Example to Illustrate the USS Pension Cuts
Meet Rachel Rockstar. She was born in 1990, is a single woman who hopes to marry before retirement. Height 5 foot 7 (175 cm), weight 13st (83 Kg), waist 34.5in (88cm), never smoked, consumes 14 units of alcohol a week and has no serious health conditions. Yes these are important details. We’ll come back to them later.
Rachel is an academic rockstar. Rachel achieved a strong 1st class degree from Oxford, got a PhD from Cambridge, and did a 2 year post-doctoral fellowship at Harvard. In 2017 Rachel received a job offer to join the University of St Andrews. Very, very few people can achieve this level of success. Most staff do not get lectureships until their 30s. So the following scenario is a best-case career for someone considering becoming a university faculty.
Planning to start in 2018 Rachel’s salary is £39,992, she spends 8 years as a lecturer, before being promoted to senior lecturer at 36. She is promoted to Professor aged 47 and spends the next 20 years as a professor. At retirement, she has a typical professor salary of £80,353. This is also a very high level of achievement, many faculty do not achieve the level of full professor in their entire career.
Under the 2017 pension rules, given that career, Rachel would expect to receive a guaranteed pension of £28,283 plus a lump sum of £212,143. With 50% of the guaranteed pension available for her spouse should they survive her.
Now in January 2018 the pension committee decided to do away with defined benefits. Instead of getting a defined benefit, Rachel will invest the pension contributions and receive the total when she retires. Instead of a pension income for life Rachel will get a lump sum of £781,726. Which sounds like a lot, but wait. Now Rachel has to decide what to do. The safe option is to go onto the private market and purchase a life insurance annuity. Remember when I said the details about Rachel’s height, weight, and health were important? Well, in order to figure out your annuity rate the insurance companies use your health profile to calculate an expected lifespan. So we need to give that information to an insurance company to calculate how much they’ll charge Rachel for an annuity. After doing this we can determine what would happen if Rachel kept the lump sum of £212,143 (which she would have received under the 2017 rules) and purchased an annuity with the remaining £569,583. She would have an annual pension income of £17,080. This is a drop in annual pension income of £11,279.
But here’s more to the story! This is just the latest in a series of cuts to both income and pensions over the last 10 years. In order to illustrate what’s happened let’s turn to an alternate-universe timeline for Rachel Rockstar. In this alternate-universe the pension is the same as what was promised in 2008. Not only that, but university staff wages have been increasing in line with inflation.
In this universe, Rachel’s starting salary is £46,792 and she retires after 40 years with a final salary of £94,209. This career would end with a pension of £47,104 (£30,000 more than under the proposed new scheme) and a lump sum of £141,314.
Over the last 10 years there has been a real decrease in salary of 14.5% and pension of 37%. All of the current proposed changes would cut pensions even further. University income, however, has increased substantially. Adjusting for inflation total income increased from £29.9 Billion in 2007/08 to £35.7 Billion in 2016/17. A real increase of 19%. The majority of that increase comes from shifting revenue to student tuition. Income from central funding councils have decreased from £10.9 billion to 5.1 billion with tuition income increasing from £8.1 billion to £17.7 billion. An increase of 218%! (Source: Higher Education Statistics for the United Kingdom, adjusted using CPIH to 2017 pounds).
And Rachel Rockstar is one of the lucky ones.
That’s what the strike is about.