USS Benefits

Until 2011 the scheme was a final salary scheme, paying a pension of one eightieth of one's final salary for each year worked, with a lump sum on retirement of three times annual pension. A surviving partner's pension was half of the original pension. There were various death in service and early retirement due to incapacity benefits too. Indexation of the pension during retirement mirrored public sector pension increases. One could also purchase "added years" (well, days in reality) of service, at prices which varied considerably. The youngest age at which one could retire and claim an unreduced pension was 63.5, unless retiring with one's employer's consent (i.e. being made redundant), at which point an unreduced pension could be paid from the age of fifty.

At the time these benefits would have been considered good, but not exceptional. Some private schemes offered final salary pensions based on sixtieths, not eightieths, and with the suriving partner's pension being two thirds, not one half.

In 2011 the standard retirement age was increased to 65, and the option to avoid a reduction in pension on early retirement with the employer's consent disappeared. Indexation changed from uncapped CPI to a capped version of CPI. CPI is used up to 5%, then half the excess to a maximum increase of 10%. (E.g. CPI=8%, indexation=6.5%.) These changes were accompanied by an increase in employee contributions from 6.35% to 7.5% of salary.

At the same time the final salary section was closed to new members. New joiners suffered a scheme based on career averaged earnings. Each year one's pension increases by one eightieth of one's earnings that year, and everything is indexed by the above capped version of CPI. Those in this part of the scheme had a slightly lower contribution rate of 6.5%.

In 2016 the final salary scheme was closed for all members, and all were left with a career averaged earnings scheme.

Those who had benefits in the final salary section discovered that the date used for calculating their final salary would not be their final retirement date, but April 2016. For those early in their careers, this could be a significant loss. But in some ways abandoning final salary was good.

One improvement was made to the career averaged earnings scheme in 2016: its acrual rate increased from one eightieth to one seventy-fifth. However, the cost to employees increased from 6.5% of salary to 8% of salary.

From this date one's earnings below £50k count in the career averaged scheme. For earnings above this threshold, which rises annually with CPI and is now just below £60k, 20% of that amount is put into a standard "defined contribution" investment scheme. Currently this would be the 9.8% employee contribution topped up with a 10.2% contribution from the employer, although when it was introduced it was 8% from employee and 12% from employer. This part of the scheme offers a very limited choice of funds, but the funds' expenses are absorbed within the USS rather than being taken from the investments.

For most career earnings profiles, a career average pension based on 75ths and indexed by capped CPI will be much less generous than a final salary pension based on eightieths. So the employees were left paying more for less.

All may make additional voluntary contributions into the defined contribution part of the scheme. From October 2016 until April 2019 any such contribution based on a percentage of one's salary (only integer percentages allowed) would trigger an additional 1% contribution from the employer.

Finally, from October 2020 the retirement age for unreduced benefits increased to 66.

One sided

Should one choose to retire at 63.5, one can take one's pre-2011 benefits in full, one's 2011 to 2020 benefits are reduced more severely for being taken 18 months early, and one's post 2020 benefits are reduced for being taken two and a half years early. This seems fair enough. Choose to retire at 66, and all benefits can be taken in full. But only in full - one's pre-2011 benefits are not increased just because one claimed them two and a half years late.

Disclaimer

The above is a rough summary, and should not be relied upon for any financial decisions. Consult the USS, your employer's pension office, or a regulated pensions adviser for accurate information and guidance.

The above omits discussion of death in service and early retirement due to ill health benefits.