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The rising cost of chocolate and your pension

The changing economic landscape

When USS began in 1974 you could buy a Mars Bar for a few pence, now you don’t get much change from a pound, and they are a lot smaller! So, what’s that got to do with your pension?

The price of chocolate is a good illustrator of how the economic landscape has changed over the years. Alongside this, generally, the cost of investing is rising but investments are providing lower returns.

This mixed with some recent major economic challenges and factors such as life expectancy rising, has meant that many defined benefit (DB) pension schemes, which guarantee you an income on retirement, have struggled to remain open.

In 2006, there were almost 3,500 DB schemes in the private sector open to new joiners. Now, there are less than 800 still accepting new members – it’s a huge fall.

The truth for many employers, is that DB schemes are becoming too expensive to run. It’s a significant challenge, growing the value of the fund to match the pensions that need to be paid in the future, and this challenge has become too great for many.

In recent years we’ve seen many big names closing their defined benefit schemes to new members, companies such as Royal Dutch Shell, Unilever, and the Royal Mail. Royal Dutch Shell was the last FTSE 100 company to offer a DB scheme to new joiners.

The USS pension scheme

The Retirement Income Builder section of USS, which all active members are part of, is a DB arrangement. It hasn’t been immune to these financial pressures and, like most DB schemes in the UK, our deficit has grown over the last few years. This deficit is the difference between the amount of assets we hold and the amount of money we need to pay the pensions that members have already built up.

This deficit doesn’t affect our ability to invest and investment performance over the long term has been strong. In the last five years, up until March 2020, investment performance twinned with contributions over that same period, have seen the Retirement Income Builder grow by £17.4 billion and provide a 6.19% per annum return.

Outside of the strong growth, we’ve launched a defined contribution section of the scheme, which celebrates its fourth birthday this year. This hybrid approach means we offer the advantages of both, giving members a guaranteed income on retirement through the Retirement Income Builder, with the option to top up their income and taking their benefits more flexibly, by saving in the Investment Builder.

What does the future look like?

The vast majority (73%) of UK DB schemes are already cash flow negative, with payments higher than the income being generated. According to the Pension Policy Pension Institute by 2028 this is set to rise to 90%.

The cost of maintaining these DB schemes is increasing and, as a result, there will be difficult decisions ahead for the schemes that are still open. They will need to look at whether they ask for more contributions from employers and members or close the doors to new members joining and future benefit accrual.

Our long-term investment performance and innovations like becoming a hybrid scheme provide a good foundation for us to continue to put our members first. However, we continue to face some of the same challenges that have had such a significant impact on other DB schemes. We are currently undertaking a full valuation, so we can assess our funding position and work with our stakeholders, to ensure USS is a sustainable scheme.

Published: 14 September 2020