Major UK Pension Fund Slashes Benefits As Funding Crisis Spreads

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