A look at the recently proposed changes to the USS pension scheme.
What is the USS?
The USS (or the University Superannuation Scheme) is a pension scheme available to many UK University staff (mainly those that were universities prior to 1992; post 1992 universities are mostly members of the Teachers Pension Scheme). There’s been a lot of news recently about university staff striking about proposed changes to the scheme. If these changes affect you, then you should have received an email in the last few days from the university finance department detailing the final arrangements. However, it’s easy to miss the key points, so I thought I would try to spell out the changes in clearer terms.
The USS is a defined benefit scheme. For every year you contribute to the scheme, you will accrue a pot of 1/75 of that year’s salary, which you will then receive each year once you hit retirement age. So, for example, if you earn a gross salary of £33500 in the tax year 2017-2018 and didn’t opt out of the scheme, then you would contribute £2,680 (or £223.33 per month) to the scheme and would then be entitled to a payment of £446 per year once you hit retirement age. At the moment members of the scheme contribute 8% of their salary and their employer contributes 18%. There is also an additional defined contributions part to the scheme, called “The Match” which allows you to contribute an additional 1%, which will be matched by your employer.
The current defined benefits are to remain the same, but the contributions required to fund them are to increase three times over the next 18 months. From April 2019 you will contribute 8.8% to the scheme (£2948 per year or £245.67 per month). Then, from October 2019 your contribution will increase to 10.4% (£3484 per year or £290.33 per month) and again in April 2020 to 11.7% (£3919.5 per year or £326.63 per month). Employer contributions are also set to increase, from the current 18% to 19.5% of salary from April 2019, to 22.5% in October 2019 and 24.9% in April 2020. Furthermore, “The Match,” that I mentioned above will also be discontinued from April 2019.
Is the scheme worth it?
There is constant talk in the news that workers are not saving enough (or at all) for retirement, and that the state pension will not be sufficient for most people to live on (it currently stands at £8575.55 per year, and I wouldn’t be surprised to see the “triple lock” that ensures it increases by at least 2.5% per year be scrapped at some point in the near future). So, with that said, any scheme that can increase your income at retirement is a good thing, even if it’s going to cost more up front. The fact that it is a defined benefit scheme also means that you’re not reliant on making good investments or on the stock market continuing to increase.
However, after faffing about a bit with excel, I think that the earlier you are in your career, the better a defined contributions pension becomes. In my case, I’m 29 and so could well be working for another 30 years. Assuming I work until I’m 60 and never receive a promotion or a pay rise (other than keeping pace with inflation), I’d end up with a defined benefit of £13,847 per year. If I instead took the amount I’d been contributing each year and invested it in a passive index tracker, assuming 4% returns over inflation each year, I’d end up with a pot of £227,915 at 60 years old. If I then withdrew £14,000 per year, whilst still assuming that 4% growth rate, the fund would run out of money after 26 years, when I turned 86. According to the Office for National Statistics, the life expectancy in the UK is 79.1 years for men and 82.8 years for women. So there’s a good chance that, if I leave academia at any point in the near future, I may well request to move my accrued pension from the defined benefit scheme to my own private pension.