Alastair Meeks gives his thoughts on university pensions
My first boss was the source of many wise words, some of which I use to this day. “Alastair”, she would often say, “there is no problem in the world that cannot be made to go away with money”. It’s not strictly true, of course, but it is truer more often than is usually appreciated.
That was 25 years ago, at a time when pension schemes almost all had surpluses and the question I was most commonly asked was what the employer and trustees needed to do with it. Nowadays, most pension schemes have deficits and the pensions problems that I am asked to advise on often revolve around how best to deal with the funding hole. This is far more fraught: If you don’t have money, problems don’t go away anything like as easily.
University Pensions deficit
There aren’t many pension schemes bigger than the Universities Superannuation Scheme (USS). And the deficit of the USS is correspondingly gargantuan: It was most recently estimated at £6.1bn. That’s the sort of number that would make anyone blanch. To put this in context, the Scheme had assets of £60bn, giving the scheme a funding ratio of 91% on these assumptions. But, on the assumptions previously used, the deficit was estimated at £12.6bn. We are talking huge numbers here, and they are significantly influenced by what actuaries decide they feel comfortable with at any given moment.
Changes proposed
Against this background, the employers are proposing benefit changes for future service, bringing 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 membership. For now, the pension scheme members seem to have the students firmly on their side in principle, with over 60% supporting their actions.
Dispelling the myths
It’s time to despatch a whole shoal of red herrings. First, the salaries of vice-chancellors are not going to plug this gap. Their combined annual remuneration represents a tiny rounding error compared with this deficit.
Next, the proposals for future service are not going to plug the existing deficit. The past and the future are two different things. The past service deficit cannot directly be used as a justification for these changes. That hole still needs plugging, regardless of what is done for the future.
Next, there is nothing inherently bad about money purchase. In fact, for some USS members, particularly younger members whose career trajectory is unlikely to be stellar, the changes might well represent an improvement for them in the short term at least. 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. Some of the younger employees on the picket line might reasonably ask themselves who they are striking for. It’s also worth noting that the oldest employees also have little to fear – they’ve already substantially completed their accrual of benefits. The group who really get clobbered are in their 40s and early 50s.
And finally, many bystanders, many of whom curiously do not have final salary pensions, have developed schadenfreude at the very definition of ivory tower elitists being confronted with this change. But USS’s own figures show that on average this is a big hit for employees. USS estimates the present cost of future final salary provision at 37.4% of payroll (of which the employees pay just 8%). The future service money purchase benefits are 17.25% or 21.25% of pay (of which employees would pay 4% or 8%). Treating pension as part of the pay package, this means that members are being asked to swallow a cut in their remuneration of, on average, over 12%. Anyone else care gladly to volunteer for that?
To date, the employers have not proposed any kind of transitional measures. Age discrimination laws make targeted assistance difficult, though not impossible. And the members might also focus more on the funding of the past service deficit. A pension promise is all well and good, but it needs the funds to back it up. Right now, the USS still has a substantial deficit. And there isn’t the money immediately available to make that problem go away.