University Lecturers Are Striking Over Losing Their Final Salary Pensions…. Why should you be worried?
You’ve probably seen in the news that some university lecturers are taking part in strike action. The action has spread over the last week, with over 60 universities now affected.
When you hear about strikes – especially when those striking seem to have secure and well paid jobs – it’s easy to be dismissive and to think, well, why should I care?
In this case we think you should be concerned, and we’ll explain why here.
First of all, why are they striking? Under a proposal agreed in January the Universities Superannuation Scheme – which is a private pension scheme for higher education – will place future pension contributions into a defined contribution scheme instead of the current defined benefit or final salary scheme.
They’re doing this because they claim the scheme has a deficit exceeding £6 billion. Which means, as things stand, it won’t be able to pay the lecturers their pensions.
As you might (or might not) know a defined benefit scheme gives you a guaranteed pension in retirement based on your final salary. With a defined contribution scheme your pension depends on what you’ve contributed, and on how well (or not) that money is invested over the years.
The lecturers believe they will be on average £10,000 a year worse off in retirement under the new arrangements.
So, let’s get back to why this should concern you ….
Pension deficits are not limited to the university scheme. Many others are in deficit. In 2016 JLT Employee Benefits estimated that the deficit in FTSE 100 final salary pensions alone amounted to £117 billion.
If you’re part of a pension scheme in deficit that could be a real problem. Unless something is done the scheme won’t be able to pay your promised pension. You might even have to rely on the official Pension Protection Fund for your pension. The snag here is that it doesn’t necessary pay out full pensions, especially for higher-paid employees. No one can guarantee that, in future, the PPF will be able to pay all the pensions itself.
But what about the advantages of moving from a defined benefit to a defined contributions scheme?
While it’s true that, generally, defined contribution schemes are not as generous there are some clear advantages that are often overlooked ….
A defined contribution scheme allows you to take control of your pension. You can be sure that a certain sum of money will be there waiting for your retirement. You won’t retire to find that your scheme is in deficit, nor have to throw yourself at the mercy of the PPF.
There can be other advantages too, such as the ability to take a tax free lump sum at 55 (instead of 65), being able to leave your pension pot to your children, and having a more flexible income stream in retirement.
And the even better news is that if you have, or transfer to, a defined contribution scheme good professional financial advice may be able to help you get a much better return from that money than you thought was possible.
So what would we suggest? Should you join the picket line?
No, we wouldn’t suggest you pitch up at the gates of your local uni, placard in hand!
But we would suggest that, no matter what kind of pension you have, you do arrange a regular pension review with a qualified financial adviser. We can review your current arrangements and, if applicable, advise if your scheme is in deficit. We can review your personal situation, help forecast how much money you will need in retirement, and explain the options that may be available to you for your pension.
If you need us, here are our contact details.
You might also be interested in our report which looks at the subject of UK pensions transfers.
Footnote. There’s actually another point to consider here. It’s something which should concern you if you have children who plan to go to a UK university over the next decade or so.
Many students are asking for a refund of fees as a result of the strike action, with many claiming that they don’t get value for money. But, as we write in a recent blog post, student fees aren’t likely to go down any time soon – and the pension deficit could potentially impact university budgets and put pressure on fees to rise further. Read our post about the high cost of going to university here.