Putting the USS closure debate into perspective

Auto-enrolment is reducing the number of people with no pension at all, except for the self-employed and low paid, but there is still a massive divide between those with defined benefit schemes and those with defined contribution schemes. Increasingly this is a split between public and private sector workers.

In 2006, there were almost 3,500 DB schemes in the private sector still open to new members. By 2016, this had fallen to less than 700.

That seems like a great deal for employees compared with the average private sector rate

The number of employees in the private sector earning DB benefits fell from 3.6m to 1.3m over the same period. The average contribution to a DB scheme in the private sector is 22.7 per cent, with a quarter of that met by the members.

DC contributions set to rise

The corresponding figure for DC schemes is 4.2 per cent, with employers paying 3.2 per cent and members 1 per cent.

In fairness, the DC figure is distorted by the initial low rate of AE contributions and it will have to rise to at least 8 per cent by April 2019.

Many employers, however, will still only be paying a tiny fraction of the alternative DB rate, even though around one in four pay DC contributions of more than 10 per cent.

A fairer comparison might be the 2012 statistics predating auto-enrolment, which showed the average employer contribution rate was 6.6 per cent in the private sector.

Public sector contributions outstrip private

The public sector and similar employers remain far more committed to DB schemes, despite the escalating costs of providing pensions with low interest rates, increased longevity and relatively high inflation and pension increases.

The NHS Pension Scheme raised its retirement age from 60 to 65 in 2008 and then moved to a career average revalued earnings scheme in 2015, but members still get a guaranteed pension of almost 2 per cent of their pensionable earnings for each year of service.

Members can pay up to 14.5 per cent of salaries to be in this scheme, but this is earnings-related, so the lowest paid only contribute 5 per cent. The rate remains a modest 7.1 per cent for those earning up to around £27,000 a year and 9.3 per cent for those on up to £48,000 a year. The Teachers Pension Scheme is similar.

Eighteen per cent is still good

With the Universities Superannuation Scheme, we have seen strikes against proposed changes to a scheme that the employers say is simply too expensive. The current USS benefits offer a pension of 1.3 per cent of salary for each year of service, along with a tax-free cash lump sum of 3.9 per cent for each year of service.

Employees contribute 8 per cent and employers pay 18 per cent, slightly more than the average DB rate in the private sector.

The employers claim that the latest actuarial valuation requires the combined contribution rate of 26 per cent to increase to 37.4 per cent unless these benefits are cut back somehow.

The universities have pledged to maintain the 18 per cent rate from the employers in whatever scheme structure is used in the future.

That seems like a great deal for employees compared with the average private sector rate, but it doesn’t seem at all popular with the members faced with these changes.

Public perception could change

It would be great to see everyone getting a decent pension from their employment irrespective of whether they work in the private or public sector, but that isn’t happening at the moment.

Politicians and pensions people know this already. The question is whether students would be as sympathetic to lecturers on strike if they realised it was for a pension far in excess of what many of the students could ever aspire to, and how many taxpayers would resent the massive differential in pensions paid to public service workers if they knew.

And don’t even get me started on the MPs Pension Scheme…

Hugh Nolan is president of the Society of Pension Professionals and a director at consultancy Spence & Partners