Amid the overhaul of the banking industry, there was a stark reminder from the occupational pensions sector last week that Europeâs retirement system is also still in dire need of its own reform.
Cost pressures facing the UK’s Universities Superannuation Scheme (USS), which provides pensions for academic staff working in higher education, has led to reforms that are designed to make the £30bn scheme sustainable.
The cost of providing current USS benefits continues to rise and, under the current scheme rules, the various employers in the fund are required to bear the whole of any cost increases. In 2009 the employers paid an extra 2% - or £110m - of salaries towards the fund.
Longevity, salary costs, and uncertain investment returns were the three main pressures on the scheme that provoked the reform.
Longevity risk stems from the fact that the life expectancy of a USS member retiring today is around 13 years longer than it was when the scheme was set up in 1974.
The final salary structure of the scheme has compounded salary costs because the last decade’s significant pay rises in higher education were well in excess of the funding assumptions made by USS actuaries.
And poor stock market performance over the past decade has run parallel to considerable volatility in USS asset values.
The changes recommended last week were modifications to proposals previously put forward to the USS board and centred on issues such as the cap on inflationary increases.
Among the original proposals it was recommended that the scheme’s normal pension age should increase in line with the State pension age, and that the employee contribution rate for members of the final salary section should increase to 7.5%. Currently, members pay 6.35% of salary into the scheme.
Also, it was proposed that new entrants will have a normal pension age of 65, but existing members over the age of 55 will be exempt from the changes to the normal pension age.
The UK government this month published the Pensions Bill, which contains proposed changes to workplace, private and State pensions. It follows on some 10 years after the introduction of the ‘stakeholder pension’ system under the previous government, which itself followed a major pensions green paper.
The financial crisis caused the reform of banking, which by comparison is moving faster than pension reform. The question surely is, what crisis will have to befall Europe before pension reform receives the same thrust?
Nick Fitzpatrick, editor©2011 funds europe