Abuse of final salary pension schemes?

dsw_123

Since April 2016 the USS scheme is now a CARE scheme up to 55K and above that a DC scheme so the incentive and ability to game the system is reduced.

Plus

I'm puzzled by this quote from 'an independent pensions consultant' in the BBC article:

"That means either they go up or there is a smaller amount of money that can be dedicated to teaching and research. And obviously the student fees that are paid are for teaching and research, not to pay for the folly of USS betting on equities over the last few years."

The pensions deficit has grown rapidly since 2014, when benefits were reduced for new entrants to plug a £5,3bn deficit.

Mr Ralfe said poor management of the fund was to blame.

"I think the root cause of this is the USS trustees going down to the casino and betting the money that they had been given by universities, betting it on [the stock market]," he said.

What is the scheme supposed to do? It has to provide for members who are living longer than expected. It would seem that longer term investments are the place to be for that, rather than being forced to buy bonds which return virtually zero. And I'm not sure which stock market he's referring to - the world economy hasn't done too badly.

Or is there a large amount of redemptions they have to meet in the short term and hence they need a very conservative risk profile?

Edit: Also to note the original Guardian article cited above is from 2015, when the final salary section was in place.

hyubh

Plus wrote: »

I'm puzzled by this quote from 'an independent pensions consultant'

What is the scheme supposed to do?

Require employers to put more money in.

It has to provide for members who are living longer than expected. It would seem that longer term investments are the place to be for that, rather than being forced to buy bonds which return virtually zero.

Ralfe's position is that a DB scheme should match its assets to its liabilities as much as possible. Your 'longer term investments' don't do that, since they involve a risk and indeterminacy that isn't found in the future pension payments promised.

Or is there a large amount of redemptions they have to meet in the short term and hence they need a very conservative risk profile?

And if the 'long term investments' don't come off, who then pays the pension promises that nevertheless remain...?

jamesperrett

WobblyDog wrote: »

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.

This is still the case with the Classic scheme but was changed for new joiners back in 2002 and since 2015 everyone (apart from those retiring before 2022) has been moved to a career average scheme.

Marine_life

Eric_the_half_a_bee wrote: »

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

Why is it abuse or fraud if its within the scheme rules?
Immoral it may be but wouldn't you do the same thing?

kidmugsy

hyubh wrote: »

Ralfe's position is that a DB scheme should match its assets to its liabilities as much as possible.

Ralfe's arguments about DB schemes seem to me pretty persuasive for company pension schemes but much less so for USS. Liability matching for USS is rather difficult when index-linked gilts have such negative yields.

To give him credit, though, he spotted that USS was in dire straits long before the management of the scheme admitted to it.


If we (and many other advanced countries?) face a prolonged deflation, like that which has plagued Japan for so long, then presumably all DB pension schemes are going to be in trouble. Money purchase pensions will disappoint too.

So far the government hopes to protect state retirement pensions by increasing the age from which they become payable; this can't go on forever.

greenglide

Of course the only people who benefit from such pay rises in later life are those who are able, directly or indirectly, to have some control over their salary / promotions.

I never came on any of this in the private sector or the public sector. I can see where certain people in positions of power could arrange it with their mates but for each of these there will be hundreds of people in the organisation who wouldn't have any way to do this.

I suppose that the USS would have more chance than most as I would imagine there are fewer people in lower grades.

Apodemus

greenglide wrote: »

I suppose that the USS would have more chance than most as I would imagine there are fewer people in lower grades.

What? The academic world is very much a pyramid, with a huge number of young PhD researchers, a smaller number of post-docs and a progressively smaller number of lecturers, senior lecturers, professors etc. There will be very many people (like me ) who stand to get 1 or 2 40ths of final salary (my final salary was £2,400) from the USS 40 years after leaving the scheme!

hyubh

It isn't 'fraud' - it's just how the scheme worked. Employer liabilities were fully 'grouped' until recently for everything (and even now, are still largely grouped), e.g. an employer could grant an earlier retirement without an explicit cost being charged to it. Nobody was defrauded, because participation in the USS was (and is) a private arrangement between the universities themselves.

The USS is a funded, trust-based scheme, not an unfunded, statutory scheme. As such, it pays the Pension Protection Fund (PPF) levy, although its fully grouped nature means it does so on a 'last man standing' basis (i.e. all its participating employers would have to fail for entry to the PPF to actually take affect).

Your objections are really to final salary schemes generally.

I think it is perfectly right and proper for contractual pension promises made in the past to be respected. Do you?

The scheme's actuary back in the day would have taken account of patterns of late career pay increases, i.e. the issue was already 'banked' when determining employer and employee contribution rates.

zagfles

hyubh wrote: »

It isn't 'fraud' - it's just how the scheme worked. Employer liabilities were fully 'grouped' until recently for everything (and even now, are still largely grouped), e.g. an employer could grant an earlier retirement without an explicit cost being charged to it.

Why? That's the point - it incentivises this sort of manipulation. If an employer thinks an employee is worth a pay rise then that employer should pay the full cost of the payrise, including any extra liability they impose on the pension fund. If an employer wants to get rid of an employee, they should pay redundancy instead of offering an early retirement deal funded by the pension scheme.

Nobody was defrauded, because participation in the USS was (and is) a private arrangement between the universities themselves.

Except other members of the pension fund should it go bust with a deficit.

The USS is a funded, trust-based scheme, not an unfunded, statutory scheme. As such, it pays the Pension Protection Fund (PPF) levy, although its fully grouped nature means it does so on a 'last man standing' basis (i.e. all its participating employers would have to fail for entry to the PPF to actually take affect).

Or get bailed out by the taxpayer or student fees.

Your objections are really to final salary schemes generally.



I think it is perfectly right and proper for contractual pension promises made in the past to be respected. Do you?

Yes. So dodgy practices which may prevent contractual pension promises being kept - for instance those which impose an excessive burden on the fund and increase its deficit like unfunded late career payrises, should be banned.

The scheme's actuary back in the day would have taken account of patterns of late career pay increases, i.e. the issue was already 'banked' when determining employer and employee contribution rates.

How do you that "back in the day" the actuary would have known these practices were going to take place? Or that they haven't changed over the years?