Pension scheme deficit: How much to worry?

Tomatillo

I’d very much appreciate thoughts on whether/how to take account of risk to existing pension when planning for the future. I am a member of USS and have been for a good chunk of my working life. It’s well known that the scheme is in serious deficit, exactly how bad is contentious but it’s clearly not in a good way. I’m not relying on the scheme carrying on offering anything like the same benefits in the future but at the moment I’m worrying about the benefits I’ve already built up. 

Most of my existing USS pension is DB – I built up some years in the old final salary scheme and in the current career average scheme. I also have a small amount in the DC scheme. I’d understood that the existing benefits were fairly secure in that it’s a multi-employer scheme all with legal obligations to secure the existing benefits. Then there’s the PPF if the whole thing were to collapse. So I’d felt pretty secure that my current DB benefits were a fairly reliable safety net even if the future of the scheme looks iffy.

Last night I was chatting to a friend in a scheme that’s also in deficit (railway scheme) and she was of the view that it was foolish to rely on the existing DB benefits and it is prudent to build up an entirely separate personal pension that would be enough if it collapses. Is she right? I have a bit of money that I have been thinking of putting into a SIPP but it’s never going to get to anything close to what I already have in USS and USS is becoming extremely expensive so the pension part of my budget is already getting large.

 I’d appreciate any view on how to plan around the risks thanks.  

2nd_time_buyer

In theory the defined contribution "investment builder" section of USS is separate. So whatever happens to the main defined benefit scheme it should not be affected. One reason to put money into this rather than a SIPP is if your contributions are made via salary sacrifice (as is the case at most universities). Another reason is that there are no investments charges for the USS DC scheme whilst paying in.
However, it is understandable if you would prefer something entirely separate. One compromise would be to transfer the defined contribution section to a SIPP when you cease to be employed.

2nd_time_buyer

... I personally think the risk to existing contributions in the defined benefit section is very, very small for the reasons you outline in the second paragraph of your post.

Tomatillo

Thanks v. much, I was worried I was being naive. I have enough in the DB section to cover a basic standard of living so that is important to me to give a safety net in planning everything else.
On new DC contributions, I can salary sacrifice so that would be the cheapest way of doing things but I am a little anxious about having everything in the USS basket. 

Albermarle

I have a bit of money that I have been thinking of putting into a SIPP but it’s never going to get to anything close to what I already have in USS 

You are right , it will not get close . If you consider that to buy an annuity at 65 that will pay around £2000 pa , inflation linked , with 50% spouse benefit would cost you around £100K.

Ok if you do not buy an annuity but use drawdown , then the £100K could get you £3.5K maybe , but you get the point . 

2nd_time_buyer

I appreciate your nervousness and it is understandable. The defined contribution section is effectively your pot of money. So it would be pretty outrageous for it to be at risk.

grumiofoundation

Tomatillo said:

Thanks v. much, I was worried I was being naive. I have enough in the DB section to cover a basic standard of living so that is important to me to give a safety net in planning everything else.
On new DC contributions, I can salary sacrifice so that would be the cheapest way of doing things but I am a little anxious about having everything in the USS basket. 

As above I don’t think the DC portion is ‘at risk’ if the main scheme goes under. 

Check with your university how much you can salary sacrifice - I was told they only allow an additional 1% to be salary sacrifice (no idea why.... but universities....) 

2nd_time_buyer

... that 1% is quite strange. Sounds like an overhang from the I'll-fated "the match" where the universities matched a 1% employee contribution.

FWIW I salary sacrificed 40% of my salary last month.

ewaste

I would make as much use of the scheme as possible, the DC/AVC side shouldn't be affected even if the scheme faces difficulties. You are already aware of contingency arrangements in place e.g. the PPF and the multi-employer nature of the scheme. 

 Last night I was chatting to a friend in a scheme that’s also in deficit (railway scheme) and she was of the view that it was foolish to rely on the existing DB benefits and it is prudent to build up an entirely separate personal pension that would be enough if it collapses. Is she right?

The Railways Pension Scheme (RPS) is split into over 100 sections so a number of those sections are likely in deficit. The Network Rail section is the single largest among them and at its last full actuarial valuation in 2019 was 115.8% funded.

I would agree with your friend to a certain extent and wouldn't be betting on the USS scheme being around for your entire career. Despite being in a DB scheme I also contribute 15% of my gross earnings into the AVC/SIPP. Primarily because I think the DB scheme will be long gone by the time I reach retirement in 30 odd years.

The pessimist in me can't see 'funded' DB schemes being around much longer, even large well funded schemes like the LGPS. Not least because the PPF and it's levies on the fewer and fewer DB schemes is a self-fulfilling prophecy.

MarkCarnage

Last night I was chatting to a friend in a scheme that’s also in deficit (railway scheme) and she was of the view that it was foolish to rely on the existing DB benefits and it is prudent to build up an entirely separate personal pension 

First assertion is scaremongering, second is sensible enough. See the second as complementary to the first, not a replacement.

Benefits already built up are in a better place than future accrual which may or may not happen. You don't say, but it sounds like you have built up a fair amount of DB in USS already. There isn't enough space here to go into all the governance and valuation issues in USS, but there are significant question marks around both. I am a trustee of a major private sector pension fund and although there are undoubtedly things we could have done better, I look on in askance at the mess of USS. Probably too many conflicts of interest, plus an unhelpful  last valuation date, and a somewhat complacent attitude to hedging liabilities in the past. I suspect it's actually in a bit better place right now than the headlines suggest. 

I think that you are right to assume that it's still a pretty secure safety net compared to DC.  I assume that you are intending to continue membership of the DB and make the contributions associated with that? Which as you say, might limit how much you can afford to contribute in addition. If it closed to future accrual, then the existing benefits would remain and the employer would have a duty to fund them via a recovery plan.

Any DC element of USS should be ring fenced in terms of security. 

Tomatillo

Thanks v. much for the very helpful replies. Just in answer to the questions above, I am still c25 years away from my state retirement age so plenty of time for things to change and I certainly don't expect USS to be offering anything like the current benefits for that time. At the moment I have enough in the DB scheme (low 5 figures pa, plus my spouse is also in the scheme and has about 50% more than me) that it would pay the bills and secure a basic standard of living. That's important to me because if I know I have a safety net for older age it changes the way I look at risk for other contributions/planning to retire early etc. 
Yes I do plan to remain in the scheme at the moment but the contributions are becoming eye watering and I don't have a lot of faith in its management so I will keep that under review if more changes come.