Pension scheme redesign and wealth redistribution between the members and sponsor: The USS rule change in October 2011

Emmanouil Platanakis, Charles Sutcliffe

Research output: Contribution to journalArticle

5 Citations (Scopus)
118 Downloads (Pure)

Abstract

The redesign of defined benefit pension schemes usually results in a substantial redistribution of wealth between age cohorts of members, pensioners, and the sponsor. This is the first study to quantify the redistributive effects of a rule change by a real world scheme (the Universities Superannuation Scheme, USS) where the sponsor underwrites the pension promise. In October 2011 USS closed its final salary scheme to new members, opened a career average revalued earnings (CARE) section, and moved to ‘cap and share’ contribution rates. We find that the pre-October 2011 scheme was not viable in the long run, while the post-October 2011 scheme is probably viable in the long run, but faces medium term problems. In October 2011 future members of USS lost 65% of their pension wealth (or roughly £100,000 per head), equivalent to a reduction of roughly 11% in their total compensation, while those aged over 57 years lost almost nothing. The riskiness of the pension wealth of future members increased by a third, while the riskiness of the present value of the sponsor’s future contributions reduced by 10%. Finally, the sponsor’s wealth increased by about £32.5 billion, equivalent to a reduction of 26% in their pension costs.
Original languageEnglish
Pages (from-to)14-28
Number of pages15
JournalInsurance, Mathematics and Economics
Volume69
Issue numberJuly 2016
Early online date16 Apr 2016
DOIs
Publication statusPublished - 1 Jul 2016
EventBAFA annual conference - |University of Bath, Bath, UK United Kingdom
Duration: 21 Mar 201623 Mar 2016

Keywords

  • Defined benefit
  • Pension scheme
  • Redistribution
  • USS
  • Scheme design
  • Risk shifting
  • Risk management

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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