Author Topic: UK university pension changes  (Read 3076 times)

Kwill

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UK university pension changes
« on: February 23, 2018, 07:06:29 PM »
I've been away for about 10 days, and in the meantime my email and Facebook have erupted over the coming changes to UK university pensions. What are the big picture implications? How should we understand and respond?

Kwill

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Re: UK university pension changes
« Reply #1 on: February 26, 2018, 12:47:42 PM »
Answering my own questions here, it seems like the dispute is over whether or not there is a huge deficit in the university pension system. Up to this point, lecturers and others working in the universities have had a pension system that guaranteed a certain amount of pay each year during retirement. By the time I started, the guaranteed amount had gotten smaller than in the past, but up to a few years ago, it was a very generous pension plan. Now there are changes planned that will get rid of the guaranteed amounts altogether and make the system more like a 403b / 401k in the US with specific amounts going in but no guarantees about what comes out. Part of me wonders if that might not be all bad, but it must be worse since everyone is so upset.

Some stories about this:
http://www.independent.co.uk/voices/university-lecturers-strike-economics-pensions-a8227421.html

http://www.bbc.co.uk/news/education-43200128

https://www.uss.co.uk/how-uss-is-run/valuation/2017-valuation-updates/proposed-changes-to-future-uss-benefits

https://www.spectator.co.uk/2017/09/are-university-professors-big-fat-pensions-under-threat/

Izzs

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Re: UK university pension changes
« Reply #2 on: February 26, 2018, 02:19:31 PM »
I'm on strike at the moment because of the pension changes, I'm an early career researcher. I'll give it a go explaining whats happened, but it may be a bit garbled as I'm a bit exhausted after spending all morning on the picket lines, it's bloody freezing out there!

I'm guessing you're working at a university, so probably your best bet is to just chat to a few people on your nearest picket line. Going on strike is always a personal decision, so some people may have slightly different reasons than others. I'll try and stick to generally to the ucu (university and college union) message.

The USS (university pension scheme) has stated they will  be changing pensions from a career averaged defined benefit (known amount paid out, based on average salary over your employment) to a defined contribution scheme (known amount paid in). This pension scheme covers older universities (pre 1992), the newer universities can join the teachers pension scheme (a government backed defined benefit scheme) . This change follows the ending of a pension based on your final salary (in 2011ish) and changes in the last year or so capping the salary that is used to calculate the pension to 55k.  This change has shown the average lecturer is likely to be around 10,000 a year worse off in retirement. It also will pass the risk of whether the investments are up/down at retirement onto the staff whereas currently the scheme is backed by all pre 92 universities, if on university folds the pension is shared amongst the rest with Cambridge at the top as the richest.

This change is due to recent valuation of the USS which showed it had a 7.5 billion deficit. There's a lot of debate amongst academics about how this pension valuation was calculated and whether it was done correctly. Currently they will not release the figures the pension valuation was based on or what assumptions were made (which you can imagine really pisses off academics).
The pension scheme was valued 3 times in the last 6 months or so giving different values of deficit, and this last valuation was accepted by the UUK (Universities UK, a body that represents all UK universities.) During the period of these valuations the UUK has sent all vice chancellors a survey (which was leaked https://www.theguardian.com/uk-news/2018/feb/21/universities-strike-blamed-on-vote-by-oxbridge-colleges). In this survey they asked whether the universities were happy with the level of risk in the pension scheme and also asked if they were thinking of setting up their own pension schemes. 42% of the survey responses wanted to lower the risk so the USS started de-risking the pension by buying gilts and bonds, which obviously effects future growth and the pension valuation. It has since been leaked that a large number of the votes to de-risk were from Oxford and Cambridge colleges who were allowed to vote individually, giving a large weighting to only 2 of the 80ish universities in the scheme.

The universities and UUK have said they will continue to pay the same amount into the staff pensions (18%) however 4.75% of this will be used to reduce the deficit of the defined benefit pension and 13.25% directly into the staff members pension pot. This is pretty good by private business standards, however, I think it should be pointed out that pay is significantly lower than the private sector and that the staff have started pensions later due to studying for 7+ years, and that a lot of people are on fixed term and insecure contracts.

In addition to the pension there is also a feeling of 'the last straw' about this strike because of the general marketisation of universities within the UK, through massive tuition fees and universities investing more in infrastructure than staff.

Tomorrow the vice chancellors of the universities will be meeting in London to resume discussion, however the UUK have already stated that they will not discuss closure of the defined benefit pension or the valuation of the pension.

Personally I'm undecided about the closure of the move to a defined contribution scheme, I like the flexibilty to allow early retirement but feel that too little will be paid in by my employer. I work at one of the Oxbridge universities so I feel particularly motivated to strike, I've never gone on strike before and only joined the union 2 weeks ago!

Kwill

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Re: UK university pension changes
« Reply #3 on: February 26, 2018, 11:35:00 PM »
Thank you for the explanation, @Izzs!

Yes, I'm at a university, possibly not far away from you. I think when I started a couple years ago the deal was that the pension would be 1/80 of the annual salary each year, so that after 25 years, the pension would be less than 1/3 of the average annual salary (not final salary). I was already wondering how people would retire on that without other savings, and since then the pension has been reduced or changed a couple times. Many of my coworkers have been here more than 10 years, so they started when the pension was based on a percentage of final salary and are pretty safe from these changes.

I feel like I haven't been here--in the university or in the UK--long enough to get too involved. But then I also wonder if maybe I should have been attending meeting of the university's governing body and reading all official emails closely enough to respond.

Izzs

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Re: UK university pension changes
« Reply #4 on: February 27, 2018, 01:36:48 AM »
No problem! I think we probably started at universities around the same time. When I started it was the 1/80 th scheme but that changed in 2014/15, when the final salary part was closed to all staff not just new starters. Its currently 1/75th with a 3/75th lump sum (and paying in 8%), retirement age for me is currently 67 but it'll change with state pension changes. So I think its expected staff will get about half of their career averaged salary at normal retirement age. It's decent bit not exactly rolling in cash, obviously the guaranteed amount and index link is worth a lot too.

From the USS report I've read, the planned changes are fairly pessimistic for growth of the defined contribution scheme by MMM standards. But similarly the defined benefit calculations are also fairly pessimistic about future growth.

The changes will happen for all staff not just new ones, anything earned in the current/previous schemes is protected but anything in the future will be under the new scheme. I have spoken to people striking who are really near retirement who are seeing it as a devalueing of their job rather than something that effects them very much. I think some universities are worried about future recruitment as well and a shift of the best staff to the newer universities which can get the best pension.

It's obviously up to you about the strike, a lot of people are just working from home rather than going into the department and crossing the picket line. I was unsure whether to take part particularly as the strike is seen as a lecturers strike and I'm really only creating more work for myself by going on strike, but I'm glad I did. Also you could get involved by emailing your vice chancellor asking for a resumption of talks (there's various templates you can google).

PhilB

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Re: UK university pension changes
« Reply #5 on: February 27, 2018, 05:41:01 AM »
Thank you for the explanation, @Izzs!

Yes, I'm at a university, possibly not far away from you. I think when I started a couple years ago the deal was that the pension would be 1/80 of the annual salary each year, so that after 25 years, the pension would be less than 1/3 of the average annual salary (not final salary). I was already wondering how people would retire on that without other savings.
Given that the average life expectancy at pension age is pushing 20 years (and probably higher for USS members than the average) it would be more than somewhat generous to have a scheme were 25 years of employment did automatically give you enough to retire comfortably without making other savings.

Kwill

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Re: UK university pension changes
« Reply #6 on: February 28, 2018, 12:54:37 AM »
Given that the average life expectancy at pension age is pushing 20 years (and probably higher for USS members than the average) it would be more than somewhat generous to have a scheme were 25 years of employment did automatically give you enough to retire comfortably without making other savings.

I guess that's true. If you were to start your career at 23 and work straight through until 67 (mandatory retirement age), then paying off a house while working and then getting 1/80 or 1/75 per working year in retirement would probably be perfect. But if you did some short term jobs in your 20s and then spent a decade plus in graduate school and postdocs and contingent / temporary positions before finally getting a permanent position eligible for a pension, then it is a little trickier. I think that is not uncommon in universities. Even if people might want to finish the PhD and land a good tenure-track or permanent job by age 30, there is no magic wand to guarantee it, and the job situation in academia is worse in the US.

poppydog

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Re: UK university pension changes
« Reply #7 on: February 28, 2018, 01:55:12 PM »
Im just replying to say that millions of us in the private sector have had our Defined Benefits pension schemes closed over the last decade or so, with accrued rights frozen and future pension rights transferred into a defined contribution scheme.

Im not saying this is right or fair, just pointing out that what is happening to University staff is by no means uncommon, rather, it has become commonplace.

jade

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Re: UK university pension changes
« Reply #8 on: March 05, 2018, 06:10:46 AM »
hi all, I'm also a member of USS, but only joined in Sep 2016. I went in aware of the issues older members have had and with quite low expectations i guess... plus mainly saving elsewhere in a S & S ISA for my pension. I am thinking with the 18% employer contribution, it's probably still worth it but interested if anyone else decided otherwise?

ps - thanks for the links, will have a read.
« Last Edit: March 05, 2018, 07:36:24 AM by jade »

cerat0n1a

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Re: UK university pension changes
« Reply #9 on: March 05, 2018, 07:27:26 AM »
hi all, I'm also a member of USS, but only joined in Sep 2016. I went in aware of the issues older members have had and with quite low exceptions i guess plus mainly saving elsewhere in a S & S ISA for my pension. I am thinking with the 18% employer contribution, it's probably still worth it but interested if anyone else decided otherwise?

With an 18% employer contribution, you would be crazy not to join, I would think.

jade

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Re: UK university pension changes
« Reply #10 on: March 05, 2018, 07:35:47 AM »
thanks cerat0n1a, that's what I thought - I gather that even if all the worst case scenarios happened, this 18% contribution would balance out some of the negatives.

Kwill

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Re: UK university pension changes
« Reply #11 on: March 06, 2018, 12:31:09 AM »
You should definitely join and contribute, but the 18% figure is somewhat deceptive. I was surprised when I read the small print about that number some months ago before all this happened. It's not that they put 18% of your salary into the fund. It's that USS charges the employers 18%. The extra 1% employer match that you can get by contributing more is built in to that. The actual employer contribution the way you'd expect it to be calculated is 13%.

From page 8 of 'Your Guide to the Universities Superannuation Scheme' <https://www.uss.co.uk/~/media/document-libraries/uss/member/member-guides/post-april-2016/your-guide-to-universities-superannuation-scheme.pdf>:

The combined employer contribution rate
will include various elements. Below is a
breakdown of the rate:
i The future service defined benefits this
accounts for 13%;
ii The employer contribution to the funding
deficit which is 2.1%;
iii The employer contribution to the USS
Investment Builder which is 2.5% this is
made up of:
12% on salaries in excess of the 55,550
threshold;
the 1% employer match in respect of
additional contributions to the USS
Investment Builder;
iv Expenses of 0.4%.

jade

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Re: UK university pension changes
« Reply #12 on: March 06, 2018, 01:39:48 AM »
thanks kwill, that's good to know - I did see something like that in one of the links posted here that I read yesterday. Still worth staying a member I think but good to know the reality.

cerat0n1a

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Re: UK university pension changes
« Reply #13 on: March 06, 2018, 02:01:13 AM »
13% is still worth having - it's significantly higher than any private sector pension I'm aware of.

jade

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Re: UK university pension changes
« Reply #14 on: March 06, 2018, 02:41:04 AM »
I think so too cerat0n1a.

Izzs

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Re: UK university pension changes
« Reply #15 on: March 06, 2018, 02:14:39 PM »
Oh yes it's definitely worth staying a member. It's probably also worth doing the 1% extra contribution to the investment builder part to get the 1% match. Any changes to the scheme won't come into effect until April 2019, so you'd still get an additional year.

jade

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Re: UK university pension changes
« Reply #16 on: March 07, 2018, 03:42:52 AM »
thanks Izzs - I am doing the extra 1% too. good to know it doesn't start till next year.

londonstache

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Re: UK university pension changes
« Reply #17 on: March 13, 2018, 06:36:14 AM »
13% is still worth having - it's significantly higher than any private sector pension I'm aware of.

Indeed. I work in HR and 3% is about the going rate for employer pension contributions in the UK - much more than this tends to be an outlier. My employer currently offers a 10% contribution which is far better than most, although we've just been acquired by a company that only provides 5%, so I don't expect this to last too long.

I have some sympathy with the university staff however as poppydog points out there is an air of inevitability about this.

sea_saw

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Re: UK university pension changes
« Reply #18 on: March 23, 2018, 10:53:49 AM »
Since I seem to be on a pension roll today... a random story.

I had lunch with a friend in academia today and we chatted about the strike. She said that the projections were that if she continued in academia in the same types of roles as she works now, her pension would have been 20k/year under the old scheme, and would be reduced to 8k/year under the proposed new. Her partner who is in the same field is in the same boat.

I have no idea if these calculations are accurate or exaggerated (any thoughts from the crowd here?). My friend was kind of resigned to it, and started talking about how since they own their house and will have paid off the mortgage by then, they could survive on the lower pension, maybe with a bit of savings too. But it would be a sad existence to live like they did when they were grad students when they're in their old age and they weren't sure what to do about it. They're considering having at least one of them switch career paths.

I told her she could always stash extra money away into a SIPP. She'd never heard of them but seemed interested in contributing more to a pension somewhere. When I said you got a 20% top up on your contributions her eyes went WIDE and she literally did not believe me until she got out her phone and googled it right then. A 20% top up?! That's AMAZING! You can't get that from any savings account!

Then she saw that you had to pick your own investments and looked like EEK. I told her we could have another lunch to talk about that if she wanted. So, I guess that's my good deed for the day. She left the tab up to do more research later.

I would like to send many thanks to whoever on these forums explained how pensions work when I originally arrived here because damn, I did not know that either until I started reading. I'm on another DB scheme and never gave it a second thought after signing up. It's not exactly a comfortable topic somehow. Then again it boils down to money + death, so it shouldn't be that surprising!

Izzs

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Re: UK university pension changes
« Reply #19 on: March 23, 2018, 02:41:47 PM »
I'm not sure if there are a few calculators around, but that sounds about right for the one I tried. It did have the default growth set at 2% though, which I think is overly pessimistic, and also is based on buying an annuity.

 For 3% growth and retirement at 67 I think mine came out at 18.5k  currently reducing to 12k under the original change to DC. For the overally optimistic 5% I was looking at 16k. But that's not considering the guarenteed amounts of the DB scheme.

Great that you're having the pension chats, I keep being surprised by people who haven't thought about retirement much. I don't know about your DB scheme but the academic one pays in by salary sacrifice so perhaps thats why they hadn't realised about the tax relief.

Izzs

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Re: UK university pension changes
« Reply #20 on: March 23, 2018, 02:48:35 PM »
Wait I just re-read your post seasaw, I thought that was a 8k reduction not the finally amount! It seems low but perhaps there's a different calculator I'm missing, or maybe I should calculate it myself.

sea_saw

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Re: UK university pension changes
« Reply #21 on: March 23, 2018, 04:29:15 PM »
Yes - it honestly didn't occur to me before someone here mentioned it that there was any other way of doing it than salary sacrifice. It's so neat and simple - I can see my gross salary, minus the pre-tax things, then minus tax, receive net pay into bank. Surely anything I do with my money after that is 'post tax' by definition?! I had zero idea there was a mechanism for 'topping up' further contributions into a pension scheme. And apparently neither did my friend.

It's very possible that she misremembered a projected 8k reduction in retirement income as a reduction to 8k. Or that someone else did and passed on incorrect information. Perhaps I'll tell her it's worth a double check. Thanks for looking into it.

Kwill

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Re: UK university pension changes
« Reply #22 on: March 23, 2018, 05:54:05 PM »
I'm not sure if there are a few calculators around, but that sounds about right for the one I tried. . . .
 For 3% growth and retirement at 67 I think mine came out at 18.5k  currently reducing to 12k under the original change to DC.

Is this the calculator you used? http://www2.eng.cam.ac.uk/~gc121/pension.html

It's useful to see numbers. I don't have my pension booklet handy for the exact numbers but guesstimating gets me to just under 15k with the original plan, down to just under 8k in version 2, and up to just above 13k with version 3. I've checked the USS benefit illustrator a few times and that basically fits with version 1. In any case, I can't depend on getting by with just the pension even if they don't change it at all, so I will probably start contributing more to the investment side of it.

Izzs

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Re: UK university pension changes
« Reply #23 on: March 24, 2018, 04:19:09 AM »
Yep, that's the one I used. To be honest all of the options came out higher than I expected, probably because I always put in a retirement at 60 at the latest!

PhilB

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Re: UK university pension changes
« Reply #24 on: March 25, 2018, 02:35:08 AM »
Whilst I agree that you have to place a lot of value on the certainty a DB scheme provides, just for fun lets compare the assumptions used in that calculator with the ones that would more normally be used on MMM.
The long term average real return on equities is around 5%.  I normally use 4% to allow for expenses and a bit of prudence and 4% to 5% seems to be a pretty commonly used range here.  That calculator uses 2%.
In retirement at age 65 the calculator uses a 2.5% annuity and of course we have our beloved 4% SWR. 
I don't know the age of see-saw's friend, but lets assume she's 30.
To get an 8k pension at 65 with those assumptions she would need to contribute 7,810 pa for 35 years to get a pot of 320k for her 8k pa pension.  Using 4% and 4% she would have a pot of 476k giving an income of 19k pa.