Should JNC eliminate 12% DC employer contributions above £57,216?

[UPDATE 25 July 2018: JNC did not recommend any changes, so the 12% contributions remain in place.]

According to this UUK briefing document, in accordance with Scheme Rule 76, USS is planning to raise our member contribution from the current 8% to 8.8% from 1 April 2019, 10.4% from 1 October 2019 and 11.7% from April 2020. They plan to raise current 18% employer contributions to 19.5% from 1 April 2019, 22.5% from 1 October 2019, and then 24.9% from April 2020.[*]

The above increases are based on the assumption that our current level of 1/75 CRB DB accrual on all salaries below £57,216.50 is maintained, as are 12% employer contributions into DC pension pots above the salary threshold. The optional 1% DC match will, however, be eliminated.

The UUK briefing document also reveals that USS is insisting that JNC decide by 20 July whether to reduce or eliminate the 12% employer DC contribution. JNC is meeting today (the 13th), so presumably this item is on their agenda for their meeting. If JNC decides to completely eliminate this 12% DC contribution, that would result in a lowering of the increases listed in the first paragraph by 0.4% for members and 0.8% for employers.

Below are some thoughts on what JNC should decide. First, I present a case in favour of such elimination, which I had previously made. Then I present a case against, to which I am now more inclined.

The case in favour of elimination of 12% DC contributions

As I indicate in the first paragraph above, USS will be phasing in an increase in member and employer contributions, eventually by a total of +10.6% (+3.7% member, +6.9% employer) from April 2020. 3.9% of the 10.6% increase consist of higher deficit recovery contributions (DRCs). DRCs go entirely to the recovery of the deficit on past DB pensions promises, the majority of which are for the final salary DB scheme from which professors and other higher earners benefited most. For that reason, the case can be made that it is fairest that professors and other higher earners take a temporary hit, via cut in DC contributions above the threshold to mitigate the increase in contributions to younger, lower earners who didn’t benefit from final salary, the deficit on which these DRC’s is paying off.

The case against the elimination of 12% DC contributions

This above case in favour of elimination of 12% DC contributions is counterbalanced by an existing cross-subsidisation of the DB scheme by contributions above the salary threshold: Under the status quo, 2.5% of the 18% employer contribution above the threshold goes to the subsidy of DB. (See linked spreadsheet with the current breakdown of contributions.) This subsidy would increase by however much the employer contribution goes up under Rule 76, as sketched in the first paragraph of this post.

Moreover, any increase in member contributions beyond 8% will result in further cross-subsidy of DB by members who earn over the £57k threshold. This is because, according to the scheme rules, even if member contributions go up beyond 8% under Rule 76, it will remain the case that only 8% will go into their DC pension pot. Any amount above 8% they contribute from their salary above the threshold will therefore provide a subsidy of DB.

From the perspective of a member earning above the threshold, any amount they contribute above 8% above the threshold will, in effect, be a decrease in their employer DC contribution by that amount.

In sum: Contributions on salaries above the £57k threshold are already subsidising DB below the threshold. This subsidy would become greater under Rule 76 contribution increases.

Moreover, the complete elimination of 12% DC contributions above the threshold, while a big hit on the pensions of those earning above the threshold, would result in only a modest 0.4% decrease in member contributions above and below the threshold.

[*] The Joint Expert Panel is due to report in September, and JNC and USS will decide how to respond to this report later in the autumn. Assuming that JEP does not manage to persuade USS that none of these contribution increases are necessary, JNC has the option of cutting or modifying our benefits in order to avoid some of these planned increases. But USS maintains that any such changes would take at least 12 months to implement, so not before April 2020.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store