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

Universidad

hyubh said:

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

And that might be interesting when taking an overview of the historical arc of pensions over the last century.

But as an employee, the only question that I have to care about is "Can i do better?"

Far from not proving anything, the bare facts outlined above are pretty much all the proof that matters.

hyubh

Universidad said:

hyubh said:

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

And that might be interesting when taking an overview of the historical arc of pensions over the last century.

But as an employee, the only question that I have to care about is "Can i do better?"

Far from not proving anything, the bare facts outlined above are pretty much all the proof that matters.

Not sure where you're going with, apart from the (clearly true) point that if comparing two potential job opportunities, look at the respective pensions as well as headline salary...? You said before that you just couldn't believe that a scheme with such strong backing can't offer more value - but a comparison with the civil service scheme doesn't support that, for the reasons I gave...

Take the TPS: it's now more generous than the USS, yes. However the vast majority of TPS members are school teachers, and school teachers as a class are paid less than university lecturers as a class. Conversely, the early years of teaching are less precarious than the life of a postdoc. So pros and cons - at the risk of mixing metaphors, things need to be looked at in the round, not let the pension tail wag the dog. And the USS remains better than how many university support staff schemes ended up, so some handy class privilege there...

thegentleway

hyubh said:

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...

@hyubh I wonder if you'd be so kind as to clarify: are you saying my assumption of 5% growth is unlikely? I thought this was rather conservative since on average the stock market has returned 7% per year when accounting for inflation. You only need 2.74% growth to beat DB pension at 45 years from retirement...

OldScientist

thegentleway said:

hyubh said:

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...

@hyubh I wonder if you'd be so kind as to clarify: are you saying my assumption of 5% growth is unlikely? I thought this was rather conservative since on average the stock market has returned 7% per year when accounting for inflation. You only need 2.74% growth to beat DB pension at 45 years from retirement...

It depends on the period and country. Taking the figures in the Credit Suisse Handbook for 2022, UK equities had real returns of 5.4% (1900-2021), 6.1% (1972-2021), and 3.8% (2002-2021). While not included in the handbook, rolling 45 year periods for the UK give a worst case annualised real return for equities of just under 2% and for a 80/20 portfolio of about 1.5% (I used the data at https://www.macrohistory.net/ to calculate that). Median values are around 4.5% and 3.8% for 100/0 and 80/20, respectively, so yes, from a historical perspective 5% real has been unlikely for a UK portfolio.

Rather than using the 4% 'rule' (which doesn't necessarily apply for the UK since our historical inflation has been worse than that in the US - 3.0 to 3.5% might be more realistic), a better comparison might be between the DB pension and a joint annuity with a 50% survivor benefit. The type of annuity would rather depend on when the USS payouts were accumulated. Prior to 2012(?) it would be against an RPI linked annuity (according to moneyhelper, currently a payout rate of around 3.7% at 65yo, joint 50% benefits), post 2012 it would need to be compared against an RPI annuity with a cap (or at a pinch with a nominal annuity with an escalation equal to the cap) - the cap being 5% or possibly 2.5% depending on what USS decide. According to HL, a joint annuity with 50% survivor benefits and 3% escalation currently has a payout rate of about 4.2%.

I've done a simple calculation with those comparisons and found that a DC pension with the same contributions, would probably provide a better income than the 2.5% capped DB pension. However, in the worst historical cases, or where the annuity rate at the beginning of retirement was poor, then this might not have been the case. The outcome does critically depend on various assumptions (e.g. inflation rate, salary growth rate, investment growth, etc.) and needs more exploration than can be done on a forum. Finally, my guess, is that if USS went over to a fully DC scheme, the current high employer contribution rates would be reduced to those more commonly found in the private sector.

thegentleway

OldScientist said:

thegentleway said:

hyubh said:

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...

@hyubh I wonder if you'd be so kind as to clarify: are you saying my assumption of 5% growth is unlikely? I thought this was rather conservative since on average the stock market has returned 7% per year when accounting for inflation. You only need 2.74% growth to beat DB pension at 45 years from retirement...

It depends on the period and country. Taking the figures in the Credit Suisse Handbook for 2022, UK equities had real returns of 5.4% (1900-2021), 6.1% (1972-2021), and 3.8% (2002-2021). While not included in the handbook, rolling 45 year periods for the UK give a worst case annualised real return for equities of just under 2% and for a 80/20 portfolio of about 1.5% (I used the data at https://www.macrohistory.net/ to calculate that). Median values are around 4.5% and 3.8% for 100/0 and 80/20, respectively, so yes, from a historical perspective 5% real has been unlikely for a UK portfolio.

Rather than using the 4% 'rule' (which doesn't necessarily apply for the UK since our historical inflation has been worse than that in the US - 3.0 to 3.5% might be more realistic), a better comparison might be between the DB pension and a joint annuity with a 50% survivor benefit. The type of annuity would rather depend on when the USS payouts were accumulated. Prior to 2012(?) it would be against an RPI linked annuity (according to moneyhelper, currently a payout rate of around 3.7% at 65yo, joint 50% benefits), post 2012 it would need to be compared against an RPI annuity with a cap (or at a pinch with a nominal annuity with an escalation equal to the cap) - the cap being 5% or possibly 2.5% depending on what USS decide. According to HL, a joint annuity with 50% survivor benefits and 3% escalation currently has a payout rate of about 4.2%.

I've done a simple calculation with those comparisons and found that a DC pension with the same contributions, would probably provide a better income than the 2.5% capped DB pension. However, in the worst historical cases, or where the annuity rate at the beginning of retirement was poor, then this might not have been the case. The outcome does critically depend on various assumptions (e.g. inflation rate, salary growth rate, investment growth, etc.) and needs more exploration than can be done on a forum. Finally, my guess, is that if USS went over to a fully DC scheme, the current high employer contribution rates would be reduced to those more commonly found in the private sector.

Why U.K. equities and not global equities?

Good point about 4% but why joint annuity with 50% survivor benefit?

OldScientist

thegentleway said:

OldScientist said:

thegentleway said:

hyubh said:

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...

@hyubh I wonder if you'd be so kind as to clarify: are you saying my assumption of 5% growth is unlikely? I thought this was rather conservative since on average the stock market has returned 7% per year when accounting for inflation. You only need 2.74% growth to beat DB pension at 45 years from retirement...

It depends on the period and country. Taking the figures in the Credit Suisse Handbook for 2022, UK equities had real returns of 5.4% (1900-2021), 6.1% (1972-2021), and 3.8% (2002-2021). While not included in the handbook, rolling 45 year periods for the UK give a worst case annualised real return for equities of just under 2% and for a 80/20 portfolio of about 1.5% (I used the data at https://www.macrohistory.net/ to calculate that). Median values are around 4.5% and 3.8% for 100/0 and 80/20, respectively, so yes, from a historical perspective 5% real has been unlikely for a UK portfolio.

Rather than using the 4% 'rule' (which doesn't necessarily apply for the UK since our historical inflation has been worse than that in the US - 3.0 to 3.5% might be more realistic), a better comparison might be between the DB pension and a joint annuity with a 50% survivor benefit. The type of annuity would rather depend on when the USS payouts were accumulated. Prior to 2012(?) it would be against an RPI linked annuity (according to moneyhelper, currently a payout rate of around 3.7% at 65yo, joint 50% benefits), post 2012 it would need to be compared against an RPI annuity with a cap (or at a pinch with a nominal annuity with an escalation equal to the cap) - the cap being 5% or possibly 2.5% depending on what USS decide. According to HL, a joint annuity with 50% survivor benefits and 3% escalation currently has a payout rate of about 4.2%.

I've done a simple calculation with those comparisons and found that a DC pension with the same contributions, would probably provide a better income than the 2.5% capped DB pension. However, in the worst historical cases, or where the annuity rate at the beginning of retirement was poor, then this might not have been the case. The outcome does critically depend on various assumptions (e.g. inflation rate, salary growth rate, investment growth, etc.) and needs more exploration than can be done on a forum. Finally, my guess, is that if USS went over to a fully DC scheme, the current high employer contribution rates would be reduced to those more commonly found in the private sector.

Why U.K. equities and not global equities?

Good point about 4% but why joint annuity with 50% survivor benefit?

Actual cap weighted global indices have not been available for all that long and some of the longer term historical data that do exist (e.g. the free macrohistory database) do not have cap weights while the data sets that do include this (e.g. Dimson et al.) aren't free! As far as I know, the only work that looks at safe withdrawal rates with international diversification is https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates with, for the UK, an increase of about 20 basis points in safemax going from domestic to global (not so relevant to accumulation though, although possibly indicative that the difference in the worst cases is not large). While I did try a GDP weighted approach, there was some odd behaviour I wasn't entirely happy with (and have yet to look at properly), so the best I have currently been able to come up with is to model a portfolio consisting of 40% UK stocks, 40% US stocks, and 20% UK bonds, where the 45 year annualised real return using UK inflation was 3.2% (1st percentile) and 5.8% (median).

Joint annuity with 50% benefit mimics the USS pension (there is a 50% survivor benefit).

thegentleway

OldScientist said:

thegentleway said:

OldScientist said:

thegentleway said:

hyubh said:

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...

@hyubh I wonder if you'd be so kind as to clarify: are you saying my assumption of 5% growth is unlikely? I thought this was rather conservative since on average the stock market has returned 7% per year when accounting for inflation. You only need 2.74% growth to beat DB pension at 45 years from retirement...

It depends on the period and country. Taking the figures in the Credit Suisse Handbook for 2022, UK equities had real returns of 5.4% (1900-2021), 6.1% (1972-2021), and 3.8% (2002-2021). While not included in the handbook, rolling 45 year periods for the UK give a worst case annualised real return for equities of just under 2% and for a 80/20 portfolio of about 1.5% (I used the data at https://www.macrohistory.net/ to calculate that). Median values are around 4.5% and 3.8% for 100/0 and 80/20, respectively, so yes, from a historical perspective 5% real has been unlikely for a UK portfolio.

Rather than using the 4% 'rule' (which doesn't necessarily apply for the UK since our historical inflation has been worse than that in the US - 3.0 to 3.5% might be more realistic), a better comparison might be between the DB pension and a joint annuity with a 50% survivor benefit. The type of annuity would rather depend on when the USS payouts were accumulated. Prior to 2012(?) it would be against an RPI linked annuity (according to moneyhelper, currently a payout rate of around 3.7% at 65yo, joint 50% benefits), post 2012 it would need to be compared against an RPI annuity with a cap (or at a pinch with a nominal annuity with an escalation equal to the cap) - the cap being 5% or possibly 2.5% depending on what USS decide. According to HL, a joint annuity with 50% survivor benefits and 3% escalation currently has a payout rate of about 4.2%.

I've done a simple calculation with those comparisons and found that a DC pension with the same contributions, would probably provide a better income than the 2.5% capped DB pension. However, in the worst historical cases, or where the annuity rate at the beginning of retirement was poor, then this might not have been the case. The outcome does critically depend on various assumptions (e.g. inflation rate, salary growth rate, investment growth, etc.) and needs more exploration than can be done on a forum. Finally, my guess, is that if USS went over to a fully DC scheme, the current high employer contribution rates would be reduced to those more commonly found in the private sector.

Why U.K. equities and not global equities?

Good point about 4% but why joint annuity with 50% survivor benefit?

Actual cap weighted global indices have not been available for all that long and some of the longer term historical data that do exist (e.g. the free macrohistory database) do not have cap weights while the data sets that do include this (e.g. Dimson et al.) aren't free! As far as I know, the only work that looks at safe withdrawal rates with international diversification is https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates with, for the UK, an increase of about 20 basis points in safemax going from domestic to global (not so relevant to accumulation though, although possibly indicative that the difference in the worst cases is not large). While I did try a GDP weighted approach, there was some odd behaviour I wasn't entirely happy with (and have yet to look at properly), so the best I have currently been able to come up with is to model a portfolio consisting of 40% UK stocks, 40% US stocks, and 20% UK bonds, where the 45 year annualised real return using UK inflation was 3.2% (1st percentile) and 5.8% (median).

Joint annuity with 50% benefit mimics the USS pension (there is a 50% survivor benefit).

Very interesting. 5.8% median so 5% real return isn't unlikely?
Monevator has real 50 year return for equities at 5.7% https://monevator.com/uk-historical-asset-class-returns/ using Barclays Capital Equity Gilt Study 2016

Looks like I won't be salary sacrificing away from DB then. I'll donate the dividends to charity instead, nearly doubles it (19% corporation tax and 33.75% dividend tax)!

I didn't know about 50% survivor benefit! That's great.

Wyndham

USS really isn't as good as it used to be. And this is why UCU (University and College Union) is currently striking, and has been - on and off - for some time. In my opinion, we are approaching a scandal - and a few things along the way have really made me think. (I won't give details, but invite you to google for 'Jane Hutton' and USS)

However, I have money in USS, because it's my sector. It's also my husband's sector. We're hoping for a good retirement (we're both now just past 50), but USS is not inspiring confidence....

However, any pension gets the employer contribution so is good - and I'm not sure that the OP has alternatives where this would happen? So, like many of us, surely it's better to go for it than not?

hyubh

Wyndham said:

I won't give details, but invite you to google for 'Jane Hutton' and USS

That will be the person who got sacked as a USS non-exec director, took the USS to an employment tribunal, then unilaterally withdrew after two days...

mark5

thegentleway said:

hyubh said:

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...

@hyubh I wonder if you'd be so kind as to clarify: are you saying my assumption of 5% growth is unlikely? I thought this was rather conservative since on average the stock market has returned 7% per year when accounting for inflation. You only need 2.74% growth to beat DB pension at 45 years from retirement...

I would quite happily swap my dc pension with 3% employers contribution for your 1/85 plus x3 lump sum and widows pension. 

Yes you don’t have the best db pension out there but you do have a better pension than the majority of the UK. 

Contribute to a defined contribution pension alongside your existing pension and see what it returns you in the future!