Major UK Pension Fund Slashes Benefits As Funding Crisis Spreads

Tyler Durden's picture

As we continue to cover the pension crisis that is unfolding in the United States (recently here and here), it is important to remember that these problems are not unique to just the U.S.

One of the largest educator pension funds in the U.K., the Universities Superannuation Scheme (USS) is implementing significant changes to the plan benefits as it becomes increasingly under-funded, just like its peers in the United States. The changes are drastic, and are meant to keep the fund solvent in order to at least pay some benefits rather than none over time. The plan represents 330,000 members across 400 institutions, according to its website.

The changes were foreshadowed in 2014, when in discussing the funding issues, the USS said "this means it is likely that, given the increased cost of providing future pensions and the need to deal with an increased deficit, higher contributions and/or other responses will be required."

Upon the completion of the 2014 actuarial valuation, the first of those "other responses" was for the fund update its deficit recovery plan to include employer's contributing 2.1% of salaries toward the deficit over a period of 17 years.

Following completion of the 2014 actuarial valuation, and further consultation with Universities UK (as the representative body for the scheme’s sponsoring employers), the trustee has updated its recovery plan for addressing the scheme’s deficit. The updated recovery plan requires employers to contribute 2.1% of salaries towards the deficit over a period of 17 years. The trustee has extended the period of the recovery plan following an extensive piece of work, undertaken independently, on the financial strength of the scheme’s sponsoring employers (which is generally referred to as the employers’ covenant). The conclusions from that work confirmed the trustee has reasonable visibility of the ongoing strength of the covenant over a period of 20 years.

Then, as the funding gap widened, further measures were taken.

According to the 2015 annual report (month ended March 31, 2015) the fund had £49.1 billion in assets, and £57.3 billion in valued liabilities, adding up to a deficit position in the amount of £8.2 billion. Said another way, only 86% funded, down from 89% the prior year.

 

Based on the 2015 results, additional steps were taken in the effort to lower the plan's deficit.

The USS introduced changes that significantly change the structure of the plan, and begins to shift the focus from definied benefit to defined contribution. Beginning April 1, 2016, the following changes have been made (per the annual report):

  • The use of final salary to calculate retirement benefits comes to an end, and will be replaced by a career revalued benefit (CRB) basis (i.e. an average salary calculation, adjusted for a capped CPI amount will be used to calculate defined benefit payments instead of using the most recent - and presumably highest - salary at retirement).
  • Employer contribution rates will increase to 18%, up from 16%
  • Employee contribution rates will increase to 8%, up from 6.5% for current CRB members, and up from 7.5% for final salary members)

Additionally, beginning October 1, 2016, contributions after the first £55,000 of one's salary will be paid into a new defined contribution plan (of which the employer will contribute 12% of the excess salary over the threshold). This point is critical, as it starts to move the plan from defined benefit to defined contribution, which takes pressure off employers to fund guaranteed payout amounts, and puts members at the mercy of the performance of the money managers handling their investments.

In summary, one of the UK's largest pension funds couldn't sustain the current trajectory of cash flows, so they decided to cut defined benefits and put the burden on money managers to live up to member expectations in retirement. This is a plan that we already know will end poorly once the markets reset and wealth is once again transferred from the savers to the asset owners, as is the recurring cycle under the central banking regime. Of course, there is always helicopter money tied to bailouts of such pension funds, which is forever a possibility with the PhD's behind the central banking curtain.

h/t Henry Lahr

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css1971's picture

And so, it begins.

svayambhu108's picture

0FF topic: I cannot access ZH without a proxy I get this Maintenance Mode page, anyone in the same situation?

RafterManFMJ's picture

They even called it a scheme; come on eggheads you've no one to blame but yourselves.

philipat's picture

WIth NIRP, I don't see how any Pension scheme can be sustained on anything other than a Defined Contributions basis, unless they are to be fully funded up front?

Money Counterfeiter's picture
Money Counterfeiter (not verified) philipat Apr 26, 2016 5:40 AM

Zio virus is spreading.

Paul Kersey's picture

Pensions are already unsustainable with ZIRP.  The last time short-term rates were at zero percent, they stayed there for 21 years! That was following the Great Depression, from 1932 to 1953.  So what does that tell us about the real Main Street economy?  We are in a depression.

In this environment, it's hard to understand why people tie up their money in annuities.  Why would annuities do any better than pension plans?


John Kich's picture

This is Donald Trump's most shocking statement yet,

However the mainstream media isn't saying a word about it!

What are they really trying to cover up?

www.legitorscamreview.com/the-final-bubble

JohninMK's picture

FFS stop posting this in every thread.

PT's picture

Meanwhile in the Economics Department ...

Who is going to be the first to present this Essay / Lecture - a Professor or a Student? :

"ZIRP, NIRP And How It Affects My Pension"

Or will it be left to some smart-ass clown sitting at the back of the class to mention it?

Al Gophilia's picture

Of course, there is always helicopter money; or then there is mass resignation, accompanied with the demand of a cash payout whereby the members and new retirees roll over their savings to buy gold and silver, safely ensconced in their own personal retirement fund. The cushy jobs of the fund managers would be placed in the dustbin of history and the political ramifications tied to the collapse of their grafting Ponzi scheem would be biblically enormous.

JohninMK's picture

This is just the start, they are phasing in the changes gradually so as to not cause a riot.

The next step will be to start reducing potential pensions and capping pensions, across the board. Followed by the virtually inevitable, as we have started to see in the US, cuts to existing pensioners.

And then the asset values crash............................

nmewn's picture

Its euro-speak, they call "plans" schemes...we carry a negative connotation to the word "scheme" (and rightly so IMO) but they don't.

The common language shall be first to go!

Then we have them ;-)

RadioFlyer's picture
RadioFlyer (not verified) svayambhu108 Apr 26, 2016 6:21 AM

Try logging out

stilletto's picture

ZH has become unstable due to excessive number of garbage adverts that your computer cant process. I had it freezing, and maint mode etc until I installed an ad blocker. Has worked perfectly since then. Too many ads equals computer crash equals block the ads equals Site kicks own goal!

ebear's picture

Turn off Java. That also works.

firstdivision's picture

Too many ads is part of it.  It's also all the malware that is contained in those Google ads.  They're always trying to hijack your browser.

PTR's picture

Don't forget ghostery.  Should be an add-on for chrome and firefox. 

OverTheHedge's picture

Somebody knows where you live.

Be afraid. Be very afraid.

You might want to keep using the proxy ;-)

TruthHunter's picture

CRISPR will fix it. 

Soon even Semi-retards will be able to make GMO bio-weapons

EBT excepted's picture

dat funny..."is you be a retahd?  "nah jus' be a semi retahd..."

Rakshas's picture

nobody can say they were not warned ......... in the information age ignorance is a choice...... or something like that

Hobbleknee's picture

I'll gladly pay you Tuesday for a hamburger today.

-Government

RafterManFMJ's picture

Hey I need a three car brick garage built; I'll pay you 5K today, and then 100K in 30 years. What? No takers?

And yet people eat this pension shit up...

Richard Head's picture

Illinois says your 86% funded kicks ass!

NoDebt's picture

I was thinking the same thing.  "We got 'em way worse than that."

 

Stifmeister's picture

Good or Bad?

I'm 24 and I'm not contributing any of my salary to a pension scheme. If things are already unravelling slowly then imagine 40 years from now when I retire. Plus, inflation will probably eat away the value of the pension anyway. And by inflation I mean the things that really matter that are not counted into core inflation such as house prices and college tuition costs. Anyway, I know it's a risk but my plan is to save money and start my own business.  

RadioactiveRant's picture

Are university tuition fees and house purchase going to be a big area of spend for 65+ Stifmeister? Once the system is flushed, in 40 years time you'll be more concerned about green fees and care homes.

HalinCA's picture

Sorry dude ... unless you are very lucky, as well as hard working, you will work until the day you die.  Your whole generation was sold down the drain by baby boomers to fund their 'pursuit of happiness'.  

It is gross immorality that has not been seen in recorded history.  

Borrowing from the future to fund current expenses is insanity, yet since Reagan's era that has been standard operating procedure for our political class.

wwxx's picture

Your almost correct, but during Reagan's era, the last of the baby boomers were only 24 years old at that time.  It wasn't the baby boomers that started this crap it was the previous generation the fathers & mothers of the baby boomers. 

 

If you will recall, there were no baby boomers in congress during the 80's, none in the supreme court, and Reagan was a silly old fossil [ I don't know, they always look ancient to me ] along with Greenspan, and Strom Thurman, of which there was an oil boom & bust at that time and a savings & loan scandal too, not to mention Iran Contra...so even tho the current run baby boomer generation has similar idiots in place, doing the same idiotic things this day...I can squarely lay the responsibility on those WW2 old timers.

 

wwxx

rwe2late's picture

wwxx

Yes. And that is not even to mention LBJ and Nixon's costly wars,

domestic pacification programs, rising police state, and change from gold standard to fiat. We also might well ask what responsibility the younger soldiers and police have for enforcing establishment policies.

 

Those who misidentify the systemic problems such as the MIC and finance corporatism

as being "character flaws" belonging to one over-generalized age group

are way off base.

Instead, one should ask why particular members of society however uncommon,

and not others however common,

are promoted and rewarded

and ultimately direct and serve the established institutions.

 

What else can any one expect from a society that glorifies narcissistic power, and promotes "leaders" who self-servingly head institutions which are both intrinsically directed and driven to pursue privatization, control, and monopolization of the world's wealth?

EBT excepted's picture

dat jus' cuz da votahs be let dem gettin' away wif it...

mary mary's picture

Waaahh!  Worst thing baby boomers did was spoil their kids and allow them to turn into whiners rather than workers.

RafterManFMJ's picture

The Donkey works hard but at the end of the day he is still a Donkey - Mexican proverb.

NoDebt's picture

"I'm 24 and I'm not contributing any of my salary to a pension scheme."

If you're 24 and live in the US, trust me, you don't have a pension (Defined Benefit plan).  Maybe a 401k or similar (Defined Contribution plan- 401k or similar) but not a pension.

If you think you have a real shot with successfully starting your own business, keep doing what you're doing.  No investment you make in the "markets" will ever produce the rate of return you will get by investing wisely in yourself.

AVmaster's picture

At this time, I wouldn't even get a savings account as NIRP is just around the corner and is the next crack-pot step as things swirl down the toilet bowl.

 

The only real advice is to buy gold/silver, guns n ammo and a bunker...

Bangin7PoundCocks's picture
Bangin7PoundCocks (not verified) Stifmeister Apr 26, 2016 6:29 AM

Just admit that you spend your entire meager take home pay on cheap beer and weed. The truth will set you free.

EBT excepted's picture

hookahs 'n blow be a mo bettah 'vestmant...

Obadiah's picture

Retire? Are you nuts?

+1,000 for your own biz it may be the ONLY way... oh yeah and start having kids too.

northern vigor's picture

steifmaster....I did the same as you, as they told us in the 1980s there would be no pension for us either by the time we reasched retirement...which is still ten years away. I think they were right.
Here's my observation about saving in a self employed business....Most of your assets over a lifetime will equal the amount of income tax you do not send the government. Buy hard assets that you can capitalize, or expense and write off. 

 

Agstacker's picture

I keep trying to get my wife to cash out her 401K before the banksters on wall street steal it all, so far no luck :(

mary mary's picture

Starting your own business has always been the best, but you need to find a business you personally can do well, and you need to learn to sell, because nobody is going to give you their customers, and you need to watch your energy and your healthy.  Discipline.

rejected's picture

Sure,,, leave it in a bank then lose it to a bail in. Buy PM's, pay 90% tax when selling them to a dealer. Buy houses, watch those property and especially school taxes sky rocket. Start your own private business, man those start up costs to your local parasites are heavy,,, then all those environment regulations, regulations covering employees and on and on a n d  o n.

Good luck to you!

OverTheHedge's picture

What is a pension? It is a pot of money, bound by many, many rules, that the government allows you to have, provided you follow ALL the rules, and there might be some tax breaks along the way, but 40 years is a long time to trust any government.

If you're awash with cash and need the tax breaks, then by all means, but for the common sheep, it is a handy means to get funds under management, and keep sucking on those lovely annual fees.

Your own money, invested in your own way, will not have the tax breaks, but will not have all the rules and nonsense that goes with a pension fund.

FWIW, I don't have any pension either, and I'm a damn site closer to "retirement" than you are. I do, however, have assets that produce an income. As I get older, I will need help producing that income, so I will need to employ someone. I ought to be saving for the time when I will need some help, but that rather assumes that I have spare cash to save. I do live close to quite a big lake, so that might come in handy. :-)

Space Animatoltipap's picture

Political faith money schemes and the force of TIME, not a very handy combination. Just to put it very mildly, of course. Hare Krishna.

scintillator9's picture

Why oh why does that 8.2 billion quid deficit sum seem so familiar?

Oh, this is why:

https://fullfact.org/europe/our-eu-membership-fee-55-million/

Because in 2015, the UK contributed a net of 8.5 billion pounds to the EU.

Funding gap solved by channeling their inner Victoria Nuland and....

http://www.theguardian.com/world/video/2014/feb/07/eu-us-diplomat-victor...

mary mary's picture

Amen. 

Soon as I saw the headline I asked myself "HOW, exactly, did UK TPTB steal this money?"

Sounds like UK TPTB decided they don't need no stinking professionals. They can do fine with robots and immigrants.

This could work for a while, until the infrastructure falls apart.  Then UK TPTB will scream, "the BABY BOOMERS did it!!!"