USS pension: is 1/85 accrual rate + 3x lump sump DB pension any good?

thegentleway

This seems to depend widely on how old you are?
£10k salary with 1/85 accrual rate gets you £117.65 income pa. Assuming 4% withdrawal rate, you would need £3,294.12 equivalent pot (including 3x lump sum) to draw this income.
With 9.8% pension contribution:
If you're 45 years from retirement, £980 at 5% growth would get you £8,805.31 so it seems really poor value to pay into your DB pension.
If you're 10 years from retirement, £980 at 5% growth would only get you £1,596.32 so it's amazing value to pay into DB pension.

Not so clear cut for me as I'm 38 so I've got 29 years of compounding left: £4,033.81. I'm a higher rate tax payer and have some profits to take out of company so I'm looking at salary sacrificing extra money into my DC pension as I'll save 25% on dividend tax, 40% income tax, and 13.75% NI. However, this would reduce how much I pay into my DB pension but at my age this doesn't seem so bad?

saucer

Is it a career average or final salary arrangement? Either way I think you are forgetting a number of very important advantages of the DB pension. 1/85 accrual suggests final salary which would of course be based on 1/85 of that rather than of 10k. It will then rise with inflation in payment. If it is career average it will rise with inflation before and after you retire. No private pension will match that

Universidad

It's good compared to most private sector pensions. It's very, very poor compared to most public sector DB pensions, including the TPS scheme which is in play in many post-92 universities.

In other words, the oldest, and largely most prestigious universities have a pension that is significantly worse than those often thought of as "former polytechnics".

Doesn't seem sustainable to me. But then, I left because of the pension cuts.

I usually throw out a challenge - can anyone find an open DB scheme with an accrual rate worse than 1/85? So far no dice.

Universidad

saucer said:

1/85 accrual suggests final salary

Yes, that's a low enough accrual that it does suggest final salary rather than CARE.

However, it's absolutely CARE. It's just a really poor accrual for a CARE scheme.

saucer said:

If it is career average it will rise with inflation before and after you retire. No private pension will match that

It also has an inflation cap of 2.5%, so not much rising to be done there...

I don't think most private pensions struggle to compete with that over time. They don't offer a guarantee, of course. But a guarantee of 2.5% isn't worth a lot.

Dazed_and_C0nfused

The Church of England has a 1/100th accrual rate but it's not clear what the conditions are for that as they have two better rates as well.

Maybe reduced contributions?

saucer

Universidad said:

saucer said:

1/85 accrual suggests final salary

Yes, that's a low enough accrual that it does suggest final salary rather than CARE.

However, it's absolutely CARE. It's just a really poor accrual for a CARE scheme.

saucer said:

If it is career average it will rise with inflation before and after you retire. No private pension will match that

It also has an inflation cap of 2.5%, so not much rising to be done there...

I don't think most private pensions struggle to compete with that over time. They don't offer a guarantee, of course. But a guarantee of 2.5% isn't worth a lot.

On the basis of that info it doesn't look great after all

hyubh

thegentleway said:

This seems to depend widely on how old you are?
£10k salary with 1/85 accrual rate gets you £117.65 income pa. Assuming 4% withdrawal rate, you would need £3,294.12 equivalent pot (including 3x lump sum) to draw this income.
With 9.8% pension contribution:
If you're 45 years from retirement, £980 at 5% growth would get you £8,805.31 so it seems really poor value to pay into your DB pension.
If you're 10 years from retirement, £980 at 5% growth would only get you £1,596.32 so it's amazing value to pay into DB pension.

Not so clear cut for me as I'm 38 so I've got 29 years of compounding left: £4,033.81. I'm a higher rate tax payer and have some profits to take out of company so I'm looking at salary sacrificing extra money into my DC pension as I'll save 25% on dividend tax, 40% income tax, and 13.75% NI. However, this would reduce how much I pay into my DB pension but at my age this doesn't seem so bad?

I partially agree and partially disagree with other replies. 1/85 CARE isn't bad given there is also an automatic lump sum of 3/85 - in modern public sector pensions, in contrast, there is no automatic lump sum, and the commutation rate if you want a lump sum is deliberately very poor. While the cap on DB accrual may be annoying, the way it is done (i.e. switches to DC with a healthy employer rate for pay above a certain amount ) is at least better than how other private sector DB pensions ended up, capping increases on pensionable pay (i.e. the pay for pension accrual gets progressively smaller than your actual pay, typically). Lastly, the employee contribution rate is a bit lower than that for TPS members on at least £47K.

However, the cap on pension increases given the same method is also used for active and deferred revaluation is rubbish. In fact for deferred members it's worse than the normal case for a private sector DB pension (let alone public sector one), since the cap is applied on a year-by-year basis, not across the whole deferred period. Given all the fuss the UCU makes about pensions, I can't quite believe how easily that slipped through, relatively speaking - for a younger member, I'm not sure why switching to full DC (maintaining a large employer contribution) would be such a bad thing, comparatively.

Southend_2

Note that the 2.5% revaluation cap on USS is currently deferred and it is looking possible that it could be reverted back to the previous 'soft cap' following a favourable 2023 valuation of the scheme. Don't forget also that there are also death benefits - lump sum and dependents' pensions - and ill health retirement benefits. 

ussdave

I think it's fair to say that the recent changes have massively worsened the pension, especially for younger/lower earning members.  As above, a pure DC scheme with the equivalent employer contributions may well deliver a better outcome for most members.

Hopefully the changes will be reversed based on the recent UCU pressure and (more so) the upcoming valuation.

I compared the current accrual vs my wife's LGPS and even with a 10k drop in salary I'd be better off in the end.  Obviously that is "fag packet" maths, but you get the idea.

Universidad

ussdave said:

I compared the current accrual vs my wife's LGPS

I moved to the civil service, the comparisons are frightening.

USS 1/85

CSP 1/43.1

USS: 9.8% contribution

CSP: 5.45% contribution

Essentially twice the accrual for just over half the cost.

There are some remaining advantages to USS: AFAIK, they're handling the rise in state pension age more gracefully, and there is that 3/85 lump sum that it's easy to forget about. Their current actuarial reductions are easier to swallow if you want to retire early as well.  But nothing that makes the comparison even close. It's a whole different game.

The argument for being in USS if you work for a University has always been strong, of course: do you really want to turn down the employer contributions? It's free money.

But I just can't believe that a scheme with such strong backing can't offer more value. There's some maths in this very thread that suggests you'd be likely to do better with your own 10% contributions and damn the 20% your employer is throwing down. That is shocking given the broad shoulders that USS sits on.

hyubh

Universidad said:

ussdave said:

I compared the current accrual vs my wife's LGPS

I moved to the civil service, the comparisons are frightening.

USS 1/85

CSP 1/43.1

USS: 9.8% contribution

CSP: 5.45% contribution

Essentially twice the accrual for just over half the cost.

This doesn't prove anything. The civil service pension scheme is an unfunded, pay-as-you-go one. Its low employee rates are a legacy of it traditionally having been non-contributory (back in the day, civil service salary structures were devised allowing for pension contributions in comparable non-civil service jobs). It is officially costed using a discount rate based on projected GDP growth; some have argued this is a bit dubious, but either way, such a discount rate is certainly inapplicable to a private sector scheme. Nearly all DB pensions in the private sector are closed and replaced with some sort of DC arrangement because the guarantees involved in DB, when accounted for according to modern standards, are very costly indeed. And even back in the civil service, the (over) generosity of the pension has to be put against pay stagnation over the past 10-15 years.

There's some maths in this very thread that suggests you'd be likely to do better with your own 10% contributions and damn the 20% your employer is throwing down. 

Hardly likely...