UUK’s mouse of an improvement is a wholly inadequate repair to the damage of their inflation cap
In the face of highly negative consultation responses to their proposed 2.5% cap on revaluation of pensions to keep up with inflation, UUK has given birth to a mouse of an improvement to their proposals: the payment of 0.2% more for two years, to postpone the impact of the cap for two years. In this post, I show how such a change would only slightly mitigate the huge losses the inflation cap causes to member pensions. It is a wholly inadequate response to the concerns raised in the consultation. To demonstrate this, I shall draw on the consultation modelling of UUK’s cuts whose assumptions UUK has approved.
To make my point, I first draw your attention to the following graph of the negative effect of UUK’s unmodified proposals, which is from Section IIa of this linked blog post:
This graph shows that an extra £640 in member contributions to retain current benefits for 2022–23 would spare 40-year-old university workers earning £40k an immediate 12% cut in the value of their pension on account of UUK’s reduction in the accrual rate from 1/75th to 1/85th. The extra contributions also spare these members decades of further erosion in the value of their pension on account of the inflation cap. This erosion is represented by the downward slope of the orange line. On the default assumptions of the USS consultation modeller which UUK approved, the initial 12% cut is expected to grow into a 22% cut in the first year these members draw pensions at retirement age 66, and into a 30% cut down by age 86. (See red circles, rounded to nearest whole number.)
Figure 2 below shows how minuscule the improvement would be if employers pay an extra 0.2% for two years to postpone the impact of the 2.5% CPI cap for two years. All this does is keep the orange line horizonal for the first three years (as represented by the red diamonds), before it starts its downward slope. However, the loss in pension income remains at 22% at retirement (though if one squints and expands to one decimal point one will detect a small improvement), and there is a barely discernible improvement from a 30% loss to a 29% loss at age 86.
Even if the accrual rate and salary threshold of UUK’s proposals were left unchanged at 1/85 and £40,000, it would cost employers +3.9 percentage points (so an increase from 21.4% to 25.3%) in order to entirely restore current inflation protection to their proposals — not just for the first three years, but indefinitely.
By contrast, a rise in employer contributions to 23.7% for six months and to 25.2% for a further six months would restore the accrual rate to 1/75 and the salary threshold to £60,000 as well as entirely restoring current inflation protection.
It is for this reason, among others, that the case for paying extra contributions to retain current benefits for 12 months is overwhelming: the modest and affordable rise in contributions for 12 months is a small price to pay to avoid large cuts to pension. UUK’s 0.2% solution is risible by contrast: barely better than nothing.
