What happens to AVCs when final salary pension schemes close (USS in future?)

tsg20

I'm currently a member of the USS final salary pension scheme. I'm 32 and only have 4 years of contributions, so the idea of paying AVCs (in the form of extra years towards the final salary) naturally came up.

Now, it seems to me that it wouldn't be paranoid to imagine that in 5 or 10 years time the final salary part of the USS scheme will close completely, and all future contributions will be to the CARE scheme instead (the number of people in the final salary scheme will be decreasing, and their salaries will be increasing, so it will be harder and harder to make an argument to support it).

What I'm wondering is how AVC contributions would be calculated if this happens. As I understand it, an AVC contract is a commitment to pay a percentage of your salary for the rest of your career, in return for additional years of benefits. But will these years count towards final salary or not, in the event of such a change? I suspect this issue must have come up with other final salary schemes before (e.g. the BBC?), but I haven't been able to find any clear information.

ermine

AVCs and added years are two separate things, though both are additional voluntary payments. If you are buying added years then what is most likely at the time of the FS pension winding up is your entitlements to that date are retained (because it is part of your contract of employment). You will therefore get 4/60ths (or 80ths or whatever the accrual rate is) of your final salary at the time of the pension being wound up. Which, if you anticipate career progression is a poor result, since you are in the early part of the career.

The added years let you buy say 2 extra years which would be useful if you could say double your entitlement before they closed the door. However, I guess this depends on how strong the representation of the workforce is when the scheme is closed, they could take the line well you've only paid them for a small percentage of the planned term so you're only entitled to a few days, ie scaling down by the shortfall in years to NRA at winding up time. This is why it is so much cheaper to buy added years when you are young than when you are older.

AVCs (rather than added years) are effectively a DC add-on to a DB pension, the plus point of those if you can take 25% of the capital value of your pension on retirement. Your FS pension at retirement is worth about 25 times your pension at normal retirement age so you can take a lot more as part of your tax free lump sum than you'd otherwise be able to. If you're 32 I'm not usre I'd rely on the rules being the same in 30+ years...

tsg20

Thanks for the clarification. USS refers to "added years AVCs", which doesn't help with confusion!

I guess accrual of added years (and final salary pay in general) will be more useful in the event of salary increases prior to winding up, in that case (as if salary is relatively constant over the next few years, it would be equivalent to be in the CARE scheme, anyway, if I'm understanding correctly).

I'm still a little confused about what would happen with added years; is it possible that one would have to carry on making the payments of a certain percentage of salary, but that the benefit at the end of it would be a percentage of salary at the time of winding up? That could obviously turn out to be pretty bad in the event of future salary jumps.

ermine

is it possible that one would have to carry on making the payments of a certain percentage of salary, but that the benefit at the end of it would be a percentage of salary at the time of winding up?

It's hard to second guess but I'd imagine that is highly unlikely. If you had to keep on paying proportional to your rising salary than the benefit should continue, and any halfway competent union should be able to challenge cessation of benefit without cessation of contribution as a breach of contract.

Your prime risk is that your added years will be less. Say you are buying 10 added years, over the next thirty years. If your pension scheme only lasts 5 more years, your added years are shortened to 10*5/30 = 1.6 added years. On the upside, you aren't paying for them for 25 years, so it's not such a raw deal. But you also don't get the benefit of career progression on your FS.

Only you can work out whether this chance is worth it for you, but I wouldn't worry about having to carry on paying once the FS scheme is would up.

kidmugsy

My own view is that almost everything to do with pensions is quite a gamble when you are many decades away from retirement. So I'd ask myself whether the odds of the gamble seem favourable. My own temptation might be to wait until I was a higher rate taxpayer before chucking extra money into pensions and meantime to save by other means. That said, the ability to buy extra Final Salary pension is undoubtedly worth mulling over.

rpc

kidmugsy wrote: »

That said, the ability to buy extra Final Salary pension is undoubtedly worth mulling over.

ITYM the ability to buy extra FS pension is worth biting their hand off for. Although the benefits may be reduced, I'm not sure that you could come up with anything that can compete for the same cost.

dasherman

The Royal Mail pension changed from final to average salary in 2008 and anyone who was already paying for added years was allowed to carry on under the same arrangements. Only time will tell whether that would also happen with the USS or any other pension scheme.

kidmugsy

Two other thoughts:
1) Some universities offer salary sacrifice. If yours doesn't yet, well worth finding out if they might.
2) Remember that USS is a private sector scheme. There's no reason to expect a govt bail-out if it all goes wrong.