I was wondering how to react to news that the UUK (the employers of university staff) is proposing to axe future Defined Benefit accrual into the USS.
Anger or sorrow seemed the two main candidates as I flew back last night. I was certainly angry that certain people were celebrating the proposals on twitter. But I was really upset for the many people I know who work for universities. Coming on top of the problems for BSPS members and the ongoing conflict at the Royal Mail, this is a hammer blow for tens and thousands of people who signed up to certainty and will get something else.
To be precise, UUK propose the current level of employer funding (18%) be paid into a DC account and not earn members further rights to a guaranteed income for life – a pension.
My views on closing USS for future DB accrual are known. But I couldn’t help blurting them out.
Thoughts of Mike Otsuka
But this morning , turning to the thoughts of Mike Otsuka , I read a measured and sensible article that I hope will get the circulation it deserves.
Mike who’s the staff union rep (UCU) at the LSE is thinking about the strike ballot that’s been called.
A YES vote will be interpreted as a mandate for sustained and disruptive strikes, since Sally Hunt writes: “There is no point pretending that anything other than sustained strike action with the aim of hugely disrupting (and not rescheduling) lectures and classes in the New Year will make the employers listen.”
There is, however, also no point in getting our employers to listen to demands for things they are incapable of delivering. Our employers cannot deliver something the Pensions Regulator won’t accept. The Pensions Regulator has stated in a letter to USS that the level of investment risk of the valuation that USS proposed in September is at the limit of what they would find acceptable. The current level of defined benefit on salaries up to £55,550 exceeds this level of acceptable investment risk for future accruals.
In order to achieve the required majority vote of a majority turnout, UCU will need to offer a proposal for us to rally around, which is realistic about what can actually be achieved by the strikes we’re being asked to authorise. It will also need to be worth the disruption and sacrifice.
The following is both achievable and attractive: a WinRS (wage in retirement scheme — see linked slides 10–12 including notes, this post, and this slide presentation by First Actuarial’s Hilary Salt) funded in perpetuity by USS’s current growth portfolio, but with a very modest core DB promise that remains within USS’s and tPR’s level of investment risk, with all further pensions increases contingent on investment returns. If investment returns exceed a modest CPI + 1.85%, it will be possible to provide us with pensions beyond the level of our current CRB 1/75 accrual.
WinRS is something our employers can deliver, which they also have an interest in adopting. But if they initially refuse, it’s something worth going on sustained strike to achieve.
So I hope UCU proposes WinRS, or something else that is both attainable and attractive, rather than something our employers can’t deliver, such as a preservation of the DB status quo.
The final paragraph is open to question, “can’t” and “won’t” aren’t quite the same. Reading the employer’s argument, it relies on the Pension Regulator’s assessment of the employer covenant (which is quite different from that of the employer covenant specialists employed by the Trustees). EY and PWC rated the covenant as good and the Pensions Regulator thinks it’s not.
Mike is prepared to accept “won’t” as “can’t” on the basis that future accrual will continue, albeit at a modified rate. He will get some stick from that from hardliners and I’m sure he knows it. But I think Mike is being smart. There are matches you can win without contesting every set piece.
For the sake of all parties, I hope that the tone of the debate is as measured and temperate as Mike’s response and that the arguments for and against, don’t lead to the kind of disruption foreseen by UCU.
As with the Royal Mail workers, my sympathy is with USS members who are seeing their pension promises about to be broken in return for a cash settlement.
Mike’s proposal is for a different way to share the risks of funding, one that has been developed by colleagues of mine. In introducing this idea into the debate at this critical point, Mike has done a good thing and I applaud him.
I hope that he gets credit for this brave and timely statement.
Otsuka – forever young!
Thanks, Henry, for your comments on my post, which are too generous to me! Just a few words about “can’t” versus “won’t”. I think tPR’s stance really does render it impossible for employers to continue to provide DB at its current level. tPR says that, even if we accept the EY PWC rating of the covenant as ‘strong’, the level of investment risk proposed in the September consultation document is at the limits of what they would find acceptable. I also think tPR is unreasonable in its stance. But we can’t go on strike against tPR.
But it clearly is time that we closed the pension regulator. Their comprehension of risk is childish. Their interventions extremely destructive to our social welfare.
“UUK propose the current level of employer funding (18%) be paid into a DC account”: what will be the corresponding rate of employee contribution?
Actually, under the current proposal, only 12% of the 18% employer contribution would go into DC pension pots. The remainder would go to deficit recovery contributions, expenses, and residual DB pension for death in service and incapacity. I believe that the employee contribution would remain at 8%.
However, if there are just the deficit contributions going into the DB fund, will the current 2.1% be sufficient? At that level – maybe 200m/yr – the outgoings in pensions, 2bn/yr and increasing, will not be covered by the deficit contributions plus income of the fund (about 1.5bn), so they will have to start running down the capital.
If the required deficit contributions increase, will that be at the expense of the 12% DC and the 1% match? It appears that the employers’ total contribution will be limited to 18%, so I can’t see where else it might come from.
Richard, I think DRCs have increased, under a revised valuation, to about 4%. There will be a further 1% to retain the death in service and incapacity and ill health protection of the current DB, and then some fraction of a percent for expenses. So that accounts for about 6% of the 18%, and the rest will consist of the 12% employer contribution to DC. I don’t think the match will survive.
You’re right that this will make the DB scheme cash flow negative, and they will need to start selling assets to meet future DB payments.
In this post, I calculate the magnitude of the cuts to our expected pension income under UUK’s proposal: https://medium.com/@mikeotsuka/by-usss-own-estimates-uuk-s-dc-proposal-would-reduce-our-future-pensions-to-40-75-of-our-23f71f5cd805