The proposal to close the Universities Superannuation Scheme (USS), the biggest private defined benefit (DB) scheme in the country, could leave staff with only half of their retirement income, a London School of Economics (LSE) professor has argued.
Michael Otsuka, professor at the LSE department of Philosophy, Logic & Scientific Method, and pensions representative at the University and College Union (UCU), has analysed the proposed changes to the scheme.
He concluded that members will only receive between 50 to 75 per cent of the current benefits.
Earlier this month, Universities UK, which represents 350 university employers, announced plans to close down USS DB section, and transform the scheme into a full defined contribution (DC) fund.
A spokesman for Universities UK said: "This proposal would tackle the scheme's financial deficit and rising future costs whilst ensuring that it continues to offer attractive pensions benefits to members."
UCU, the trade union for higher education staff, is conducting a ballot between its members considering industrial action next year about this decision.
USS covers the majority of staff mainly in the older "pre-1992 universities" including Oxford, Cambridge, Manchester and Imperial.
Aon Hewitt conducted a modelling of the proposed benefit changes, concluding that “including standard state pension entitlements, current members should continue to receive retirement incomes which are equivalent to 80 to 90 per cent of those received currently in terms of monetary value."
DB benefits already earned
Mr Otsuka said: "They mask the impact of their proposal on future pension income by aggregating such future accrual with various other things that remain the same under both proposals, such as past USS pension accrual and the state pension we will also receive."
According to the professor, some of the model assumptions aren’t correct, such as the fact that Aon assumes that all members will opt for drawdown rather than purchasing an annuity which is comparable to their DB pensions.
He said: "Drawdown exposes members to longevity risk. If we are among the more than half who will live longer than the life expectancy of a USS member, our pension pot will be depleted before we die if we drawdown at Aon’s rate.
"Drawdown also exposes members to investment risk, especially since Aon assumes that, at retirement, we will re-risk our pension pot back to where we were roughly five years short of retirement on the 10-year default lifestyle de-risking path.”
Also, Aon’s estimates of returns on investment are higher than the estimates that USS uses, he added.
Paul Hamilton, partner and head of higher education Barnett Waddingham, explained that comparisons between defined benefit and defined contribution schemes are very difficult to do.
First, the DC benefit is very uncertain, since the "amount received can vary hugely depending upon the investment return," he said.
Also, within a defined contribution scheme, members have a lot more flexibility over how they take their benefits.
He said: "This flexibility does have a value […], but a comparison that looks only at the pension paid immediately on retirement (but ignores what happens in later years) does not necessarily show the full picture."