David Pitt-Watson and Hari Mann believe there could be a way to settle the ongoing pensions row amicably

University employers and university staff are locked in a dispute about pensions. Both have reasonable positions. The employers say that the cost of the scheme is getting out of control. The employees say that the alternative offer falls well below the income that they expected in retirement. Where next?

University staff find themselves in a similar position to postal workers. The difference is that postal workers and the Royal Mail think that they may have found a way forward. Royal Mail is willing to set aside a decent amount to provide a pension for its employees. They simply need a structure that will allow a pension to be paid, without the employer having to make a promise that it fears it may not be able to keep.

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Here is the irony. It is perfectly possible to get almost as good a pension as is presently provided, and for a similar cost. The pension regime in The Netherlands has been successful in achieving this. While no-one would claim that Dutch pensions are perfect, the country is considered to have one of the best pension systems in the world. In the UK, the government hasn’t implemented these “collective defined contribution” pensions (CDCs), despite legislating for it in the 2015 Pensions Act.

That is why Royal Mail, and its trade union the CWU, are uniting to get the government to write those regulations. It is why Frank Field MP’s Work and Pensions Select Committee has launched an inquiry into the issue. Perhaps it is a campaign that Universities UK, the University and College Union and others should join.

Although they won’t bridge the entire gap, CDC pensions go a long way to ensuring that the money we set aside for a pension will provide us with a decent income in retirement.

Let’s look at a simple illustration. It is of two university lecturers, Jill and her daughter Jo. The numbers are simplified, but entirely consistent with in-depth studies performed by the Government Actuary, the Pensions Policy Institute and others.

Jill is about to retire at the age of 65. She has a “defined benefit” (DB) pension to which she and her employer contributed 15 per cent of her income. With 40 years of contribution she will get a pension of £17,500 per year until she dies. The trustees of the pension fund have calculated that members will, on average, live 20 years after retirement.

The problem is that the DB scheme is closing. The employer is concerned that the pension promise lasts 70 years. And if something unexpected happened, such as financial meltdown, it might prove unaffordable.

So Jill’s daughter Jo will be put in a “defined contribution” (DC) scheme. It will receive the same 15 per cent and give Jo a cheque when she retires. The problem is, Jo doesn’t know how long she will need a retirement income for. She could live for one year, she could live for 35. If the latter, she could only afford to spend £10,000 a year in retirement. And that won’t be guaranteed because her investments may or may not perform well.

So Jo decides to use her pension saving to buy an annuity. The problem is that she doesn’t know how much an annuity will cost when she retires. Right now, they are very expensive  and often don’t go up with inflation, but could provide an income of £13,500 per year.

So Jo is still out of pocket relative to her mother, even though she contributes the same. She wonders why she can’t save in a pool with all her colleagues, just like her mother did, getting a retirement income that will last as long as she needs it. She heard that this is what happens in The Netherlands and Denmark, where the pension systems are among the best in the world. Jo asks what income she could get if she saved on this basis, and finds that it could give her £17,500 — the same as her mother’s scheme, depending on how the market fares until she retires.

That means that it isn’t quite as good as DB, because there is no guarantee. But it isn’t so far off, so Jo wonders whether her pension could be managed that way. If the DB scheme closes, it is better than the other options. And she’s heard that the 2015 Pension Act gave the government powers it wanted to allow this sort of pension to be established.

Although the law has been passed, the regulations to make CDC work have not. It may not solve every issue. But Royal Mail believes that with CDC it can get closer to agreement, and that it can avoid a damaging strike. Maybe the same would apply to our universities.

David Pitt-Watson is a former Executive Fellow in Finance at the London Business School. Hari Mann is the programme director for driving growth and innovation at Ashridge Management College. They are the co-authors of the Tomorrow’s Investor report for the Royal Society for the encouragement of Arts, Manufactures and Commerce, which paved the way for the 2015 Pensions Act.

This article is re-published with permission of the authors; it originally appeared on the Times Higher Education Website