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

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  • Platanakis, Emmanouil
  • Sutcliffe, Charles

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.

Suggested Citation

  • Platanakis, Emmanouil & Sutcliffe, Charles, 2016. "Pension scheme redesign and wealth redistribution between the members and sponsor: The USS rule change in October 2011," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 14-28.
  • Handle: RePEc:eee:insuma:v:69:y:2016:i:c:p:14-28
    DOI: 10.1016/j.insmatheco.2016.04.001
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    Cited by:

    1. Jan Bonenkamp & Lex Meijdam & Eduard Ponds & Ed Westerhout, 2017. "Ageing-driven pension reforms," Journal of Population Economics, Springer;European Society for Population Economics, vol. 30(3), pages 953-976, July.
    2. Jan Bonenkamp & Lex Meijdam & Eduard Ponds & Ed Westerhout, 2017. "Ageing-driven pension reforms," Journal of Population Economics, Springer;European Society for Population Economics, vol. 30(3), pages 953-976, July.
    3. Emmanouil Platanakis & Charles Sutcliffe, 2017. "Pension Schemes, Taxation and Stakeholder Wealth: The USS Rule Changes," ICMA Centre Discussion Papers in Finance icma-dp2017-08, Henley Business School, Reading University.

    More about this item

    Keywords

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

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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