Defined Contribution Vs Defined Benefit (USS Scheme)

Southend1

I think you are underestimating the likelihood of the employers seizing the opportunity to cut costs as part of a change to D.C. only. My view on USS is that it is heading that way in the long term, and that the 12% was deliberately chosen to set the precedent for employer contributions to D.C. pensions with this in mind. Ask yourself why the current contribution is set at 12% and not 16.5%. What other plausible explanation could there be?

Investment risk for individuals in D.C. schemes is indeed higher close to retirement , hence “lifestyle” finds which reduce equity exposure near to retirement. This is why pooled investments are better value, because the overall fund risk doesn’t need to follow individual profiles in the same way.

The risk of dropping dead the day after retirement and ending up with nothing is the same if you were to buy an annuity with a D.C. fund.

I’m not sure I understand your comments about compounding. Investments held in a DB fund also benefit from the same effect, benefitting members. The difference is that the DB scheme can maintain a higher proportion of investments in equities regardless of any one individual member’s age, whereas the D.C. member needs to consider risk reduction closer to retirement. Hence DB schemes are more efficient.

I don’t think I’m being selfish at all. The way I see it, it’s better for most of us to be better off in the long run than for a small percentage of us to have the potential to do better than others at the expense of another group of us who are likely to be worse off as a result.

You seem particularly bothered about the fact that some of the current employer contributions are going towards past service deficit but don’t forget that you may benefit from the same situation in future - that is the nature of DB schemes. And in any case, if the past service deficit wasn’t being paid, it wouldn’t go to your D.C. pot anyway!

hyubh

Sam_J wrote: »

That's very interesting, thank you. I'll check it out!

http://www.civilservicepensionscheme.org.uk/members/partnership-csavc-stakeholder/dc-1/partnership-faqs/

See under 'what will my employer pay?' - ranges from 8% for members under 31 to 14.75% for members over 45.

To be honest, I don't think it would really makes sense for the USS to offer a merely optional full DC - the people who would (rationally) take it up would be young researchers, i.e. those who (given the USS' flat contribution rates) somewhat subsidise the older, longstanding members (who typically were of course young researchers themselves once).

System

Sam_J wrote: »

This is actually something that bugs me. It appears not to be a promise at all. For example, the old final salary members appear to have been shafted. There were making contributions on the assumption they were accruing a proportion of their salary at retirement. Instead, when the scheme was closed last year, their final salary was deemed to be their salary on the day the scheme closed, effectively reducing in value the previous contributions by being forced into "retirement" (for the purposes of the scheme) when they had not retired. DB promises are promises that can be broken.

Thanks to the indexing of the 'final salary' when the final salary scheme closed many people found that their 'final salary' was significantly higher than their actual salary!

Southend1

Economic wrote: »

Thanks to the indexing of the 'final salary' when the final salary scheme closed many people found that their 'final salary' was significantly higher than their actual salary!

Yes that was the case for me.... almost 20% higher.

System

Of course, it shows how real salaries have fallen! The USS probably chose the best time to close the final salary scheme (at least, for employees approaching retirement), but not for the USS.

Southend1

Sadly I have another 30 years to retirement

bluenose1

Southend1 wrote: »

Sadly I have another 30 years to retirement

At least you have had the foresight to plan ahead. The only foresight (actually luck) I had was to marry a police officer. They make massive contributions to their pension so he has retired at 49 with a sizeable lump sum and a pension of over £19,500 pa.
Have had an epiphany in last couple of days. Rather than saving/going on expensive holidays and generally frittering my money on stuff I don’t really need I have asked to make additional contributions of 60% of my salary. By my estimate I should be able to retire in 5. 1/2 years at 57 and between us we will have annual income of approx £30k.
By planning ahead your pension should be very healthy.

bigadaj

bluenose1 wrote: »

At least you have had the foresight to plan ahead. The only foresight (actually luck) I had was to marry a police officer. They make massive contributions to their pension so he has retired at 49 with a sizeable lump sum and a pension of over £19,500 pa.
Have had an epiphany in last couple of days. Rather than saving/going on expensive holidays and generally frittering my money on stuff I don’t really need I have asked to make additional contributions of 60% of my salary. By my estimate I should be able to retire in 5. 1/2 years at 57 and between us we will have annual income of approx £30k.
By planning ahead your pension should be very healthy.

Police officers don't make massive contributions, those are made by their employer. Or rather were like most schemes, particularly in the public sector, the benefits are now much reduced for those starting out, eventhough these schemes are still very generous, certainly when compared with virtually anything in the private sector.

Well done on realising the benefits of pension savings though it appears to have taken a long time to get there.

bluenose1

bigadaj wrote: »

Police officers don't make massive contributions, those are made by their employer. Or rather were like most schemes, particularly in the public sector, the benefits are now much reduced for those starting out, eventhough these schemes are still very generous, certainly when compared with virtually anything in the private sector.

Well done on realising the benefits of pension savings though it appears to have taken a long time to get there.

No doubt the employer contributes towards the pension but my husband also had to contribute approx 14% of his gross salary to his police pension which is a lot higher than most pension schemes I am aware of. He started in the police in the 80s so has benefitted from an excellent pension scheme.

Sam_J

I thought I would just update this thread with the latest proposals. The union UCU have made proposals to maintain a reduced defined benefit system with a substantially increased cost to both employee and employer. UUK (the employer) has proposed abandoning DB completely and maintaining their overall contribution of 18% of employee salary into a DC scheme and deficit reduction for the DB scheme.

UCU proposal:

• Members contribution increase from 8% of salaries to 10.9%.
• Employer contributions rise from 18% of salaries to 23.5% of salaries
• The accrual rate will be reduced to 1/80ths from the current 1/75ths
• The salary threshold will remain unchanged at £55,550 (index linked)
• The 1% match will cease to apply (this was a previous 1% contribution to a DC scheme)

UUK proposal.

End the DB scheme and move to a DC scheme with employee contributions of 4% and employer contribution of 13.25%. The other 4.75% of the 18% contribution goes towards deficit reduction of the DB scheme and maintaining the current subsidy of investment fees, and in service/death benefits for the DC scheme.

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My personal feeling leans towards the DC scheme with 13.25% employer contribution. But if the Union really considers it feasible that the employer can pay another 5.5% on top of what they are currently paying then I cannot understand why they are not striking for a DC scheme with a 18.75% contribution from employer, and an abandonment of the DB scheme for future contributions, which would then be fully funded under the UUK proposals (or at least an option for employees to join such a scheme). Then it would be a slam dunk obvious choice to opt for the DC (see my reasons in the original post - only now the DC would be more generous and DB less generous) - a contribution of 10.9% + 18.75% to the DC scheme means pension savings of 29.65% of salary, compared to accruing 1/80s of an average salary scheme for the same cost of 10.9%. Obviously this is not on the table right now but such a DC scheme would have exactly the same cost to employee and employer as what UCU is proposing and would seem massively better to me.

Additionally, many employees were opting out of the pension entirely at 8% contribution levels, so this will likely increase at 10.9% contributions for a less generous DB pension. In contrast, the UUK make the scheme more accessible requiring only 4% contributions for the maximum benefit of 13.25%.