a year) and a lump sum On retirement of three times that (£40).
At the moment the USS pensionable age 65 and life expectancy for a mid-career (~45) male is 36 years (living to ~81 years), or 16 years of pension. For women it is a couple of years more (the average lifespan for a 45 year old woman is about 84 years).
There are slightly more men than women working in academic roles in HE in the UK, so the average expected lifespan is around 82.5 years.
This means the pension fund needs 20.5 years of pension payments for every male member (3 years of lump sum and 17.5 years of payments).
But, £307 is 23 years of pension payments (23 times 1/75th is 0.307).
You are paying in for 23 years of pension but only expect to receive 20.5 years. You are paying 2.5 years more than you expect to receive.
Fine, you might say. Better to over pay a little to be sure of our return:
- The stock market goes up and down and we wouldn’t want any colleague to have less pension because of that, and
- Even though life expectancy in the UK has fallen recently and the NHS is underfunded, we just might live longer, plus
- We need to pay USS employees for managing the fund.
But, you are paying in much more than that.
Inflation and stock market returns
Your pension is indexed to inflation, that would suggest that some of these extra years is to cover for inflation. But, historically stock market returns beat inflation by 4-8% per year.
This means, we ought to be able to contribute 4-8% less than our expected annuity. That margin above inflation should more than cover increases in life expectancy and fees to manage the fund (when actually the ONS tables show expected life spans falling).
Instead we are contributing almost 13% more (2.5 years of over payment / 19.5 years of expected return).
So what are the extra contributions for?
Part of the reason for the increasing contributions is to pay down the hypothecated deficit.
In a previous email we laid the foundations for why the deficit is nonsense. By de-risking investments (moving investments to low return government bonds), the fund will not manage to match inflation. And, by valuing the fund as though the assets were invested in government bonds this effect is amplified in the valuation.
This makes no sense because this is a multi-member, multi-generational, multi-institution fund. The downturn in the stock market some years is covered by upturns in other years (because when it does well, retirees don’t get increased pensions). The outgoing head of investment strategy has admitted as much (paragraph 5):
The ‘deficit’ is therefore artificial. The extra contributions are in part paying for a poor investment strategy (looking forward) and some are paying for this hypothecated deficit.
The employers are supposed to be the guarantors of underperformance in the pension fund. However, from 1999 to 2008, USS approved employers making underpayments.
In effect, employers by requiring you to shoulder extra payments are wriggling out of at least part of their guarantee. Is there any wonder staff do not trust management?
This is why a key demand of the current pensions campaign is no detriment. You should not be paying for employers’ historical underpayments.
So what explains employers behaviour
Employers do not want defined benefit pensions because the hypothecated deficit or surplus goes on their balance sheet. Lenders take this into account when lending money for grand projects and require covenants that debt to equity ratios do not move past certain limits.
The variability in the stock market conditions means that the valuation will fluctuate and management can not borrow as much money as they would like. Buildings matter, staff don’t.
Having lost the battle to simply eliminate your defined benefit pension in the industrial action two years ago, employers are now playing a longer game.
Employers are happy to let USS continue to raise contributions (and have you pay for their historical underpayments). Employers will cut costs in other ways and wait for the contributions to get to point where employees say, this is not worth the money.
Of course, should the defined benefit scheme close, you can be sure of two things:
- employer contributions will shrink, and
- you will have no choice about where you take your employer contribution.
USS is also to play this longer game because a defined contribution scheme, with locked in members, makes their job easy.
If we play their game, the coin is loaded: Heads USS and employers win, tails you loose.
The horrible irony is that as universities borrow billions, the a good chunk of the interest they pay will be income to other people’s pension funds.
The equalities connection
There is an equalities dimension to all of this. Women and minority colleagues tend to get paid less and promoted later than men and non-minority colleagues. This means cuts to pensions (though benefit cuts or contribution rises) have a higher life-time effect on discretionary income. Likewise, because women tend to live a little longer than men, any cuts to benefits hurt them more.
Vote now for industrial action on your pension
Vote now for industrial action on pay and equalities
PS: As a reward for getting to the end, what do you think will happen when the defined benefit fund closes (and the last member has passed away) and their is money left? Are you willing to bet it goes to your decedents?