Pension schemes explained
What is the difference between a Defined Benefit and a Defined Contribution pension scheme?
In a Defined Benefit scheme, the employer agrees to provide a specified, fixed, annual pension payment and/or lump sum at retirement, which is calculated through a formula based on a member’s salary and length of service. The amount usually increases with inflation and is guaranteed until death.
In a Defined Contribution scheme, members have individual saving pots that both they and their employer pay into. At retirement, members draw their pension savings from this fund, which consists of all the employer and employee contributions paid in over the years, plus investment returns that have been earned by investing the scheme in, for example, stocks and shares.
In this kind of scheme, employees can choose whether they wish to take out all their retirement savings as a lump sum, or to opt for alternative options such as an annuity or drawdown. An annuity is a fixed sum of money paid to someone each year, typically for the rest of his or her life. The annuity option provides a guaranteed regular retirement income from your individual saving pot. Drawdown involves keeping your individual saving pot invested but regularly drawing an income from it rather than purchasing an annuity.
Is USS a Defined Benefit or a Defined Contribution scheme currently?
The USS is a hybrid scheme, meaning that it is partly a Defined Benefit scheme and partly a Defined Contribution scheme. Members currently earn a Defined Benefit pension on salary up to £57,216.50 and Defined Contribution benefits on salaries above this threshold. The USS is one of the largest private pension schemes in the UK that currently still allows new Defined Benefits to be built up.
Is the USS like the Teachers’ Pension Scheme and NHS pension scheme?
Academics at some universities (particularly post-1992 universities) are in the Teachers’ Pension Scheme (TPS) rather than the USS. If you are medical staff working in the NHS you may be in the NHS pensions scheme rather than the USS. These two schemes are very different from the USS.
TPS and NHS are public sector unfunded schemes backed by the UK taxpayer. In contrast, the USS is a private sector scheme directly backed by higher education institutions with a fund set aside (from employer and member contributions, plus investment return) to pay pensions. This means that USS employers carry the risk if the fund is insufficient to deliver the agreed pensions, whereas TPS and NHS pensions are ultimately underwritten by HM Treasury. Unlike the USS, TPS and NHS are not reliant on investment performance, and are not subject to the same regulations that the USS must follow. Although these schemes do still offer a defined benefit pension, the cost to employees in the scheme is higher than those paying into the current USS scheme.
If changes are made to USS, what happens to the pension I have built up already? Will that be affected?
No. Pension you have earned through past service is protected by law and cannot be changed retrospectively. The pension changes will therefore not affect the pension that you have earned up to an agreed implementation date (expected to be 1 April 2019).
Can I join another pension scheme, like the NHS, TPS or SAUL?
If you are currently a USS member, then you cannot change to a different pension scheme because of the exclusivity rules set by the USS.
What did the 2014 valuation show and what actions were taken?
The 2014 valuation showed a funding deficit of £5.3bn and a rise in the cost of future defined benefits. UUK and UCU agreed a package of reforms to address these funding challenges. The plan at that time was to recover that deficit over a 17-year period.
As part of the reform, both members and employers agreed to pay more towards the USS and changes were introduced to pensions’ provision from April 2016. The USS became a hybrid scheme, offering defined benefits (currently on salary up to £57,216.50) through the USS Retirement Income Builder, and defined contribution-type benefits on salary above the threshold through the USS Investment Builder.
What did the 2017 valuation show?
The 2017 valuation showed that the USS scheme had a £6.1bn deficit. Since the last valuation in 2014, economic conditions for defined benefit pensions have worsened. As a result, the position at the 2017 valuation was much worse than expected.
Every three years, the USS carries out a valuation to establish at a particular point in time whether it can reasonably expect to have enough money to pay the pensions that all members have already built up in the scheme, and how much is needed to continue to provide the current level of pensions in future for members still actively paying in.
As well as being a specific legal requirement, the valuation gives the USS, UUK and UCU representatives the opportunity to formally take stock and, through the JNC, consider whether the findings mean any adjustments need to be made to future contribution rates, to future benefits – or both.
The USS is required to sign off the valuation and submit its report to The Pensions Regulator (TPR) within 15 months of the valuation date.