Future benefit changes alone won't solve uni pension funding problems

Out-Law Analysis | 28 Feb 2018 | 11:59 am | 2 min. read

ANALYSIS: Proposed changes to university staff pensions will go some way towards making these schemes affordable for the future, but will do nothing to tackle a huge historical deficit.

There aren't many pension schemes bigger than the Universities Superannuation Scheme (USS), and the deficit is correspondingly gargantuan: it was most recently estimated at £6.1 billion, against assets of £60bn. But on the assumptions previously used, the deficit was estimated at £12.6bn. These are huge numbers, which are significantly influenced by what actuaries decide they feel comfortable with at any given moment.

Against this background, the scheme employers are proposing benefit changes which would bring final salary benefits to a close for future service from 1 April 2019 at the earliest, and introducing a money purchase benefit that would be considered generous by most standards.

These proposals have been agreed with member representatives. However, as the current strikes show, some member representatives seem to be out of step with large parts of the scheme membership – and the members seem to have students firmly on their side at least in principle, with over 60% supporting their actions.

To address the myths: first, the salaries of vice-chancellors are not going to plug the USS funding gap. Their combined annual remuneration represents a tiny rounding error compared with the deficits set out above.

Secondly, there is nothing inherently bad about money purchase. In fact, for some USS members, particularly younger members, the changes might well represent an improvement for them, at least in the short term. Defined benefit schemes give cross-subsidies all over the place, with the bulk of the cost of future service provision going towards providing the benefits of those close to retirement.

But the scheme's own figures show that, on average, employees will take a big hit from the changes: USS estimates the present cost of future final salary provision at 37.4% of payroll, of which the employees pay just 8%; while future money purchase benefits are 17.25% or 21.25% of pay, of which employees would pay 4% or 8%. Treating pensions as part of the pay package, this means that scheme members are being asked to take a cut to their remuneration of, on average, over 12%.

It's also worth noting that the oldest employees also have little to fear from the changes, as they have already substantially completed the accrual of benefits. The group for whom they will have the greatest impact are those in their 40s and early 50s. To date, the employers have not proposed any kind of transitional measures, although age discrimination laws make targeted assistance difficult, though not impossible.

For most members, questions of how the past deficit will be funded should be of more immediate priority. A pension promise is all well and good, but it needs the funds to back it up. The proposals for future service are not going to plug the existing deficit, which will still need plugging regardless of what is done for the future. Right now, the USS still has a substantial deficit, and there isn't the money immediately available to make that problem go away.

Alastair Meeks is a pensions law expert at Pinsent Masons, the law firm behind Out-Law.com.