Pensions threat – why we should be worried
Last week the Chair of the Joint Negotiating Committee (JNC) of the Universities Superannuation Scheme abandoned his independence and voted in favour of the Employers’ Proposals.
£627,000 of taxpayers’ money was used to support the employers in preparing and pushing their proposals.
Subsequently, the University of Leeds chose to inform staff of the intention to impose a serious detriment on our pensions by means of an all-staff email which adopts a pleasant and neutral tone, but whose real import can only be discovered through a careful investigation of a series of web links, and even these fail to put the staff point of view.
Sally Hunt, the General Secretary of the UCU was quoted in full on this subject in our previous blog on this subject. She reminded us that only the employers thus far have been consulted on a scheme that affects many of our futures, and that a ballot of all USS members was what was required to give legitimacy to any future plans for the pension scheme. In a consultation in May this year, 96% of voting UCU members, voted to reject the employers’ proposed changes, with a similar number backing UCU’s alternative proposals to share costs between employers and staff.
The employers’ proposals will now be recommended by the Joint Negotiating Committee to the USS Trustee Board at its meeting on Thursday 22 July next week. A consultation period with USS members will then take place with any changes proposed to be implemented on 1 April 2011.
A full Q&A on the changes can be found at www.ucu.org.uk/usschanges and further details on the difference for a new starter on the career average scheme, compared to the final salary scheme can be found at http://www.ucu.org.uk/index.cfm?articleid=4573&detailid=4594
Some additional points for those interested in the details
There is absolutely no reason for the employers to seek to cap inflation-linked rises in the manner proposed.
At times of high inflation, the nominal value of stocks and shares and the nominal value of returns increase with inflation at the worst over the medium run. General price inflation is an issue only if assets are denominated in other currencies, those currencies are not subject to inflation, and there is a devaluation of the pound.
Longevity is not a problem.
Suppose someone accrues 40 scheme years and is paying in 23.5% of salary a year (=16% from employers and 7.35 from employee). Assume zero inflation. Or equivalently, assume that the nominal value of investments goes up with inflation (trying to do all this in real terms and assuming no salary growth – and perhaps this is a big part of the issue, whether career average earnings can help stabilise the fund relative to final salary.)
Then with NO REAL GROWTH IN ASSET VALUE – i.e. your investment has neither gained nor lost value over time – the pension fund after 40 years would buy almost 19 years of pension.
A 2% real return means the fund buys 28 years of pension.
A 3% real return – and you should be able to get that off government bonds, i.e. risklessly, buys 35.5 years pension.
A 5% real return – perhaps 2% growth in equity value and dividend 3%, both rather conservative, buys almost 57 years of pension.
Suppose that your real salary had doubled by the time your career ended but was constant until the last year. Then even this extreme example of paying in on a low salary but having a big final salary for pension purposes buys 28.4 years of pension
USS returns average 7% pa over 200 years made up about equally of stock appreciation and dividends.
Suppose inflation runs above 5% for a significant period
The employers are proposing to cap their contribution to USS at 5%. Between 1970 and 1979 inflation ran at an average of 13% and peaked at 25% in 1975. (http://www.bankofengland.co.uk/education/inflation/timeline/chart.htm) .
Let us consider a £20k pension in year 1 at 8% inflation over a decade. Fully funding the pension becomes £39980. Cap this at 5% (compounded) though and it then becomes only £31027. This £9k difference is a lot of money to anyone. Of course, future inflation could easily be higher than the 8% used in this example, so a 5% cap would cause an even greater shortfall between what a pension should be worth against inflation and what it becomes worth.
The 5% cap looks relatively benign in these days of relatively low inflation, but it clearly represents a potentially very serious detriment and could effectively wipe out the real value of the pension.
USS members accept lower pay rises in return for secure pensions
Our pay has risen more slowly than that of our comparators and this year our pay was cut in real terms (see table below). Further below-inflation pay increases are in the pipeline, causing further pay cuts in effect. These pay cuts translate already into cuts in pension as less is paid in to the fund. Further erosion of those pensions – our deferred pay – will be the consequences of the employers’ proposals. Undercut the pensions, and we lose both pay and the secure pension.