2016: Year of (pension) changes in the UK


This year seems to be filled with major changes on fundamental issues concerning the United Kingdom and its inhabitants. Besides other developments, some remarkable changes within the pension systems came into force. Britain is a country with many research facilities and a lot of researchers spend at least one phase of their careers there. Thus, the changes in terms of pensions are worth to have a look at and we will give you an overview in our newsletter. Details of the systems are explained in the respective Pension ABCs of the UK Department for Work and Pensions and the Universities Superannuation Scheme (USS).  



Automatic Enrolment into a workplace pension scheme
Following the ongoing discussions on sufficient provisions for old age, ‘automatic enrolment’ had been introduced by the UK government in 2012. According to this law, employers must offer a workplace pension scheme and automatically enrol certain eligible workers in it. The coverage has started with the largest employers since October 2012, followed by medium-sized and then small ones. The obligation will apply to all employers by 2018. By means of this default-solution more employees are expected to earn supplementary pensions in addition to their State Pension. Nevertheless, it is still possible for workers to optout within a month after the enrolment.

Reform of the two-tiered State Pension System

The UK state pension system, a so-called two-tier-system, was considered to be very complicated. This was one of the reasons for another reform which was adopted by the government in 2014. The former system comprised two different elements: a basic and an earnings-related part called Additional Pension. Regarding the latter, also known as second tier, reforms already took place when the former SERPS system was closed and been replaced by the State Second Pension = S2P scheme in April 2002. This new arrangement was intended to grant higher benefits to affiliates with lower incomes and contended distributional effects. However, ‘contracting out’ of the Additional Pension towards a workplace (occupational) pension instead was possible and many employees had chosen this option.

According to the latest reform, the State Pension has been transformed into a single-tier, flatrate pension called the new State Pension which started as of April 2016. Following the new rules it is not possible to contract out of the State Pension system as it was in the old, two tiered system. You can learn more about the transformation of accrued entitlements into the new scheme in our UK State Pension ABC (please select your target group and find the Pension ABC).

Many researchers and scientists have been or are members of USS (Universities Superannuation Scheme). Here, changes and new features have been installed as well. So, why the changes and what has changed at USS?

Recent Reforms in the Universities Superannuation Scheme

For many years USS had a so called Final Salary system from which guaranteed benefits resulted under certain requirements (so-called defined benefit (DB) system). These benefits were based on the employee’s last salary. Every three years an asset and liability valuation takes place at USS. After a valuation highlighted a substantial deficit for the future, changes had to be made in order to stepwise replace the so-called Final Salary Section (FS). The first major change took place in 2011 when the Final salary section was closed for new members and a Career Revalued Benefits (CRB) section for new members who joined after 30 September 2011, and for some members who rejoined the scheme, was introduced.

This year, on 31 March 2016 the Final Salary section closed completely. Benefits accrued up to then were calculated resulting from how long members have been affiliated to the scheme, and on how high their pensionable salary was at that point in time. The calculation is made by using a formula known as ‘smoothing out’. The newly (1 April 2016) introduced benefit system (second revision) comprises the following: The so called ‘Revised Career Revalued Benefits’ scheme has two sections, the Retirement Income Builder and the USS.

The Retirement Income Builder includes furthermore a defined benefit (DB) system. DB schemes are such schemes where the pension plan contains a guaranteed pension benefit on retirement which often refers to the salary you have earned. However the Retirement Income Builder is restricted to a threshold salary of £55,000 per year (2016). At the same time the USS Investment Builder was introduced in order to also include the salary components above the mentioned threshold into the pension accrual. Here, pension accrual follows a defined contribution (DC) system, meaning that the employers pay a certain contribution level but there is no guarantee regarding the future benefits. They depend on factors including the amount you pay in, the fund’s investment performance etc.
More details can be found in the new USS Pension ABC… (please select your target group and find the Pension ABC).

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