USS funding position -- how to understand the situation?

hyubh

guymo wrote: »

You're saying that the longer-serving members represent a larger liability on the books.

Any active member with a lot of membrship is fundamentally more risky from a FS pension fund's point of view because any pay rise (which the pension fund can't control!) will automatically make accrued service more valuable and potentially drastically inflate the pension owed. In the LGPS case, with its ungrouped employer rates, this factor can lead to radically different employer rates just by itself.

But of course their lifetime contributions to the scheme are larger too.

That assumption only works in a CARE scheme where the value of previous service is not retrospectively inflated!

If I understand correctly, this means that the UCU is asking me to defend the right of young people to pay for my old age.

I don't know about the UCU, but I've seen one or two letters in the Times Higher where an older academic is quite blunt about expecting younger colleagues to pay for his (more generous) pension...

Why should they? The poor youngsters have to sit through enough of my nonsense as it is (my research papers, my managerial roles, etc) -- to ask them actually to pay me money is completely absurd. Is that what you are saying or am I as stupid as I fear?

You are putting it a bit dramatically, because again, it's intrinsic to an open DB scheme: if previous assumptions prove unrealistic to pay for the pensions that come actually to be due, it's current not past members that lose out in some way, which in the USS case has meant significantly lower benefits accrued going forward for only a nominally lower contribution rate.

kinger101

guymo wrote: »

You're saying that the longer-serving members represent a larger liability on the books. But of course their lifetime contributions to the scheme are larger too. What are we to conclude?

The salary of a new lecturer is around £37k, while a professor can earn in excess of £100k. Most of these contributions will be based on a much lower salary than the final salary. Their contributions are not proportionate to their final salary in that the pension contributions made to the salary near the end of their service may only have a few years to grow in value with the scheme.

The basic concept of investment = growth rate x time.

If the current system worked, there wouldn't be the large deficit.

The system is also being propped up by the pension contributions of postdocs, the vast majority of whom will never get a permanent position in a university. If say a new postdoc at aged 25 was offered the opportunity for the 22.5% of their salary (14% employer, 6.5 % employee). Their £30k salary will net them a pension work £375 (plus another 1/3 as lump sum) when they retire. If they had the option of putting the same amount into a DB scheme, at a 4% above inflation growth rate, this would be a pension pot of £32k at 65. I think this might fund a better pension than their career average scheme. The postdoc would have lost his job in academia long before the DB scales tip in their favour.

The truth is, if University employees were given the option of DB or DC schemes with the same contribution rate, postdocs would rapidly transfer to DC, and this cross subsidy would rapidly be lost. This would plunge the USS into a major crisis.

kidmugsy

kinger101 wrote: »

The truth is, if University employees were given the option of DB or DC schemes with the same contribution rate, postdocs would rapidly transfer to DC, and this cross subsidy would rapidly be lost. This would plunge the USS into a major crisis.

I suppose you could argue that postdocs have already volunteered to be shamelessly exploited by tenured academics. But, more seriously...

your point is that the scheme is already in trouble because of its mountain of accrued liabilities, and the disagreement is simply about who is going to be lumbered with bearing the cost. In the light of that, I can see the merit of DC payments on all earnings over £50k p.a. It may not help defray those costs but at least if forbears to add to them.

Your point also means that bleating about "this will cost me £10k p.a." is fruitless: the accrued liabilities mean that active members are inevitably going to lose by reform; it is unavoidable unless you plan to "kick the can down the road" by punting on equities and crossing your fingers. That's the policy, eh? Delay and pray.

kidmugsy

Here's a question: suppose you assume a real return on equities of 3% p.a. and on gilts of 0% p.a., and suppose you retain its current investment proportions; what then of the scheme's funding position? Is it in the clear, or still in the merde?

Secondly; if the proportion of 18-year-olds going to university fell to 33%, with a corresponding reduction in recruitment of young academics, what then for the scheme?

Wouldn't answers to a few such what-if questions clear people's thinking? Still, I don't suppose everyone's in favour of clarity.

UPDATE: what about another route to stability?
http://www.theguardian.com/money/2014/nov/07/isle-man-government-move-pension-age-74

Just make the scheme retirement age 75, and turn from 1/80 to 1/100 for every year of membership. Would that do the trick?

hyubh

kidmugsy wrote: »

your point is that the scheme is already in trouble because of its mountain of accrued liabilities, and the disagreement is simply about who is going to be lumbered with bearing the cost.

Was it kinger101's point? Maybe it was, but if so it doesn't follow from the claim actually made (viz., that the current scheme benefits different sorts of member in disprortionate ways). The only thing that matters in a DB scheme is the funding level overall, not whether the benefit structure is 'fair' on all members.

That said... I don't think it's obvious that post-docs en masse would prefer a generous DC scheme. Surely many (most?) don't start on the assumption they won't make an academic career... or is there evidence to the contrary? (Genuine question.)

kidmugsy

hyubh wrote: »

That said... I don't think it's obvious that post-docs en masse would prefer a generous DC scheme. Surely many (most?) don't start on the assumption they won't make an academic career... or is there evidence to the contrary? (Genuine question.)

I regret that I can't give you a genuine answer. I suppose it's all too possible that absurdly many of the poor souls/mugs really do hope to find permanent academic jobs. Most of my postdocs, no mugs they, showed little interest in permanent academic jobs, being highly employable elsewhere.

kinger101

hyubh wrote: »

The only thing that matters in a DB scheme is the funding level overall, not whether the benefit structure is 'fair' on all members.

Well, it neither adequately funded, or fair. The career average scheme at least attempted to move to fair, but failed in that there are different pools of employees who accrue benefits differently. With deferred members being the lowest tier.

The new DC scheme offered for people over the earnings threshold is still very generous, with the employer paying in 12% compared to the the employee's 6.5 %.

kinger101

hyubh wrote: »

That said... I don't think it's obvious that post-docs en masse would prefer a generous DC scheme. Surely many (most?) don't start on the assumption they won't make an academic career... or is there evidence to the contrary? (Genuine question.)

I've known a few people not pay in because they see it as a Ponzi scheme. I think they've made a error of judgement, but certainly agree with them that it's doubtful that many people contributing today are very unlikely to receive the benefits they're supposed to. The taxpayer isn't going to prop-up all the DB schemes the will fail, so politicians will force the benefits to be slashed.

We often see stuff like "gold plated pensions" in the media, when the fact is many people are getting a few thousand a year. It's not difficult to turn public opinion against those on DB.

kidmugsy

kinger101 wrote: »

I've known a few people not pay in because they see it as a Ponzi scheme.

An ancient friend of mine says he knows some people who declined the move from FSSU to USS because they didn't like the smell of the new arrangements. "All you'll get in the end is whatever they let you have at the time."

kinger101 wrote: »

The taxpayer isn't going to prop-up all the DB schemes the will fail

Why, indeed, should the taxpayer prop us up? The universities have cocked it up and so the scheme members will pay a price. It would be rather refreshing if there were some consistency in the application of that idea more widely in society, mind.

kinger101 wrote: »

so politicians will force the benefits to be slashed

In what sense "force"? If the scheme becomes insolvent, and proves to be too big for the PPF, then "force" is hardly apposite.

kinger101 wrote: »

We often see stuff like "gold plated pensions" in the media, when the fact is many people are getting a few thousand a year.

The media are quite right in this regard: it's the terms that are gold-plated, irrespective of the amounts. After all, an individual may have extravagant terms paid for by the taxpayer, but get a modest pension simply because he wasn't a scheme member for very long. But heaps of modest pensions equals a very large annual sum.

kinger101

kidmugsy wrote: »

The media are quite right in this regard: it's the terms that are gold-plated, irrespective of the amounts. After all, an individual may have extravagant terms paid for by the taxpayer, but get a modest pension simply because he wasn't a scheme member for very long. But heaps of modest pensions equals a very large annual sum.

Which is why the scheme needs to reflect the actual contributions made by the employee. The employee who wasn't there very long was never offered the opportunity to use a DC scheme which would have probably resulted in better rewards, but it the same time, being fully exposed to the investment risk (which can easily be mitigated with sensible planning).

I'd be in favour of universities capping all contributions above a certain threshold, but still being required to make the employer's contribution into the scheme (with no benefit accruing to the employee) in order to make up for the deficit.

What concerns me is that if DB schemes do have to cut the benefits, then there are many more people who will be in the position where they haven't made adequate provision for their retirement.