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I don't know if this may be too broad, but I was hoping someone can give me some guidance. I don't know a huge amount about pension schemes (or finance for that matter!) but I have a job opportunity that would auto en-roll me to the "Universities Superannuation Scheme".

The value of this is seems to be quite high, but I can see the contributions to this are also pretty significant from an employer (22.5%) and employee (10.4%). I'm used to regular private pensions (employer 5% / employee 5%). So at the moment I'm having difficultly comparing them like for like considering differences in salary too.

The other thing I noticed is just doing a little reading I came across this, which makes me wonder how safe the money would actually be in this scheme?

The Universities Superannuation Scheme (USS) ... after a major review in 2017 found a £7.5bn hole in its finances.

Can anyone shed some more light on the situation/calculations I should be considering?

  • Hi user86111. Are you being offered a 'defined benefits' pension (i.e. 'we will pay you some amount as pension based on final salary, length of service etc.) or 'defined contributions' (i.e. 'we invest money contributions for you and you get whatever amount of money is in the fund when you retire')? – DJClayworth May 10 at 14:06
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    @DJClayworth Good question, the benefits listed are a pension of 1/75 of your salary for each year of pensionable service up to a salary threshold, a cash lump sum of 3/75 of your salary for each year of pensionable service, up to a salary threshold and a money purchase pot in the USS investment builder for some of the contributions paid over the salary threshold. I don't understand the last point actually! I believe the first is final salary? – Ian May 10 at 14:28
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    Completely off topic and irrelevant, but I wish the USS would offer its services to startups, purely so the scheme could be called USS Enterprise. – DJClayworth May 10 at 14:51
  • @DJClayworth ROFL! – Ian May 10 at 14:56
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I've not dealt with the USS, but I did have dealings with a similar scheme. Let me offer my observations.

First, you may not actually be given a choice about whether you join this scheme or not. Schemes like this are often compulsory. So while I applaud you for doing research, you may not have any decisions to make based on the research. If you are given a choice of different levels of opt-in your research may be useful.

Second (and you probably know this) defined benefit schemes are usually much better than defined contribution schemes, and it is usually worth opting in to them if you can. Being promised a definite retirement income, whatever the economic situation, and however long you live, is extremely valuable. It means the company is assuming some of the economic risk that you normally have to assume in your own pension planning.

So about security. A defined benefit scheme is actually a contract between you and the fund. You pay them so much money up front, and they pay you a pension. In that sense it is very secure. They can't say "our fund didn't do as well as we thought, so we will pay you less pension". They can't change their minds, or rewrite the terms of the contract, without your consent. You are guaranteed to get the pension they promise. However...

There is unfortunately one way the fund can fail to deliver the pension you are promised, and that is if the fund goes bankrupt. This can happen. I was a member of a scheme that did. It is rare. So how likely is it to happen?

With funds like these, size correlates with security. The USS has 400,000 members, which is huge, and 30 billion in assets, which is also huge. The chances of it being allowed to fail are very small. (My fund that failed had a few thousand members). Also in general employers are responsible for making up shortfalls in the fund. This is an obligation which can only be avoided by bankruptcy of the employer. The USS is used by many universities in the UK, and they would all have to go under for the fund to fail. (That's what happened to me, but my fund had only one small employer).

The UK also has something called the Pension Protection Fund, which is specifically responsible for taking over the obligations of bankrupt pension funds. In the unlikely event of the fund going under they would take over the assets and pay some fraction of the pension you were owed. Currently the fraction is 90%. With 400,000 members there is an additional degree of safety in that it is unlikely that a government would let the pension scheme of that many quasi-governmental workers fail. (No government wants 400,000 voters to blame them for financial ruin!)

  • Thanks, struggling to upvote (or accept) without creating (and linking!) an account. Will do that later when the question becomes less sensitive. – Ian May 10 at 16:03
  • I'd be curious what your reasoning is for that assertion - define benefit has risks as well, and the beneficiary has more control over risk and potential in a defined contribution. – D Stanley May 10 at 17:04
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    Defined benefit has risks, but the ones for defined contribution are much larger. A serious economic downturn reduces the payout of your DC scheme, not the DB. If you live a long time you risk outliving your DC benefits, but not with DB. – DJClayworth May 10 at 17:08
  • @DJClayworth with a DC scheme you have the option of annuitizing at the point that you retire, which effectively insures against long life in the same way that a DB pension does. – Brian Borchers May 10 at 22:20
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    There are other issues, but let's not discuss this in comments. – DJClayworth May 10 at 22:39

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