V-cs ‘seriously underestimated’ USS pension cuts, study claims

Members of the UK’s largest higher education pension scheme who earn less than £40,000 a year face losing about 30 per cent of the value of their retirement income under recently implemented cuts, according to a study.

Three academics have published what they say is the “first global analysis of cuts to future pensions” after the changes to the Universities Superannuation Scheme were implemented in April 2022.

They say the findings contradict statements made by Universities UK, which has claimed that those who earn less than £40,000 – 84,000 of 196,000 of the total enrolled in the USS – would suffer only a “headline” cut of 12 per cent in future pension benefits. This was a “serious underestimate”, the study claims.

USS employers have defended themselves against allegations that “misleading claims” were made and said their projections were “reasonable”.

But the study – conducted by Jackie Grant, senior teaching fellow in physics at the University of Sussex; Mark Hindmarsh, professor of theoretical physics at the University of Sussex; and Sergey Koposov, reader in observational astronomy at the University of Edinburgh – claims that UUK has “ignored” the impact of the hard cap, which means the value of a pension pot can increase by only 2.5 per cent, rather than in line with the consumer price index rate of inflation (CPI).

It is this, the authors say, that “imposes the most detrimental loss” of all the changes. If CPI remains at its historic average of 2.5 per cent, then cuts are likely to be between 30 per cent and 35 per cent, the study found. This would rise to between 40 per cent and 45 per cent if CPI – currently at 5.5 per cent – averages 3 per cent.

“The global loss across current USS scheme members, in today’s money, is calculated to be £16 [billion to] £18 billion, with most of the 71,000 staff under the age of 40 losing between £100,000-£200,000 each,” the study says.

“Our data, extracted from the USS modeller, shows that a member of staff aged 37.5 earning £42,500, will lose 34 per cent to 38 per cent of their future pension for CPI at 2.5 per cent to 2.8 per cent,” they add.

Losses were calculated using two datasets: UUK’s own “heat map” of active membership numbers by age and salary, and projected pension values taken from the USS consultation modeller.

The authors assumed that the defined contribution component of the scheme would be converted into an annuity in order to compare cuts to the pension across age groups.

The changes, based on the 2020 valuation that was conducted at the height of the pandemic, have led to widespread industrial action on UK campuses but were voted through by employers in March.

A spokesperson for USS employers said its proposal was a “viable and implementable solution to the 2020 valuation” and has retained a “significant element” of defined benefit within the future pensions earned by members.

“We have not made misleading claims. It is reasonable for us to conclude in headline terms – based on the ‘middle of the road’ personas developed for typical scheme members – that reductions in retirement benefits will be in the range of 10 per cent to 18 per cent.

“We have consistently said that scheme members should use the USS modeller to check the possible impacts. Employers chose to lessen the impact of rising inflation on members by agreeing to defer the application of the 2.5 per cent inflation cap up to and including the increase due in 2025.”

tom.williams@timeshighereducation.com