Abuse of final salary pension schemes?

Eric_the_half_a_bee

An interesting article in The Guardian about the funding difficulties faced by the Universities final salary pension scheme. The author, a professor and member of the scheme, writes:

if a staff member has worked for 40 years, their pension will be equivalent to half their final salary.

The scheme is reasonably generous, although not as generous as it looks as few academics these days acquire 40 years of service. Importantly, though, it gives employees certainty about their benefits. When life expectancies were lower, and salaries more closely regulated, it worked well.

However, with rising life expectancy and a competitive university environment, this has changed. The international transfer market has made it increasingly common for those in demand to bargain for a large rise late in their careers, precisely to increase their pensions. This puts a burden on the pension scheme, which hasn’t been funded by earlier contributions at a proportionate level.

https://www.theguardian.com/education/2015/feb/17/university-final-salary-pension-scheme-finance

The highlighted bit sounds like abuse to me, verging on fraud?

I wonder just how commonly this is done in other schemes?

molerat

I think more common in public schemes than industry.

getmore4less

There are a few schemes where manipulation can take place.

Late career promotions.

It was common practice in the NHS to go to fully enhanced pay within the last few years to optimise pension.
Part time nights was a good option or focus on weekends/BH.
Boosting pension 30% was relatively easy.

(part time is made up to FTE for pension calculations)

zagfles

Final salary scheme are open to this sort of abuse and are now an anachronism - they also get incredibly complicated when people change their hours and where you have to distinguish between pensionable and non pensionable pay to avoid the worst abuses.

About time they were all replaced with CARE type schemes.

Aretnap

It's always been a "feature" of final salary schemes that they give a disproportionate reward to pay rises towards the end of your career. That's part of the reason why they're gradually being replaced with career average schemes, where a large pay rise late in your career only results in a relatively small increase in your eventual pension.

But of course, it's perfectly normal to earn more towards the end of their career than you did at the beginning - you are (hopefully) better at your job than a trainee, and you may well have had a few promotions over the years. And it's hard to classify asking for a pay rise (at any point in your career) as somehow abusing the system - if your employer doesn't think you're worth the extra money (all of it) they can always say no.

And it's not even remotely close to fraud - fraud involved deliberate deception, and where do you think the deception is involved?

zagfles

Aretnap wrote: »

It's always been a "feature" of final salary schemes that they give a disproportionate reward to pay rises towards the end of your career. That's part of the reason why they're gradually being replaced with career average schemes, where a large pay rise late in your career only results in a relatively small increase in your eventual pension.

But of course, it's perfectly normal to earn more towards the end of their career than you did at the beginning - you are (hopefully) better at your job than a trainee, and you may well have had a few promotions over the years. And it's hard to classify asking for a pay rise (at any point in your career) as somehow abusing the system - if your employer doesn't think you're worth the extra money (all of it) they can always say no.

And it's not even remotely close to fraud - fraud involved deliberate deception, and where do you think the deception is involved?

Using the pension fund to pay what ought to be employer's liabilities is pretty close to fraud. Companies used to offer people enhanced early retirement packages paid for out of the pension fund, rather than redundancies paid by the company, but post Maxwell all that was stopped.

If the employer gives anyone in a FS scheme a late career payrise (or in fact any payrise) they should be required to contribute the actuarially necessary amount to the pension fund to reflect the increased liabilities they're imposing on it. I don't think most do. Then they'll really need to decide if the employee is "worth it".

Fermion

I believe the Goverment changed the original Teachers Pension Scheme (TPS) rules circa 10 years ago to be based on an average reference salary over the best 3 years of working rather than the final employment salary for this very reason. It actually also helped those staff that had decided to move to a role with lass responsibilities(and lower salary) in the final few years of employment

Sounds like the Universities scheme needs a sensible review.

WobblyDog

When I worked in the Civil Service (20 years ago) a colleague was promoted about a year before before retirement, primarily it seemed to boost his pension. I don't think that was unusual in those days, maybe things are different now.

hyubh

Eric_the_half_a_bee wrote: »

The highlighted bit sounds like abuse to me, verging on fraud?

Why? It's hardly a new discovery that final salary schemes benefit most those with late career pay rises. The USS' problems aren't because of that, but because it bet on equities. (The good professor also needs a reality check if he really believes his own USS pension isn't all that good really.)

I wonder just how commonly this is done in other schemes?

No pun intended, but the matter is a bit academic for the USS since last year, when the final salary section was closed to further accrual and no final salary link was maintained for active members (i.e. their 'final salary' for FS pension purposes will be as at 31 March 2016, uprated for inflation).

System

They should toughen the rules if they don't like people exploiting them

Exploitation isn't fraud

kidmugsy

Eric_the_half_a_bee wrote: »

... with rising life expectancy and a competitive university environment, this has changed. The international transfer market has made it increasingly common for those in demand to bargain for a large rise late in their careers, precisely to increase their pensions. This puts a burden on the pension scheme, which hasn’t been funded by earlier contributions at a proportionate level.[/I]

https://www.theguardian.com/education/2015/feb/17/university-final-salary-pension-scheme-finance

The highlighted bit sounds like abuse to me, verging on fraud?

I wonder just how commonly this is done in other schemes?

It's common in public schemes in the US, often by the fireman/policeman/whatever being granted heaps of overtime in his last year. It's so common it's got a slang name: "pension spiking".


Anyway, USS has moved from Final Salary to Career Average, which should make this stunt much less of a problem. It will also, probably, make it harder to get people to accept otherwise unwanted responsibilities late in their careers. Nothing is ever free.