USS and TPS compared
Many people do not realise that the "post-92" Universities (also known as the former polytechnics) do not use the USS pensions scheme, but rather are members of the Teachers' Pension Scheme (TPS) as used by state schools, including sixth-form colleges, and even some independent schools.
Whereas the USS is a fully-funded private scheme, regulated by the Pensions Regulator, and required to hold sufficient assets to pay all accrued benefits, the TPS is a government-backed scheme, about to pay benefits directly from income, and able to rely on government underwriting. Both are currently career average salary based schemes.
The key aspects of the defined benefits the schemes provide are summarised below.
| TPS | USS, 2016-22 | USS (proprosed) | |
|---|---|---|---|
| Accrual rate | 1/57 | 1/75 | 1/85 |
| Enhanced accrual rates | 1/55, 1/50 or 1/45 | none | none |
| Lump sum | none | 3x | 3x |
| Indexation (still working) | CPI+1.6% | CPI (capped from 5%) | CPI (capped at 2.5%) |
| Indexation (deferred or retired) | CPI | CPI (capped from 5%) | CPI (capped at 2.5%) |
| Retirement age | state pension age | state pension age | state pension age |
| Qualifying salary | all | first £60k | first £40k |
| Employee contribution rate | 7.4% to 11.7% | 9.8% | 9.8% |
| Contribution rate on £35k | 8.6% | 9.8% | 9.8% |
| Contribution rate on £45k | 9.6% | 9.8% | 9.8% |
| Contribution rate on £75k | 11.3% | 9.8% | 9.8% |
| Employer contribution rate | 23.68% | 21.40% | 21.40% |
| Salary sacrifice available? | no | yes | yes |
| Surviving partner's pension | 37.5% | 50% | 50% |
Notes
- The inclusion of a lump sum in the USS makes direct comparison with the TPS harder. However, on retirement at 66, the current commutation factor for lump sum to pension is 31, leading to effective accrual rates if no lump sum is taken of 1/68.4 (pre 2022) and 1/77.5 (proposed).
- The pre-2022 indexation of the USS is CPI up to 5%, then half of any increase in CPI from 5% to 15%, leading to a maximum increase of 10%.
- The USS contribution rates have varied considerably over the period 2016 to 2022.
- That salary sacrifice can be used with the USS reduces the effective contribution rates slightly. Those earning under about £50k avoid paying 12% National Insurance on their 9.8% USS contribution, whereas higher earners avoid a 2% charge. Employers' NI contributions are also reduced.
- The USS also has a defined contribution section. Pension contributions from salary above the qualifying threshold go into this.
Many other factors ought to be considered, such as ill-health benefits, surviving partner benefits, and penalties for early retirement or converting pension to lump sum. These can vary considerably. One which is in the USS's favour is that giving up £1 of pension at 66 results in a lump sum increase of £21.40. A TPS member would receive just £12 for this sacrifice. I believe that TPS members suffer slightly harsher reductions for retiring early too.
Conclusion
The TPS costs very slightly more, for both employer and most employess, especially after the absence of salary sacrifice is considered. However, the TPS benefits are significantly higher. The accrual rate is about 20% higher, and will be about 35% higher after the proposed USS changes. The indexation of the TPS is much more generous too.
Both schemes suffer from relatively high minimum contributions. The basic auto-enrollment pension employee contribution is 5% of earnings above £6k and below £50k, whereas these schemes are close to twice that for most people.
The TPS is much more flexible about enhanced contributions. One can change one's accrual rate. One can pay extra to reduce one's normal retirement age back to 65. One can buy index-linked sums of extra pension. The only flexibility to enhance one's pension in the USS is to convert lump sum into pension on retirement at a rather unattractive rate, unattractive unless one is expecting to live beyond the age of 97.
But for an employer to offer the TPS, it would have to leave the USS, and then persuade the TPS to let it join.