More about the USS changes
There is no doubt that everybody will be worse off as the result of these changes. Pensions are complex and it is very important to plan your retirement in good time: if you leave it to the last few years it is too late to make up any shortfall.
When planning for your retirement can consult the very useful factsheets and modellers on the USS website and it may be wise to talk to a pension-qualified Independent Financial Advisor (eg, USS trained IFAs).
If you have queries about your own pension position or want future projections you are strongly advised first to talk to Payroll and Pensions in the Finance Office.
- What are the main changes to USS?
- What do USS members stand to lose from these changes?
- But I'm exempt from these changes, aren't I?
- What is a Career Average (CARE) pension scheme?
- What is wrong with Career Average pensions?
- What about this RPI to CPI business?
- What about the caps on pension increases?
- Can I calculate my own loss?
- What about the loss to my pension on redundancy?
- But public sector pension schemes are unaffordable, aren't they?
- What about USS, is it unaffordable?
- Is this dispute about more than money?
- What, exactly, do we want to negotiate about?
On 1 October 2011 our employers unilaterally imposed very detrimental changes to our pension scheme, which include:
increased contributions, from 6.35% to 7.5%
- effectively a 1.15% reduction in salary
much lower 'career average' pensions for new staff
- the loss over a new lecturer's career could amount to over £250,000
- existing staff who take a 30+ month career break are affected too
an unfair and divisive two-tier scheme has been created
- this is terrible legacy to leave for the younger generation
- and there is little doubt that they will seek to move existing members onto these inferior terms over the next few years
reduced protection against inflation for people drawing their pensions
- government-led switch from RPI to the lower CPI
- USS saved £billions, an unexpected windfall, at our expense
- further capped when inflation exceeds 5%, as it does now!
increase in normal pension age
- was 60 or 63.5 for many people, now 65
- rising to 66 in 2020
- linked to State Pension Age, which the government will hike even further
reduced pensions for staff made redundant
- if you lose your job you could lose over £100,000 in pension too!
Our preparedness to take sustained action is based on the extent of pension losses that people face and the recognition that neither we nor future generations will ever win back what we lose now! The USS pensions dispute briefing states that:
- A 25-year-old researcher and current member of USS who left the scheme after 12 years would lose £23,000 in pension benefits. A new entrant to the scheme would lose £53,000.
- A 30-year-old USS member and lecturer, who continues to work to the new retirement age of 65, would lose around £130,000 in expected benefits over the course of their retirement.
- If that lecturer was a new entrant to the scheme they would lose around £369,000 over the course of their retirement.
- If that 30-year-old lecturer was promoted in 10 years' time to a senior lecturer position and worked through to 65 they would lose £150,000 if they were a current USS member, and £461,000 as a new entrant over the course of their retirement.
That's not all:
- In a particularly mean-spirited move, people above the age of 55 (or 50 in many cases) will lose the right to an unreduced pension if made redundant from October 2014, giving potential pension losses of around £100,000 for some. Despite our employer's protestations that the changes to USS are necessary to safeguard our pensions, this measure does not save the USS pension scheme any money whatsoever: it is designed to make it cheaper for the University to sack you!
New entrants to USS, and people who leave USS and return after more than 30 months, are now being put into the Career Average (as opposed to Final Salary) section of USS.
Existing members will remain in the Final Salary section, which calculates the pension on the basis of an accrual rate of 1/80. You will get a pension of 1/80 of your pensionable salary (broadly, final salary) for each year of service in the scheme.
So a person who has been in USS for 20 years and whose salary on retirement is £40,000 can expect an annual pension of 20/80 x £40,000 = £10,000, plus a lump sum of 3 x pension = £30,000.
Career Average Revalued Earnings (CARE)
It is not straightforward to calculate a Career Average pension. Basically, a pension is calculated at the end of each year of service based on that year's salary, and added to a 'pot'. The 'pot' is adjusted each year for inflation (re-valued so that it's 'worth' keeps up with the chosen inflation measure).
As a general rule, and particularly for people whose salary rises throughout their career, unless the accrual rate of a Career Average pension scheme is more generous than a final salary scheme, the Career Average will yield lower pension benefits.
This excellent BBC page gives more information: How Career Average pensions work.
UCU doesn't even oppose Career Average pensions in principle. In fact, there are good CARE schemes in existence both in the private sector and in the public sector, such as in the Civil Service. There are also positive aspects to CARE schemes. For example, they prevent the lower paid members having to subsidise Vice Chancellors who enjoy ramped up salaries at the end of their careers.
The key point about the proposals for new entrants is that the particular CARE scheme implemented by USS will result in dramatically inferior level of pension benefits for new entrants, compared with those in the final salary scheme. Our employers have designed the CARE scheme with the same accrual rate as the final salary scheme, 1/80, whereas UCU calculates that an accrual rate nearer to 1/65 is required to yield benefits comparable to the final salary section of the scheme.
In other words, the design of the current USS Career Average section is much inferior to the Final Salary section and builds an unacceptable two tier benefit structure into USS. That is unfair (particularly to new entrants, who tend to be younger people; and re-joiners after a 30+ month career break, who are more likely to be women). It is also very divisive. Experience elsewhere with such divergent two tier schemes suggests that our employers will be likely to return in five or ten years to put everybody into the inferior section.
One of our key negotiating aims is to improve the Career Average design, not only because that is better and fairer for new entrants, but to help protect existing members from 'divide and rule' tactics (staff with inferior pensions have no reason to defend the shrinking minority of staff with much better pensions). But it is the level of the pension benefit that is the issue of dispute, not necessarily the form of the scheme.
No, nobody is exempt from all the changes! The much-touted 'exemption' for people who are over 55 on 1 October 2011 exempts you only from a relatively small change, that to your "normal pension age". That means that that the definition of "early retirement", and the calculation on which your pension is reduced if you retire early (voluntarily or through redundancy), will differ from a non-exempt person, but in most cases only slightly. In many cases, an exempt person could end up a few hundred pounds a year better off than a non-exempt person, but that is all.
If you were over 55 on 1 October 2011 you are not exempt from measures that could potentially damage your pension a great deal more - such as the switch from RPI to CPI indexation, the caps on pension increases and the changes to pension protection on redundancy if you are below the age of 60 when the redundancy happens.
In the autumn of 2010 the Government imposed a switch of pension inflation-proofing all pension schemes which, like USS, are have their annual inflationary increase linked to 'official' (public sector) pensions. No longer will these pensions be increased each year by the Retail Price Index (RPI), but by the historically-lower Consumer Price Index (CPI). As well as the formula used to calculate CPI being less generous than that used to calculate RPI, the CPI measure excludes important costs such as council tax, mortgage interest, house depreciation, TV and road fund licences.
Pension experts have calculated that introducing this change could cut pension benefits over retirement by 15% - 25% and the underlying costs of pension schemes by as much as 10% because after a typical retirement of 25 years £1,000 of pension could grow to £2,480 with RPI and only £2,094 with CPI. This estimate is based on the historical 0.8% difference between the two indices but, according to this BBC article, "new projections published at the time of the Autumn Statement showed the government is now assuming the gap between the measures will widen from 1.2 to 1.4 percentage points a year" and "The Office for Budget Responsibility, the independent but government-funded economic forecaster, said that by 2016 the gap between CPI and RPI could be as high as 1.8 percentage points, predicting that CPI will go down to 2% by then, while RPI stays higher at 3.8%."
The change that our employers initially put forward was to switch from RPI to CPI indexation for pension benefits earned by future service only. They intended that the pension benefits of past accrual remain indexed to RPI, the index that was in force when those pension benefits were earned. But in November 2010 the Government unilaterally and with very little prior consultation announced that the indexation of all pension benefits (past and future accrual) of pension schemes linked to 'official pensions' (which includes USS) would be increased by the lower CPI measure.
So not were the goalposts moved in a most confusing fashion right in the middle of our own USS formal consultation, but pension schemes received an unexpected windfall of £billions. A difference of only a few tenths of a percent between the two indices could have a very serious effect when compounded over 10, 20 or 30 years. Don't just take our word for it; a stark warning recently in The Telegraph says that this change alone could reduce the value of pension benefits by an average of between 15% and 25% and cause many to struggle in the last years of their retirement because their payments will lag behind the 'real' rate of inflation (the average USS pension is about the same as the teachers pension on which their figures are based - just £11,000 and far from "gold-plated").
Because this change was largely unconsulted, several trade unions pursued a judicial review. Unfortunately, they lost. TUC general secretary Brendan Barber said: "This is a disappointing judgment for pensioners and scheme members, whether they draw a private, public or state second pension. But we take great heart that the court accepted the argument that the government did this to cut the deficit rather than carry out a proper consideration of the best way of measuring the cost of living for pensioners, even if only one judge said it was unlawful" (quoted in this Guardian article).
Not only will our pensions when in payment be linked to the lower CPI measure for the purpose of inflation protection, but the annual inflation increases will be capped. For pension benefits accrued after 1 October 2011 you'll only get half of any increase between 5% and 10% CPI and no increase at all for any amount that inflation exceeds 10%. We've got used to fairly low inflation during recent decades, but some of you will remember rampant double-figure inflation in the 1980s and, worryingly, governments tend to encourage high inflation if they've got a deficit to eat up.
Leeds UCU noticed that CPI inflation has hit 5.2% in the very month that the 5% cap was introduced.
The USS scheme guide has a range of useful factsheets and interactive modellers that can help you to work out your future pension and options. Unfortunately, they don't show you how what you get now compares with the pre-change situation.
Our employers are imposing a change to pension rights on redundancy that is a charter to sack people more cheaply! This is one of the issues that our negotiators want to focus their opposition on.
Will I be affected?
The loss of your right to an unreduced pension on redundancy will affect you if you retire early due to redundancy or under a Voluntary Severance / Early Retirement (VSER) scheme from 1 Oct 2014 onwards. You may retire (that is, claim your pension) if you are 55 or over; or 50 if you have a "protected pension age" on account of having five or more years service and having been paying into USS continuously since 5 April 2006.
What loss of pension might I incur if I retire voluntarily or due to redundancy?
A Senior Lecturer made redundant at age 58 with 20 years' service will currently get an annual pension of around £13,500 plus a lump sum on retirement of around £40,500. Under the new imposed terms, that pension could be reduced to £10,250 pa (£3250 pa less) with a lump sum of only £30,500 (nearly £10,000 less). So over a 22 year retirement, the loss to that lecturer due to changes in USS redundancy terms alone could amount to £80,000.
How is that calculated?
The calculations are difficult and a lot depends on individual circumstances, but the reduction in pension will be approximately 4% for every year that you retire early relative to the USS "normal pension age"; which varies according to complex rules, but age 63.5 is a good approximation (for the full picture see this tranched calculation).
On that basis, somebody who retires at 58 will see their pension reduced because they are going 63.5 - 58 = 5.5 years early @ 4% per year = 22%. Somebody going at 59 will have an 'actuarial reduction' of some 18% and a 55% year old will get a massive reduction of 34%.
But I'm exempt from this change, aren't I?
Most people are not. 'Exempt' people (those over 55 on 1 October 2011) will, as at present, be able to retire without actuarial reduction from age 60 so long as they have the employers permission to retire (which will be the case in the event of redundancy or VSER). However, these so-called 'exempt' people should realise that they will face the actuarial reduction if they are made redundant or retire before they reach the age of 60.
But won't the University make up my pension?
Under the current arrangement the University is obliged to pay an "Early Retirement Funding Charge (ERFC) to compensate USS for paying an unreduced pension on redundancy or VSER. This arrangement was intended to protect members in their fifties who, it is recognised, have reduced prospects of getting another job and have few working years left to make good their retirement plans after a major blow to their finances.
Under the new rules, in about two years time (from October 2014) the ERFC becomes optional on the employer, not mandatory, although the University may augment a pension at its discretion. The ERFC for people in their fifties with 25 or more years service can easily be in the region of £100,000. How confident are you that the University will pay a full ERFC for all redundancies when the sector is being reorganised and finances are being squeezed as never before?
But USS can no longer afford to pay early pensions unreduced, can it?
Our employers representatives have been very sneaky! They presented their imposed changes as necessary to safeguard USS against future risks to its finances - yet the change to our rights on redundancy does not save USS any money!
Making the mandatory charge on each individual institution into voluntary compensation saves the institutions money, not USS. And not much at that! UCU has established that the cost of retaining the current arrangements would be just £28 million. To put this into perspective, this represents 0.19% of total staff costs in the sector. Truly, this is not about the health of the pension fund, it is about cheaper sackings.
If you are over 50 and worried about redundancy then you are strongly advised to talk to Payroll and Pensions in the Finance Office, who can give you personalised quotes of the pension you can expect to get at various ages.
UCU recognises that some changes are necessary so that USS can guarantee to meet its future liabilities to pay everybody's pensions. After all, people are living longer, so drawing more in pension payments from the scheme.
UCU are willing to agree to changes and have repeatedly put forward their own specifications for change. However, we are not willing to agree to the present changes, which we believe go far further than is necessary to safeguard USS.
Our negotiators firmly believe that further concessions can be achieved and are affordable from the "buffer" that is now built into USS. But what better time could there ever be for our employers and politicians to play on deficit fear and national sacrifice to force through disproportionate changes regardless, on the way to a privatised, low-overheads HE sector?
The financial crisis has worsened and deepened, particularly in Europe. In response, the government has extended its policy of “quantitative easing” which has resulted in the yield on government bonds (Gilts) sinking to an all-time low – in fact, fluctuating around zero. The collapse of the Gilt yield has had a major and detrimental impact on the estimated funding level of USS as measured by the contested methodology which has, at least until very recently, been practically imposed by the Pensions Regulator. This methodology insists that the Gilt yield must be the key factor in estimating the value of USS liabilities. This is why, at its most recent on-going valuation, the funding level of USS was calculated to have as low as 77%.
UCU would contend that this paper exercise bears little relationship to the real value of assets and liabilities and that these figures have not emerged from a formal triennial valuation so do not require any immediate action from USS. However, in terms of the negotiating environment, the publication of figures at this level is likely to lead to a hardening of the employers’ position. It is hoped that there may be a change to the funding methodology used by the Regulator but, if not, it is almost certain that USS will have a significantly larger deficit following the next formal valuation in 2014.
The situation is further complicated by the fact that the introduction of the new CRB section of USS in 2011 meant that the final salary section became a closed scheme. From this point onwards, the final salary section would have no new entrants (apart from returners with protected rights). Inevitably, therefore, contributions to the final salary section will fall as the number of members is reduced while the liabilities and costs falling due will increase as the ageing membership retires and claims pensions. The final salary section will, therefore, become more expensive per member to fund.
The intention was that this extra cost would be more than made up by the introduction of the new and inferior CRB section for new entrants. The saving was expected to create a very large “buffer” which would cover that additional cost of the final salary scheme and protect the employers against future cost pressures and any threat of contribution rate increases. The likelihood of a larger deficit in 2014, leading to a more expensive recovery plan, will eat into the value of this “buffer” though, in the view of UCU, it will not eliminate it.
A joint working group of employers and UCU have undertaken a comparison of USS CRB scheme with the proposed heads of agreement with Teachers Pensions CARE due to come in April 2015. The comparison shows clearly that the proposed Teachers’ Pension Career Average (CARE) scheme provides better benefits than the USS Career Average (CRB) scheme.
Details of the comparative work and a consultation with branches and members can be found here.
The cost and benefit comparison demonstrates clearly that new entrants to employment in pre-92 universities are being offered pension arrangements which are markedly inferior to those on offer to new staff recruited to schools, colleges and post-92 universities. This is bound to build up recruitment and retention problems for the future and this, in turn, puts pressure on pre 92 employers to give serious consideration to proposals designed to close the gap between USS and TPS.
Therefore, the principle negotiating objective is to close the gap between the new Career Average (CRB) section of USS and the final salary section by seeking broad comparability with the TPS. Other objectives concern the protection of those aspects of USS which remain superior to TPS and that, in particular, a high priority should be given to defending the position of those USS members who have the right to receive their pension without actuarial reduction if made redundant.
See the current negotiating objectives.
Note: some of the documents on this webpage are in PDF format. In order to view a PDF you will need Adobe Acrobat Reader