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

Article English OPEN
Platanakis, Emmanouil ; Sutcliffe, Charles (2016)
  • Publisher: Elsevier
  • Related identifiers: doi: 10.1016/j.insmatheco.2016.04.001
  • Subject: Defined benefit | Risk shifting | Risk management | /dk/atira/pure/subjectarea/asjc/2000 | USS | Scheme design | Pension scheme | Redistribution | Economics, Econometrics and Finance(all)

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.
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