Thread by @cupofassam

I want to emphasise the scale of the cuts to the USS pension (broadly the pension scheme for the ‘pre-92’ University sector) and why this is key to the current dispute with employers. This is going to take a couple of threads. This first thread is on the cuts. #USSmess #UCURising

The recent disputed cuts were implemented on 1 April 2022 as a consequence of the 31 March 2020 valuation. It is quite usual to take two years between the date that the valuation is based on, and the implementation of any changes.

These cuts affected all pensions accrued after 1 April 2022. Pensions accrued before that are unaffected. So the cuts affect younger staff proportionally more than older. The longer you have been contributing to a USS pension, the more you have 'banked' on the pre-2022 basis.

The April 2022 cuts were to three aspects of how the pension is defined: the accrual rate, the inflation protection and the salary cap. I will address the accrual first. This used to be 1/75, and it changed to 1/85. What does that actually mean to someone in the scheme?

The pension you accrue, calculated by this metric, is your actual annual income in retirement. So, if you earned £40k, you were setting aside 1/75th of that each year (£533) as annual income, and are now setting aside 1/85th (£470).

As said, that amount (was £533, is now £470, for those earning £40k) is your annual income in retirement, before inflation protection. Obviously, these quoted figures is the future income amount from just one year’s employment now.

These blocks of your future income add up over time to eventually make something that is income-sized that you can live off in retirement.

So, before inflation protection, if you worked for 20 years in a USS institution, at a static £40k (for the sake of this calc), you would have accrued £10,660 per year (£533 x 20), for life, in retirement income.

That £10,660 is now reduced to £9400 per year for life accrued over that same period on the same salary, as a consequence of JUST the cut to accrual 1/75 to 1/85.

But it's worse than that. Inflation protection was also cut in the UUK proposals. When you accrue pension each year in the manner described above, it is crucial that this can be used to buy roughly the same things in retirement than it could when you banked it, as it were.

Inflation eats at its purchasing value, so inflation protection is crucial to pension accrued. In the past, all accrued pension in the USS would grow in line with inflation, precisely to avoid this erosion of purchasing value.

Before April 2022 USS had some inflation protection, but it wasn’t utterly robust. After April 2022, it got a lot worse. I’ll outline this.

Before April 2022, the money you had accrued each year toward your annual income in retirement would be uprated against CPI inflation up to what is called a ‘soft cap’ of 5% (i.e., if inflation remained below 5%, the accrued pension grew in line with it). Good.

However, when inflation would go over 5%, any further increase would be halved. So, if inflation was at 7%, the accrued pension would only grow by 6% for that year (the full 5% plus half of the 2% difference to 7%).

This was the case up to CPI at 15%. If inflation would grow over 15%, there would be no further uprating. So the maximum inflation protection we had was 10% (i.e. the full first 5% plus half of the remaining 10% to 15%).

As it happened, for the last decade up to 2022, we only briefly saw CPI inflation above 5%, so the accrued pension has not been adversely affected. However, as we all know, inflation has grown substantially in recent months into double figures.

Now, one of the three cuts to your USS pension in April 2022 was to set a hard cap at 2.5%. That is to say, if inflation goes over 2.5% (which it has by a long way) then we get no uprating of pension accrued since April 2022 beyond 2.5%.

This is a de facto further cut to pensions already accrued from that date.

I want to emphasise againt: all pension earned before April 2022 will continue to be uprated in the background according to the inflation protection in place at the time it was accrued.

So this new cut affects younger colleagues significantly more than colleagues who have accrued pension before April 2022.

Now, the good-ish news is that there was an agreement in JNC to put this cut on hold – it is not in effect yet. The previous rule (soft cap of 5%, hard cap of 15%, is still operative).

I say ‘ish’ because CPI at 10% gives us only a 7.5% uprating of accrued pension. But that's a long way better (less worse) than 2.5%.

(I should note here that of course your pension in retirement continues to be uprated against CPI in these ways after you have retired).

Now to the 3rd cut, to the salary cap. USS is a hybrid scheme with members who have a salary above a certain amount having two pension pots, a defined benefit (BD) one and a defined contribution (DC) one. Anyone earning below the salary cap therefore still only has a DB pension.

(Though some members who were paying AVCs into the Prudential will have seen those transferred to a DC pot a few years ago, regardless of salary).

Defined Benefit means the benefit (income in retirement) is defined, i.e. calculable in advance. This retirement income is defined by the accrual rate and inflation protection as outlined above.

Defined Contribution means that only the contribution is defined – you know what you put in, but not at all what you might get out.

The salary cap was at around £60k before April 2022. This means that the maximum accrual, at 1/75, for a colleague at the cap, was circa £800. Their contributions from salary above £60k went into a DC pot, in effect a savings account invested in stocks and shares.

From April 2022, the salary cap was cut to £40k, meaning that the maximum guaranteed annual income in retirement accrued each year dropped from £800 (at 1/75) to £470 (at 1/85). This also meant many more colleagues had DC elements to their pensions.

What is more, the salary cap would rise each year at the same rate as the inflation protection. The notion being that it would increase to keep more or less the same basket of people in it.

But if the inflation uprating is cut, each year more colleagues are brought into the hybrid pension reality.

So, I hope it is clear from the above that the cuts took a significant slice out of our pensions, and, crucially, that they impact much more on those with many years of career left than those of us with retirement on the horizon.

Please recall, that these cuts were driven by a 2020 valuation that projected a deficit based on excessive assumptions (such as the fund would not grow above CPI, something historically unknown) and from a starting point of mid-Covid economic collapse.

And yet, on the same calculation basis, we have since seen a surplus grow.

And don’t forget, we had to pay more (9.8% of salary, up from 9.6%) to pay for this deficit, and receiving less in return.

A valuation basically asks ‘do we have enough money saved in the fund to pay all the pensions currently promised’. Currently, it would seem the answer Is ‘yes, and then some’.

The UCU, which represents all members of the USS scheme, not just UCU members, has committed to restoring benefits to pre-April 2022 levels, and recovering all loss since April 2022, on the basis that those benefits were and remain affordable.

We also want to push with UUK (who represent the employers) for the USS to have a much more sensible and evidence-based approach to valuations, not least so that the volatile figures cannot manufacture a wholly exaggerated deficit again.

I need to add at the end here, that the JNC (UUK and UCU) were able to hold off the 2022 cut to inflation protection, so the high rates of inflation recently will bite on the old (less worse) basis, not the new cut rate.

If you have made it to the end of this thread, then here is another thread on what Universities have being committing to when it comes to reversing the cuts I have outlined

https://twitter.com/cupofassam/status/1616028023953756160?s=20&t=R7q1xztUFqp1BrzAguj4Dw