Abuse of final salary pension schemes?

kidmugsy

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.

I agree that it isn't fraud but I do think it unsavoury because it creates perverse incentives. The University of Bed, let us say, has been ill-managed, and accordingly wants to clear some staff out into early retirement. Much of the cost will fall not on U Bed, but instead on its neighbour U Breakfast, amongst others. That reduces the incentive on U Bed to run itself competently.

Moreover I suspect that when the scheme was set up (70s I think?) nobody had any notion that there would be early retirements "in the management interest" on quite a large scale. What I don't know is how the scheme - meaning I suppose the Trust Deed? - should be modified to alleviate the problem. In whose interest is it to take action?

kidmugsy

Eric_the_half_a_bee wrote: »

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

Someone says "give me a pay rise or I'm off to the US/Australia/Singapore". Where's the fraud in that? it's a perfectly respectable aspect of bargaining with your employer.

As for a pay rise leading to a pension rise, of course it ruddy does. The clue is in the term "final salary pension".

Now that the scheme is no longer based on final salary a pay rise will be less remunerative. And so, other things being equal, more people will vanish off to US/Australia/Singapore or where have you. Is that a good price to pay? Maybe. Anyway, at least the career average scheme will put a stop to people wangling their wives/mistresses/boyfriends/cronies higher pensions. It's in the nature of mankind that that must have happened sometimes.

hyubh

kidmugsy wrote: »

I agree that it isn't fraud but I do think it unsavoury because it creates perverse incentives.

I don't disagree, but a fully collectivised approach was the norm for multi-employer DB schemes. To be honest I don't know the details of many, but SHPS and Plumbing Pensions work(ed) like that. The odd one out is the LGPS with its 'strain charges' and employer-specific contribution rates (some LGPS funds also go further and apportion different asset classes to different employers), but even then we're only talking about from the late 90s, when the full range of participating employers got to be obviously quite disparate in nature.

Moreover I suspect that when the scheme was set up (70s I think?) nobody had any notion that there would be early retirements "in the management interest" on quite a large scale.

Perhaps so, but that won't have engineered a funding crisis in itself given the impact would have been picked up almost immediately at valuation time.

In whose interest is it to take action?

Employers reporting liabilities on a cash basis (contributions paid out, not pension promises accrued) really didn't/doesn't help...

debtisnotme

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.

We no longer have final salary schemes!

hyubh

Accounting for pension liabilities was generally just quite lax in the 'heyday' of final salary schemes, compared to current standards. There's no 'conspiracy' here.

The PPF is self funding through the levy. A scheme the size of the USS entering it is admittedly pretty unthinkable though (we're talking many times the size of the Boots scheme, which was considered a 'large' one for the PFF).

Again, any unexpected increase in liabilities pertaining to early retirements would have been picked up at the time. You are cottoning on to an aspect of final salary schemes generally that has no relevance to where the USS is now.

Per my response to kidmugsy, standard practice for multi-employer DB schemes.

Given it isn't a public sector scheme, financial information on the USS is unusually public (https://www.uss.co.uk/how-uss-is-run/running-uss/annual-reports-and-accounts). So no, not 'fraud'.

If you plot the pensions in payment of a typical private sector final salary scheme, you get a graph that looks a bit like a meerkat with a very long tail standing to attention - so-called 'executive sections' were typical, where you might have double the accrual rate or the like. The USS, in contrast, was more like a public sector scheme in not having that.

Right, because some sort of inflation proofing is the law.

hyubh

When CARE first came to the USS, in 2011, it was for new joiners only (in hindsight this was a mistake). However, with v2 of the CARE scheme (now actually a hybrid scheme, since pensionable pay above an admittedly quite high level now goes into a DC not DB element), all previously final salary section members are now in it.

For sure final salary service (i.e. pre-April 2016) is protected, however unlike when the public sector schemes (TPS, LGPS, etc.) went CARE in 2014 and 2015, the final salary link has been broken, i.e. members' 'final salary' for pre-2016 service is as if they left on 31/3/16. For younger members especially this is a notable loss, since the greatest benefit of a final salary scheme is found when you stay the course and get your career service (40 years or whatever it is) go against the pay of your greatest seniority, i.e. at the end. And, at the risk of getting boringly repetitive: getting all your service go against your greatest pay level was not an obscure loophole exploited by dastardly evildoers, it just was (is) how final salary schemes work.

By the way - surely you don't think final salary service should be retrospectively converted to CARE? DB pensions are just deferred pay, so retrospectively adjusting promised pensions downwards would be akin to saying your salary from ten years ago should be retrospectively adjusted downwards too.

BobQ

I think part of the problem is you do not understand the meaning of fraud.

Universities are funded by many sources (government grants, private grants, industrial sponsors and mostly student fees). So while some funding comes from Government the bulk does not.

You keep ignoring the fact that the USS has a cash fund managed by trustees. It is not like most public sector schemes.

Employees pay c.7% employers pay c.19%. That should be enough to fund DB pension liabilities now that they have moved to a CARE scheme.

I think it is true that in both the public and private sector it is possible that individuals collude to get the people they want promoted. Anything that relies on managers making decisions cannot be free of manipulation but I doubt it is widespread.

That is a sweeping statement that cannot be justified by evidence. I suspect it is more often found in the private sector but I still suggest it does not happen a lot. Quoting examples from 1973 suggests you are grasping at straws.

I cannot disagree that the trustees appear to have miscalculated the assets of the fund and/or the need to change the contributions.
That may be incompetence but it does not make it fraud.

They need to beat this level because that is the level needed to fund the universities. In the past universities were funded by Government as were students to a large extent. The decision to reduce University income from Government meant they needed alternative funding. The decision that 40% of 18 years olds would go to university (rather that the 5% that went in the early 1970s also meant fees were required.

For the record, I believe in free university education but not at the level of 40%.

You clearly have no idea how much income UK universities receive in relation to the cost of the pensions it pays out. Try looking it up.

How do you think universities can attract the best academics if it does not offer competitive salaries and pensions?

Academics are employed on a salary and their pension relates to that salary. Why should anyone be ashamed to be offered a pay rise for taking on more responsibility?

Should people over a certain age be prevented from getting promotions?

Neither do I but so far you have no reason to call a pension scheme fraud. It is totally impossible to say that someone has never advanced by collusion, but there is no evidence that this is the general practice.

You really do not understand what fraud is do you? As explained above it is Government policy that funding of universities has transferred from HMG to students. It is also HMG policy that students must borrow and repay their costs. This is mot collusion! The Universities objected to the introduction of the loans at the time but have to work with this system.

Please remember that nobody forces school leavers to go to university. It is their choice and is clearly not fraud. It may be wrong but its not fraud.

The public sector pension schemes are defined by the HMG employers. They offer the pensions as a means of attracting the staff they want and it is part of the total reward package offered by those employers. You may disagree with them but if you keep using the word "fraud" you are merely demonstrating your ignorance.

HMG could if it chose offer a less attractive pension and most have done so since 2005/6. In 2010/11 HMG employers also increased staff contributions and reduced employer contributions. They could go further although they would then have to raise salaries to recruit and retain staff.

BobQ

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.

I worked there 30 years ago. As I recall people were selected by local managers to join national lists, all of whom would be reviewed by an independent panel, and then the best would have to pass an interview by a panel of three people you had never met before. It may have been the case that local managers could stop people getting through the sift and from reaching the interview board, but it was difficult to manipulate the final panel.

I can see that it might be easier in a university but I have still seen no evidence it is happening.

What would be useful is if those on here claiming widespread fraud can say at what point in someone's career they should be banned from being promoted?

Hussel

Just my 2p's worth:

The linked Guardian article is from 2015 so the discussion's all a bit out of date.

USS no longer has final salary linkage as already noted.

Any accrued rights in DB pensions are protected. If a final salary scheme becomes CARE any accrued pension will just be increased with inflation to retirement (or with salary if you're lucky). It can't be "re-calculated" on a CARE basis.

If you think that's fraud you should see some of the things that went on in private sector schemes.

USS has underhedged interest rate risk compared to many other schemes. I think their view is it's terrifically expensive to buy gilts, we know we're in this for the long haul and there are better things to be buying. They're always going to look bad in the current low rate environment as all their liabilities have increased with gilts. It's not pretty and I'm sure they've made some bad calls but they now need to outperform gilts which should get easier going forward unless gilt yields start going negative - possible but not likely. Of course, long-term strategies don't always look good in the short-term and they were probably expecting gilt yields to rise considerably more by now.

I don't know what probability of insolvency the PPF assigned to the universities but I have a feeling it's going to have to increase after Brexit.

hyubh

The USS itself is a limited company. The way I've put things in the past on this board is to speak of the public/private sector distinction when it comes to pensions as a continuum rather than an either/or. So, the stereotypically 'public sector' scheme would be statutory not trust-based, be DB not DC, be centrally managed, be unfunded, have its benefits guaranteed in law, will use S148 revaluation for GMP, will participate in the Public Sector Transfer Club, will be subject to the ban on money purchase transfer outs following 'pensions freedom', and so on. The LGPS (a very big public scheme) fails to meet half those criteria, BT's legacy DB scheme has an explicit crown guarantee, the BBC went DC around the same time as its private sector competitors, and so on

You're projecting contemporary standards on the past. The USS' employee rate through the 80s, 90s and 00s was par for the course, and in fact, the employee rate in many private sector final salary schemes with private sector employers was frequently lower because there was never a pretence that employee contributions primarily paid for the pensions being earned (investment returns were supposed to do that). What did you pay when an active member of the AA final salary scheme...?

Um, final salary benefits in the private sector were not retrospectively converted to CARE - accrued benefits are well protected in law.

The old AA scheme hasn't gone into thin air. Are you referring to this article?

https://www.employeebenefits.co.uk/issues/june-online-2017/aa-move-db-pension-scheme-members-final-salary-care-arrangement/

If so, current scheme members appear to be in a very similar (in fact, slightly better) situation than the lecturers. If not, what am I missing? If you are already a deferred member, accrual changes won't affect you.

You know, I'm getting the feeling you have much bigger DB pension rights than I have. If you'd like to swap figures, I've got a preserved pension of about £1850 pa, and my current employer contributes 5% to its DC scheme (I personally contribute 20%). How about you...?