Human Resources

Q&As - July 2008

These questions and answers arise from the presentations made during June 2008 to USPAS members. If you have additional questions please email uspas@sussex.ac.uk

The questions are under the following headings:

Understanding the specifics of the proposal affecting USPAS members

Wider Context

Funding and contribution rates

Other approaches

Other questions on USPAS

Detailed Q&A

Understanding the specifics of the proposal affecting USPAS members

 

Q: When will the proposals be implemented?

A: The original timeline was to implement changes with effect from 1 August 2008 but this is not now possible. Council was therefore asked by the University to approve an extension to this timeline at its recent meeting - which it did. The date for implementation of any changes is now set for 1 January 2009.

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Q: If the Scheme is closed to new entrants how will the payment of pension benefits be possible when the people who are now in USPAS retire in the future?

A: It is often thought that it is the contributions of current members which pay for staff already in retirement and that, when a scheme closes to new entrants, the scheme will rapidly "die". This is only true for what are known as "unfunded" pension arrangements such as many of the public sector pension schemes (e.g. NHS, Teachers, Police). It is not true in the case of private sector schemes such as USPAS which is a "funded" scheme. Current USPAS members are paying for their own pensions in retirement from their employee contributions - plus the employer contribution. The current assets of the Scheme plus the funding of the past service deficit will cover the accrued liabilities as at the date of changes to the Scheme. The funding for pensions accrued after the date of change will be covered by the University's contributions and those of the existing membership.

 

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Q: How does closing the Scheme to new members help address the deficit: doesn't it mean there would be fewer people to meet a growing problem?

A: Keeping USPAS open to new entrants and allowing more members into USPAS will actually increase the risk of future deficits arising. New members make contributions to the Scheme, but their pension entitlement as it grows creates long-term liabilities which (due to the wider factors of increased longevity, reduced return on investment and changes in legislation) risk creating a shortfall between what has been set aside and the future provision of pension. But closing the Scheme to new entrants would mean that the University could contain the liabilities, making the funding of the Scheme more predictable and manageable for everyone: employer and employee.

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Q: What does the proposal to cap future increases in pensions in payment to 2.5% really mean?

A: Your level of pension when paid in retirement increases in line with inflation, as measured by the Retail Prices Index (RPI), up to a cap. Although the cap originally introduced by the government was 5%, the University had a higher cap of 6% for USPAS. Then, with the Pensions Act 2004, the government introduced the option for employers to limit the cap to 2.5%. The University did not adopt this cap, retaining its cap at 6%. However, under the proposal, the University is now seeking a reduction in the cap from 6% to 2.5% on pensions in payment - but only on the part of the pension earned after the date on which the proposed change is implemented. Therefore, pension accrued prior to the date of change will still rise in line with RPI, subject to the cap of 6%.

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Q: Does the proposed increase to 10% member contributions mean that member contributions will remain at that rate or will there be further increases in the future?

A: Contribution rates are set for three year periods arising from the results of each triennial actuarial valuation. The University has taken advice that the proposed contribution rate of 10% is a sensible rate. However, the fourth element of the University's proposal regarding current USPAS members is that any future increases to funding rates for future service will be born equally by both employees and the University, whereas historically the University has borne all of the increases.

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Q: Some female members of USPAS, because of their age, have a State Pension Age (SPA) that is lower than 65, e.g. for some women their SPA is 62. Under the proposals will these women be considered to be retiring early under USPAS and therefore have their benefits on retiring prior to age 65 actuarily reduced?

A: Yes, even if a woman's SPA is less than age 65 which is the normal retirement age under USPAS, she will be deemed to be retiring early under USPAS if she retires before age 65. However, the reduction to benefits will only be applied to the element of her pension accrued after the date on which the proposed changes are implemented. So, the pensionable service that she has accrued prior to implementation of this change would not be actuarially reduced.

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Q: What will the early retirement reduction factor be under the proposed change to early retirement conditions?

A: A factor of 6% per annum is being used by way of illustration in the feedback workshops with USPAS members which is the same rate as the factor currently in operation for early retirements before age 60. In fact, 5% may be a more accurate factor to use for retirements at age 60 to 64 inclusive but the actual figure will be advised by the Scheme Actuary to protect the interests of all members.

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Q: Will the proposed changes have an impact on the amount of cash lump sum available at retirement?

A: No, there will be no changes to the calculation of cash lump sums at retirement.

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Q: Will my pension at date of retirement be based on salary at retirement age or on the salary at the time the proposed changes are implemented?

A: Your pension benefits at retirement will be based on your pensionable salary at the time of retiring (unless you are retiring as a deferred member having previously left the University or Scheme; in this case, your pension will be calculated based on your salary at date of leaving the Scheme but revalued to date of retirement).

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Q: If a member opts out of USPAS as a result of the proposed changes will his/her deferred benefits change in line with any future changes to the Scheme?

A: No, the proposed changes to the Scheme will only apply to the pension benefits accrued after the date on which the proposed changes are implemented.

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Q: What will happen to those current members of USPAS who simply cannot afford to pay a contribution of 10% and can there be some flexibility as to what members pay?

A: Part of the consultation process is receiving, and consideration of, members' views and feedback on the proposed changes to the Scheme. As such, if the feedback demonstrates that members cannot afford to pay a 10% contribution rate for a 1/60th pension accrual but that they may be able to afford another amount for a lesser accrual rate, say 1/80th, further consideration of the proposal may be given.

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Q: If someone cannot afford to pay the proposed member contribution of 10%, will it be possible for that person to leave USPAS and become a member of the new defined contribution scheme?

A: Yes, it is possible that consideration could be given to this. However, individual members should consider very carefully before withdrawing from USPAS.

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Wider Context

 

Q: Is Sussex the only university with a local pension scheme suffering from the external factors of legislation, mortality and the reduction in long term interest rates?

A: No, all organisations that operate a final salary pension scheme are affected by these factors, including other pension schemes in the sector that have been affected.

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Q: What is the situation with USS? Is it facing the same problems as USPAS?

A: Yes, the last actuarial valuation of USS also identified a funding deficit and it is widely believed that the current valuation of the USS assets and liabilities will show an increase in that deficit.

USS, although a much larger pension scheme than USPAS, is subject to the same external factors of legislation, mortality and reduction in long term interest rates.

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Q: What is a defined contribution, or money purchase, pension scheme?

A: A defined contribution (DC) scheme is an arrangement whereby the employer and employee contributions are invested in a pre-selected investment fund. The value of the contributions rise, or fall, in line with the performance of the investment fund and at retirement the accumulated value of the fund is used to purchase an annuity (pension).

DC schemes are not linked to final salary and nor are the benefits at retirement defined as they are in USPAS. DC schemes provide a flexible way in which to determine the type of pension that a member wishes to receive in retirement.

The University's proposal to introduce a DC scheme for future employees and for those current employees who have not taken up their opportunity to join USPAS, does not form part of the University's consultation with USPAS members as they will not be affected by a DC scheme since the University is proposing to keep USPAS open to them as existing members.

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Q: I have heard there is a UCEA national review of pensions in the sector; what is it?

A: The UK university employers have set up an Employers Pension Forum, a joint initiative supported by UCEA, UUK and with financial support from HEFCE. Despite the chair of the Forum being the same individual as the chair of UCEA (Prof Bill Wakeham, VC of the University of Southampton), this group is an independent discussion forum and not strictly UCEA itself. The group commissioned survey work from consultants who published a report on findings in 2007 . More work is being carried out by the Forum on employers' views on aspects of pension benefit provision and cost and risk sharing. However, the University would stress that:

  • The Forum has been set up to do some 'big thinking' on the future of pension provision within the sector and is not expected to deliver short term outcomes in changes to pension provisions.
  • The Forum has not and does not seek a mandate to negotiate or arrange benefits or provisions - it represents universities which are independent entities and which have responsibilities to their governing bodies and other stakeholders for the financial and strategic health of their institutions.
  • There are no concrete solutions envisaged at this stage. Any solutions which are identified in future as potentially joint or sector wide will be voluntary and would not in any case emerge for some time. In particular the University of Sussex, among others, cannot wait on possible solutions when there are serious issues which need addressing in the short term. It is to be noted that possible future collaboration will not be able to escape the inevitable rise in costs of provision of Defined Benefits schemes which are a result of external factors (increased longevity, lower investment returns, increase in costs of provision due to legislation). There will be no easy answers to future pension provision.
  • Sussex is not in as strong a financial a position as many comparators, who can afford to take a more relaxed attitude to pension scheme deficits and possible rising costs / risks. The University's finances though recovering are still fragile and it can be argued that Sussex is more at risk from not addressing costs and risk issues than other stronger institutions, since it will reduce our funds for investment disproportionately over others.

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Funding and contribution rates

 

Q: Was the deficit in the pension scheme funding avoidable? Could provision have been made earlier so as not to have to increase the member contributions from 6% to 10% in one go?

A: The deficit was identified in the 2003 valuation of USPAS. At that time, it stood at £14M. The University increased the employer contributions as a result from 8.8% to 19.5%, without increasing employee contributions, in order to pay off the deficit over 25 years. However, due to changes in the way the Scheme is valued, based on changes in legislation, people living longer in retirement, and a decline in long-term interest rates, the deficit has increased to £23.2M over three years rather than decreased as had been predicted. However, it is the University that will fund this deficit of £23.2M, not the employee. The reason for an increase in employee contributions is to facilitate keeping the Scheme open to current members by avoiding the growth of a future deficit.

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Q: If the proposal is to increase the USPAS member contributions to 10%, what will the University contribution rate be?

A: The University contribution rate will be as follows: future service funding for USPAS at 9.8% plus past service deficit funding of 11.1% (totalling 20.9% employer funding of USPAS) plus 1.4% extra National Insurance from 2012 as a result of changes in "contracting-out" rules plus funding for the proposed defined contribution scheme ranging from 5% to 10%. Future pension provision at 2007 prices in 2012 will be approximately £4M for the employer.

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Q: What is the justification in providing membership of USS where members pay 6.35% compared to membership of USPAS where it is proposed that members will pay 10%, and where some members of USPAS can least afford to pay more?

A: The University is responsible for its own finances and its local pension provision through USPAS. The proposal to increase employee contributions to USPAS from 6% to 10% reflects a serious attempt by the University to keep USPAS open as a defined benefit pension scheme to current members, without a further deterioration in its deficit. We do not know what future contribution rates will be to USS following the valuation of USS which has taken place later than that for USPAS. It should also be noted that employer contributions to USPAS have been higher than those to USS for a number of years: 19.5% compared to 14% so there have been differences in contributions between the schemes, and indeed in the benefits of the two schemes, for some time. This is inevitable and is not uncommon between different pension schemes even within one employer. The reality is that defined benefit pension schemes pose funding problems to employers for factors outside of their control: if the schemes are to remain open to members, prudent steps must be taken based on expert pension advice.

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Q: What is the recent history of employer and employee contributions to USPAS?

A: Pension costs (i.e. the total costs of employer plus employee contributions to provide a defined benefit pension) have risen rapidly over the past few years due to factors outside of the University's control which have led to wide-spread changes in defined benefits schemes across the UK. These changes have been detailed to members in the presentations last year and this.

Contributions paid split into employer and employee over recent years are as follows:

 

(May 2002)-July 2002

July 2002-March 2003

March 2003-April 2004

April 2004-December 2008

Employer

6.2%

10.1%

19.5%

29.2%

Employee

6%

6%

6%

6%

Total

12%

16.1%

25.5%

35.2%

This table includes the amount the University is repaying to eliminate the deficit.

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Other approaches

Q: Why isn't the University considering the option of salary sacrifice?

A: Salary sacrifice is an arrangement whereby the employee gives up part of his/her salary in lieu of the employee contributions. Both the employee and employer save the National Insurance contributions that would otherwise have been payable on this part of their salary. Although it is recognised that salary sacrifice schemes are in place at other institutions, the University is committed to providing pension arrangements at Sussex that are sustainable for the future. The adoption of salary sacrifice, when a new Payroll system can facilitate this, and with 100% take-up of the salary sacrifice by USPAS members, would generate savings of approximately £75,000 per annum based on existing contribution levels. Such an amount would not drastically change the USPAS situation and would therefore not provide a long-term, sustainable solution. However, salary sacrifice could be a minor part of the solution in the medium term.

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Q: Is it possible for USPAS to be closed entirely and for all staff to be members of USS?

A: USS is primarily a scheme of academic and academic related staff. Over recent years USS has piloted and accepted a small number of universities wishing to provide future benefits to other staff groups. However, in addition to significant entry costs, USS is also a defined benefit scheme facing a large deficit in its funding.Transferring staff to USS would not solve the situation facing the University of being able to provide sustainable pension provision since the University has very little control over funding and benefits of USS providing an increased risk over our current exposure to the existing uncertainties in the USS scheme.

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Other questions on USPAS

 

Q: Is there a way of illustrating what benefits a member will receive at retirement under USPAS?

A: No, there are no modelling tools but each year members do receive an annual statement of their benefits, illustrated at 1 April. The benefit statements are issued in July and show the accrued pension benefits to 1 April together with a prospective pension and cash lump sum figure at Normal Retirement date, i.e. 30 September after reaching age 65. Illustrative examples of the effect of changes being proposed are being presented at the feedback workshops as part of consultation with existing USPAS members.

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Q: What is the earliest age at which a member can retire under USPAS currently without reduction to benefits?

A: The earliest age at which a member may currently retire under USPAS without reduction to benefits is age 60.

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Q: How are the member contributions deducted for USPAS, i.e. before or after tax is deducted?

A: All contributions to pension schemes are tax efficient and are deducted from gross pensionable salary, so that tax relief is obtained at source.

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Human Resources

16 July 2008