Challenging common pensions misconceptions in a sector that offers great options
Richard Paul, Senior Pensions Technical Adviser, UCEA
5 November 2020
UCEA’s bi-monthly pensions newsletter provides topical stories, news and information on all aspects of pensions and retirement saving, but always with a higher education angle.
The growth in UK pension saving
The newsletter always includes exciting stuff, honestly. For those who think pensions are boring, recent editions have included such diverse topics as veganism, climate change, Bury Football Club and an American Civil War pension. We have also written articles on the Australian pensions system, pension superfunds, the job retention scheme and State Pension reform.
For the July 2020 edition of the newsletter I wrote about some Department for Work and Pension (DWP) statistics on pension scheme participation and saving trends. The DWP publication included some encouraging data showing that since 2012 when auto enrolment was introduced, there has been an increase of 8.5 million to 19.2 million eligible employees participating in a workplace pension.
In addition, since 2012 pension scheme participation in the private sector has continued to increase for all age groups. The largest increase has been seen in the 22 to 29 age group, increasing by 61 percentage points from 24% to 85% in 2019. Furthermore, the pension participation gap between different age groups of pension saver has reduced since 2012 from 26 percentage points to only two percentage points in 2019.
Staff working in the HE sector have access to some of the best Defined Benefit (DB) and Defined Contribution (DC) schemes of any worker in the UK and participation rates across UK universities are high compared to many other sectors. The majority of HE staff accrue a DB pension, at a time when the availability of these types of scheme to employees outside of the public sector has seen a steep decline.
DB schemes still prevalent in the UK HE sector
To put this into context, there are estimated to be approximately 600,000 active members of a private sector DB scheme (1) in the UK that is still open to future accrual. Based on the annual report and accounts for the Universities Superannuation Scheme and the Superannuation Arrangements for the University of London from 2019, those schemes had approximately 202,000 and 19,000 active members respectively (2). This means that just two HE sector schemes alone contain over one third of the total number of active members in private DB schemes across the UK still open to future accrual. Of course, there are thousands more HE staff that are also members of a self-administered trust (3) or the public service pension schemes offered in the sector (Teachers, Local Government or NHS Pension Schemes), each of which provide DB benefits.
The growth of DC pension provision
During the past decade there has been a significant move towards DC pension provision across the UK. According to the Office of National Statistics back in 2008 there were around 1 million active members of a DC scheme. A decade later there were 9.9m active members. While most of this increase can be attributed to auto enrolment, it is certainly the case that the vast majority of employers operating a DB scheme ten years ago have now closed that scheme and opened a DC arrangement in its place.
In the HE sector there has been a more gradual shift towards DC pension provision and while most new staff entering HE are likely to be enrolled in a DB scheme, greater numbers of staff are now offered a DC pension scheme. While the all too common narrative around a move to DC in the HE sector is cost cutting by HEIs, in reality there are a very diverse set of reasons for moving to DC.
Our members have told us that managing the costs and risks associated with offering a DB scheme, particularly a multi-employer arrangement where individual HEIs have very limited influence in the operation of that scheme, is an important issue for HEIs. However, equally important is a recognition of the significant changes in the profile and demographics of their workforce over recent years and that increasingly staff want more flexible and affordable options when saving for retirement.
In a recent UCEA pensions survey on HE DC schemes we found that when taking into account any matching employer and employee contributions structures, on average the maximum employer contribution paid by HEIs into their DC scheme is around 9% – similar to the maximum contribution paid by FTSE250 companies.
Importantly, our survey showed that eighteen responding HEIs pay contributions into their DC scheme of 10% of total salaries or higher. In addition to generous employer contributions, HEIs that have introduced DC schemes have often also put in place death in service and ill health cover, mirroring the benefits offered in the main DB schemes still open in the HE sector. This is particularly the case where a HEI offers a DC scheme as an alternative to LGPS.
Covid-19 and pension saving
It has recently been reported in the media that around a quarter of savers across the private sector have stopped or cut back on paying into their pensions during the Covid-19 crisis. Over the past few months we have heard anecdotally that DB scheme opt-out rates amongst HE staff have risen. It cannot be a coincidence that this has followed significant increases in employee contribution rates.
Even if opting-out or reducing contributions is a temporary measure, such a move can have significant negative consequences for an individual’s benefits at retirement and in addition they could be missing out on ill-health and death-in-service cover.
As we move into a second wave of Covid-19 and at a time when many HEIs are feeling financial pressures when it comes to the remuneration and reward of their employees, now more than ever it seems important for HEIs to remind their staff of the quality of the pension arrangements they offer, the generous contributions they pay and the importance for scheme members of maintaining their pension saving where possible during these difficult times.
Notes
(1) Pension Protection Fund Purple 2019 page 13
(2) In the year to 31 March 2020 USS had 205,000 active members, SAUL had 22,000 active members
(3) Some individual pre-92 HEIs operate their own DB scheme known as a Self-Administered Trust
