Employers Pension Fund

USS - FAQs

These factual FAQs were posted on the 7 October 2011 to help members of USS understand the impact of the changes that took effect on 1 October 2011.

 

Q1.  So, the changes have been implemented. How will these changes impact the pension I have already built up before 1 October 2011?

A1.  The pension you have already built up for your USS membership before 1 October 2011 is unaffected by these changes. It will be calculated in exactly the same way as before and will be based on your final salary when you leave service. The only change to affect this part of your pension is that increases to your pension once in payment (and to your deferred pension if you leave before you reach retirement age) will now be based on the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). This change, which is expected to produce a lower rate of increase than the RPI, is in response to a change in Government Legislation which affected our scheme. It was not part of the original package of changes brought in to ensure the long-term sustainability of USS.

Q2.  I’ve heard talk about people leaving USS to protect their pension. What’s that all about?

A2.  This relates to a change in the tax regime and is completely separate from the package of reforms. The only people who might need to consider whether to remain members of USS are those who have already built up (or are close to building up) maximum benefits under the current tax regime. These people might face large tax bills if they continue as members of USS. Unless you have been contacted about this issue by USS directly, there is no need to leave the scheme or retire to “protect” the benefits you have already built up as they are not being taken away or changed.

Q3.  I am over 55. Is it fair to reduce the pensions of people like me so close to retirement?

A3.  Special arrangements are in place to protect members who were age 55 or over on 1 October 2011.   You can still draw your full unreduced pension from age 60 onwards so long as you have the consent of your employer.

Q4.  I have always planned to retire at 60 but now that the Normal Retirement Age is increasing (to 65 initially) I will have to work an extra 5 years. Isn’t that unfair?

A4. The Normal Retirement Age of a pension scheme is the age at which your pension becomes payable automatically with no reduction for early payment. However, you can still choose to draw your pension at any age between 55 and 65 if you wish. As now, any pension that comes into payment early will be reduced to take into account the fact that it will be in payment for longer. Your pension in respect of your USS membership before 1 October 2011 retains a Normal Retirement Age of 60 so if you retire between ages 60 and 65, only the pension you receive in respect of your USS membership from 1 October 2011, will be reduced. Don’t forget that if you stay in USS until age 65 you will have built up an extra five years’ worth of pension and that the new flexible retirement provisions offer more choice.

Q5.  I understand that the USS Normal Retirement Age will be increasing in line with State Pension Age. How can I work out when I will finally get my pension?

A5.  You can check this using the State Pension Age Calculator at http://www.pensionsadvisoryservice.org.uk/state-pensions/state-pension-age-calculator . Please note, however, that this does not take into account changes announced in the Government's recent Spending Review. It will be updated when the changes become law, which is expected to be this autumn.

Q6.  I want the option to work for longer than I had originally planned – how will this impact on my pension?

A6. You can choose to work up to age 65 or beyond. If you don’t want to continue in full-time employment, you may wish to take advantage of the Scheme’s new flexible retirement terms. These allow you to work part-time and continue to build up benefits in USS, while drawing part of your pension. Under the new arrangements your employer is required to contribute to your pension if you work beyond 65.

Q7.  Now that inflation increases are capped for pensions in payment how will my pension keep up with the cost of living in retirement?

A7. The new inflation cap applies to pensions based on membership since 1 October 2011. This portion of your pension will be increased each year in line with full inflation based on CPI up to 5%, with half of any further increase up to 15%.

It is worth noting that the CPI has never been above 15% since the Office of National Statistics started to measure it in 1988. Similarly, RPI which has been measured for longer (since 1948), has rarely been above 15% - mostly in the 1970’s. Over the last 20 years the increase granted to pensions in payment would still have been fully in line with inflation each year, even if this new cap had been in place.

Q8.  An increase in my pension contribution seems unaffordable at a time when pay increases are moderate – how will the changes impact on my monthly wage?

A8.  While it is true that your scheme contributions have increased from 6.35% to 7.5% of pay, because you don’t pay tax on pension contributions, the impact on your take-home pay will be less than that.

If you are a basic rate tax payer your contribution is reduced by 20% (a 1.15% increase minus 20% equals a 0.92% increase). If you are a higher rate tax payer your contribution is reduced by 40% (a 0.69% increase). You can reduce the impact on your take home pay even further if you pay by salary sacrifice (also know as Pension plus or SMART pensions). This is because you won’t pay NI on your pension contribution either. For example, an employee earning £25,000 will see their monthly take home pay will reduce by just £19 per month from 1 October 2011 or by £17 per month if they pay by salary sacrifice.

Don’t forget that your employer meets the bulk of the cost of your pension, paying 16% of members’ salaries into the scheme. It is also important to remember that provides well as a guaranteed inflation linked pension for you in retirement, USS also provides life cover, spouse and child pensions plus a pension if you get sick and can’t work. These are all valuable benefits which would cost a lot more if you purchased them privately outside the scheme.

Q9.  Do the changes mean that I will lose my pension if I am made redundant?

A9. In short, no. If you are made redundant and are age 55 or more with a minimum of 5 years’ service you can still take your pension. In the case of redundancy before 1 October 2013, you can receive an immediate unreduced pension and lump sum based on your pensionable service at the date of your retirement. Furthermore, your employer is required to meet the additional cost of providing this unreduced pension by making a payment to USS.

From 1 October 2013, you will still be able to access your pension on redundancy at age 55 or over, but it may be reduced for early (and therefore longer) payment. Your employer will have the option to make an additional payment to USS in order for you to receive an unreduced (or partially reduced) pension, but they are not required to do so after 1 October 2013.

Q10.  Are the recent changes necessary? My union suggests that USS is fully funded.

A10. The 2011 valuation is being finalised and the result will not be known until November, but it is expected to show that USS has a deficit well in excess of £1 billon. A deficit means that the value of the investments held by the scheme is not enough to cover all the pensions and other benefits that the Trustees expect to pay out.

When completed, this valuation will show a snapshot of the funding level as at 1 March 2011. In reality, the funding level of any pension scheme varies from day-to-day depending on how investments are performing. Therefore, had the valuation calculations been made on any day in September, the deficit would be far greater than the March 2011 valuation is expected to show, as stock markets suffered fluctuations and instability. The USS’s funding position is also affected by life expectancy, which has been increasing steadily in recent years and is expected to continue to do so.

The package of changes was the minimum needed to put USS back on track for a sustainable and affordable future.

Q11.  Why can’t the employers and the Trustees just change the scheme calculations and assumptions in order to remove the deficit?

A11.  The Trustees set the assumptions on the advice of the scheme actuary. In turn, the actuary’s advice is based on the experience of the scheme (for example, how many pensioners have died over the last 3 years, how old were they when they died, how long had their pensions been in payment etc) and on their professional opinion of how economic factors will change in the future, for example, what will happen to interest rates.
 
The scheme actuary must comply with a professional code of conduct in the course of performing their duties. There are also regulations and guidelines that must be followed when setting actuarial assumptions and these are policed by the Pensions Regulator. The Regulator is able to reprimand Trustees and employers if their valuation assumptions are not appropriate. In addition any deficit has to be paid off through a recovery plan that is agreed with the Regulator. By monitoring valuations and recovery plans the Regulator tries to ensure that all pension schemes are well funded in the long term. If employers could simply alter assumptions in order to remove a deficit then no pension scheme would ever be in deficit! Despite this, sooner or later many schemes would reach a point at which they could no longer afford to pay the benefits due.

Q12. How did the employers enforce these detrimental changes?

A12.  These changes were approved - following extensive negotiation and in accordance with the scheme’s own rules - by the Joint Negotiating Committee (JNC) and then by the USS Trustee Board. Both the JNC and the Trustee Board involved full UCU representation. In addition, the employers carried out a detailed consultation with all current and potential USS members before the final package of changes was settled put forward to the JNC and Trustee Board for approval.
The USS scheme changes are moderate by any standards and exceptional in retaining a final salary pension for all existing members. The new Career Revalued Benefits scheme, for employees who started from 1 October 2011, is an attractive scheme providing a good level of income in retirement.

Q13.  Can the employers take over the running of the USS?

A13.  No. There are regulations which require member representatives to sit on the Trustee Board of any occupational pension scheme. In order to abide by these regulations and its own rules, the USS Board must include independent trustees and member representative trustees. The independent trustees on the USS Board are currently carrying out a review of the Scheme’s governance. This is good practice as it is important to ensure that the representation on the Trustee Board reflects the membership of the scheme. For example, while there is currently a representative for pensioners on the Board there is no representative for deferred members.

Q14.  What was the point of these changes if the government is only making more changes to public sector pension schemes?

A14.  The universities and related organisations which employ USS members are part of the private sector, even though they may receive significant public funding. Therefore USS is a private sector pension scheme and will not be affected by the proposed changes to the public sector pension schemes. The proposed public sector pension changes will have an impact on the post-92 HEIs, where most employees are members of the Teachers Pension Scheme or the Local Government Pension Scheme.

For more information on the changes visit the USS website.USS has released some updated material for members of the Final Salary section and also the Career Revalued Benefits sections which can be found via the following link: USS Scheme guide