Understanding USS changes

1. Understanding USS changes Tim Fuery- Assistant Director of Finance

2. Why are we here? • USS, like many pension schemes, are having to consider their funding position • USS remains a final salary scheme and its contribution rates are unchanged unlike, for instance, the support staff scheme - BPAS • But some changes have occurred around severance and retirement that members should be aware of • Some of the changes affect all staff and some impact on particular groups of staff. • Today I hope to explain the changes and answer questions

3. What IS NOT changing ? • USS remains a “final salary” / “defined benefit” scheme • Other USS benefits remain e.g. life assurance, lump sum options, spouse’s pension • University is still contributing normal monthly contributions at the rate of 14% of pensionable earnings

4. What is changing ? 1 • Staff joining USS from March 2007 will have an expected retirement age of 65 and accessing their pension before that age will see it actuarially reduced • USS have stated that this age may have to be reviewed again should current increases in longevity be maintained • At the last support staff valuation it emerged that longevity had increased by two years within a 3 year period

5. What is changing ? 2 • Currently all USS members can access their pension after the age of 50. From 2010 legislation has amended this to 55. USS have not taken the opportunity provided to phase this in but will make the change in 2010. • Thus retirement cannot be before age 55 from 2010.

6. Retirement • USS recognise two types of retirement • The first is instigated by the individual resigning and determining to claim their pension • The second is where the University agrees with an individual that they will retire and in essence supports the retirement • USS treat these cases differently

7. Retirement ages • USS treat a voluntary early retirement as being measured against an assumed normal retirement age of 63.5 and calculate any actuarial reduction using age 63.5 as the base • USS allow supported early retirements after age 60 and before age 63.5 without actuarial reduction at present and use age 60 as the base. • They also assume that any retirement after age 60 will have institutional support

8. Voluntary Retirement • Anyone accessing their pension now on a voluntary basis after the age of 50 and before the age of 63.5 will suffer an actuarial reduction • The reduction is based on the difference between the age the pension is accessed and 63.5, the scheme assumed average age of retirement. • We will look later at some examples of the impact based on the factors that USS apply to early retirement.

9. Normal retirement 65 Expected lifespan 85 Years pension paid 20 Funds available are the same in both cases Thus for early retirement pension is reduced Early retirement 55 Expected lifespan 85 Years pension paid 30 Funds available are the same in both cases Thus for early retirement pension is reduced Actuarial reductionIs intended to compensate the scheme for having to pay pension for longer than expected

10. 53 year old 25 years service Salary of 40000 Normal Pension 12500 Reduced Pension 8075 Percentage reduction 35.4% 58 year old 30 years service Salary of 40000 Normal Pension 15000 Reduced pension 11895 Percentage reduction 20.7% Voluntary retirement

11. What is changing? 3 • USS have recognised that it cannot continue to meet the actuarial strain of early retirements initiated by its member institutions • Any member claiming their pension before the assumed retirement age will cost the scheme more than was expected and thus the scheme will look to be compensated for the longer period of payment

12. Supported Early retirement • Before December 2006 in instances when the University supported the early retirement of a member before the age of 60 the members pension was not reduced. The USS scheme met the cost. • From December 2006 the University will have to meet the cost of any such early retirements for staff under the age of 60. • For staff over 60 there is no actuarial reduction • What are the implications?

13. Early retirement implications • In certain instances the University has provided enhanced pensions in cases of early retirement before the age of 60 through the purchase of added years of service within an agreed cost envelope • The University will no longer be able to do this as it will have to meet the cost of the actuarial reduction if it supports an early retirement case.

14. 50 year old 25 years service Salary of 40000 Normal Pension 12500 Reduced Pension 8075 Percentage reduction 35.4% Cost to University £121,000 55 year old 30 years service Salary of 40000 Normal Pension 15000 Reduced pension 11895 Percentage reduction 20.7% Cost to University £76,850 Costs of actuarial reduction examples

15. Severance • The conditions pertaining to early retirement also apply to cases of severance unless the severance relates to a disciplinary case that has resulted in dismissal. • Thus the University will also have to face the costs of protecting the member against the impact of actuarial reduction in severance cases. • The same will apply to cases of redundancy • USS are being challenged in these areas as it is believed they did not understand the impact of the change on University’s ability to manage its staff structures

16. Flexible retirement • The legislative changes in 2006 allowed for schemes to offer flexible retirement • This means an individual moving to part time working and being able to claim part or all of their pension. • It is a means of moving gradually to retirement. • USS felt it was one step too far with the other legislative changes in 2006 but are currently reviewing their stance on flexible retirement.

17. USS and Salary Sacrifice • USS have now made the necessary changes to the scheme rules to allow for the introduction of salary sacrifice • USS themselves are introducing from this April for their own staff • A number of universities are looking to introduce it in the next 12 months.

18. What is “salary sacrifice”? • Your pay is reduced by value of your pension contribution • You and the University pay lower National Insurance Contributions as a result • Your net pay increases dependent upon the amount of National Insurance you save • The University then pays the employee pension contributions directly into USS • Your original salary used to calculate benefits

19. UNIVERSITY CONTRIBUTION YOUR PAY £3000.00 £190.50 What is “salary sacrifice”?- the present position

20. UNIVERSITY CONTRIBUTION YOUR PAY £2809.50 £190.50 What is “salary sacrifice”?- going forward: an example

21. Salary Sacrifice and NI • Employee saves NI at marginal rate of payment • The majority of employees will save at 9.4% on the value of their pension contribution. • Others will save at 1% on the value of their pension contribution. • The Budget statement of the 21st March 2007 makes it a more attractive proposition for a wider group of staff in the University sector with the promise of changes in the NI system in 2008 and 2009.

22. Who should not opt for “salary sacrifice”? • If your pay is currently below the £5408 pa or £104 pw there would be a reduction in your net pay • You are female and over 60 and therefore not paying National Insurance

23. What Happens Next? • The University is prepared to consider the introduction of salary sacrifice and is now going to speak to the recognised trade union about its introduction.

24. Questions ?