Suggestions for answers to USS questions in online consultation
Susan Cooper, 11 May 2015
The responses suggested by central UCU are in italics, slightly updated by me, and my suggestions are in this font. I encourage you to think about these and form your own response. If you want to emphasise some aspects, you may feel it better to give no or very short responses to the other questions.
To respond to the consultation, go to deadline is 22 May.
1FS: Do you have any comments on the proposed change to end the link to final salary?
I note that the radical changes being proposed to my pension are predicated on a deficit which has been calculated using a contested methodology. I note that challenges to the methodology have not only been made by UCU but also by a number of large employers. Adopting a more realistic approach to calculating the funding position, one which reflects the actual assets in which the scheme is invested, would considerably reduce the deficit and question the need for such radical proposals.
I consider that when I joined USS I was given a reasonable expectation that my pension would be based on my final salary. I consider that the proposed changes are inconsistent with those widely held expectations.
I understand that the employers and UCU have agreed to review the USS Board’s excessively prudent approach to funding and I ask that this be given a high priority.
For the future, if benefits are to move to a career revalued benefits (CRB) design, I believe the scheme should be planning to improve both the accrual rate and the revaluation rate. As a minimum, USS should be matching the benefits of other public sector pension schemes (i.e. TPS in post-92 institutions) within the higher education sector.
2FS: Do you have any comments in relation to the proposed treatment of transfers in for final salary section members?
The proposal to withdraw from the public sector transfer club may create recruitment issues. There may be also be a disincentive to apply for promotion if success would mean placement in an inferior USS scheme without the ability to transfer service from other schemes.
3FS: Do you have any comments in relation to the proposed treatment of Money Purchase and/or Added Years Additional Voluntary Contributions (AVCs) for final salary section members?
People with FS AVCs who chose to continue them will have to pay a fixed % of their salary although the benefit is tied to their pensionable salary on April 2016 revalued with CPI. This is unfair for people who get a promotion. The logical fix for this is to have the contribution be not a % but the amount at April 2016 revalued with CPI.
I do not agree that USS should be able to change the final-salary terms of the contract I signed to purchase additional years’ service in the final salary section, effective from 31st March 2016.
All of the literature about the AVCs I purchased indicated that the additional years would be added to my earned service and that it would be linked to my future final salary. USS should honour the original commitment and enable me to continue to purchase additional years’ service in line with the original contract.
I note that USS considers that it can modify the benefits I will earn based on my future service in the scheme, but I do not accept that it can alter the added years’ AVC. USS should honour my AVC service, in line with the original terms.
I understand that up to 31 March 2016 my money purchase fund enables me to purchase service in the final salary section of USS. I am glad that USS has agreed that this option will remain for the money-purchase fund value at 31 March 2016 and increases accrued to that part of my money purchase fund. These funds should be clearly identified for members.
4CRB: Do you have any comments in relation to the proposed treatment of transfers in for current and prospective CRB section members?
I am concerned that there may be issues in relation to transfer from USS and non-USS institutions within the UK HE sector.
5CRB: Do you have any comments in relation to the proposed treatment of Money Purchase and/or Revalued Benefits Additional Voluntary Contributions (AVCs) for current and prospective CRB section members?
I am glad that my CRB AVC contract will be fully honoured. The closure of a DB AVC facility for new members reduces USS’s attractiveness to potential members.
I understand that up to 31 March 2016 my money purchase fund enables me to purchase service in the CRB section of USS. I am glad that USS has agreed that this option will remain for the money-purchase fund value at 31 March 2016 and increases accrued to that part of my money purchase fund. These funds should be clearly identified for members.
6Do you have any comments on the proposed new career revalued benefits section of the scheme?
The “late retirement factor” isn’t mentioned in the information provided. This is currently an additional 6% of pension for every year I delay my retirement past my 65th birthday. This adjusts for the fact that I will (on average) receive my pension for fewer years. It is only fair that it should remain and I urgently request assurance that it will.
Although the proposal is to improve the CRB section by improving the accrual rate, I am concerned that USS is failing to match the benefits available from the Teachers’ Pension Scheme, the other major pension scheme in the higher education sector for my type of post. USS should be planning to improve both the accrual rate and revaluation rate in the CRB section in the future.
The revaluation should be in line with uncapped CPI for active members.
Instead of the last sentence, I suggest: The cap on CPI revaluation should be removed for all members. If the valuation improves in future, the employer contributions should be maintained at 18% and the “excess” used to increase the revaluation rate for active members to give a fairer weight to their earlier contributions by reflecting the investment return the fund has received from them.
7Do you have any comments on the proposed level of the salary threshold or the proposed approach to the revaluation of the salary threshold?
The revaluation of the salary threshold for DC is proposed to be by CPI, which historically has been less on average than the annual pay settlements. This would lead to a creeping erosion of our DB pension. On this historical basis, we would be better off if the salary threshold were tied to the annual pay settlements. This would be consistent with employers’ aim of keeping the DB part a constant fraction of the total, so logic argues for them to accept this change.
Setting the threshold at spine point 49 would not be a significant change from the proposed £55,000, would be easier to keep track of, and would avoid having members near the threshold move in and out of DC as CPI and the annual pay settlements fluctuate independently.
I do not accept that there should be a threshold; defined benefits should be based on members’ full salary. However, as a minimum, the salary threshold should be linked to the top of the nationally agreed pay spine. If this is not possible then the threshold should be revalued in line with RPI and if that is rejected by uncapped CPI.
8Do you have any comments on the proposed application for part-time employees?
9Do you have any comments about the proposed creation of a defined contribution section for employer and member contributions on salary above the salary threshold (£55,000 as at the implementation date)?
The proposal is essentially for a hybrid scheme. The 2011 Independent Public Service Pensions Commission (Hutton Report) rejected hybrid schemes on grounds of increased complexity in terms of administration and ease of understanding, and the cash flow implications caused by the loss of contributions on earnings above the cap.
The current proposals are not transparent or simple. In fact, the lack of information on the defined contribution fund (for example, the investment options that will be available, or who will administer the scheme) undermines the consultation.
I would prefer all my earnings to be covered by the defined benefits section, and for the defined contribution section to be removed.
10Ahead of any further engagement by the trustee about the defined contribution section, do you have any comments on the range of funds to be provided (including the default fund), the charges payable by members, or any other aspects of the defined contribution proposition?
The new DC section should have at least the variety of options now available through the USS-Prudential Money Purchase AVCs. It should include an ethical investment fund and one which automatically shifts members’ investments from equities to bonds as they approach retirement age.
I understand that the employer is to pay the administration charges and in the default fund the management costs. I believe that the employer should pay the same contribution to the management costs of all funds. Not to do so restricts the individual’s ability to make choices on their investment options. In particular, it would disadvantage members who would wish to be ethically invested or invested in accord with Shariah principles.
There should be full transparency of costs, management fees and investment fees.
Governance arrangements should ensure that the selection of the funds and their operation is based on best value for members and low operating costs.
The selection funds should be able to be used for continuing investment after I retire, so that I continue to maintain the maximum flexibility of my fund and do not have to pay the costs of movement to other products.
I would expect to be able to view the performance of my fund in real time.
11Do you have any comments on the options the trustee should make available for members as to how they might use their defined contribution account at retirement or upon leaving the scheme?
The scheme should cater for the additional flexibilities to be introduced from 6 April 2015. For example, I should be able to choose to withdrawn my DC fund as I wish, or should be able to arrange to purchase an annuity. The fund should also allow for flexible drawdown, and the option, at any time, to use the remainder to purchase an annuity.
12Other/general comments
In CRB it would be very difficult for members to do their own calculations and the CRB modeller that will remain on the main USS website after the consultation becomes very important. It can never show members for sure what they will get, but it can and should show a reasonable estimate on the basis of current information to help us plan and investigate options. As our pensions will be lower in future, it will be even more important for us to understand the full picture, including state pension and taxes; by putting somewhat more work into the modeller to incorporate these, USS could be significantly more helpful to all of its members. I suggest the following improvements:
- It should use the correct “pensionable salary” for converting our existing Final Salary pension into CRB, not just our current salary as in the consultation modeller.
- It should correctly model the effect of AVC contracts, both the part already paid and future payments if we opt to continue the contract.
- Once we have put in our expected career path, it should show our expected pension as a % of our salary just before retirement, as this is the change we will see when retiring.
- It should show our expected state pension assuming we had contributed to that as long as USS, give a pointer to how to find out more information on our state pension, and provide a possibility to correct the assumed state pension used further in the modeller.
- It should show our expected total “take-home” pension as a % of take-home salary just before retirement, which even better represents the change we will experience when retiring. Several factors all go in the same direction to make a significant effect here: our take-home salary is reduced by our pension and NI contributions while our pension is not; both are taxed but the average % becomes less as income is reduced; we will get a state pension as well as USS pension. The future rates for all of these are uncertain but the current rates could be applied as a more reasonable estimate than nothing.
- The modeller should be available in two modes:
- already filled-in with the member’s data (best for most)
- initially empty and able to accept various conditions (useful for UCU and other people who want to check the modeller and/or to explore various scenarios to provide general guidance for others).
We can’t expect this to become available immediately, but it should be done as soon as possible after the final details are set, i.e. before April 2016, so people can start using it to more fully understand their situation in the new system.
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