Friday 24 April 2020

Academics face pension value meltdown because of doomsday inflation pension clause

As the UK faces the possibility of hyperinflation, any retired or soon-to-be retiring academic faces the annihilation of the value of their pension. With the Government poised to print vast sums of money in an attempt to keep the lockdown-struck economy afloat there is a looming danger of a rapid and massive take-off in inflation. However, because of the way the Universities Superannuation Scheme (USS)  is structured this means that as inflation takes off academic pensions will become rapidly devalued. If hyperinflation takes hold they will become practically worthless.

The University and Colleges Union (UCU) has been fighting battles to preserve the 'defined benefit' nature of the USS scheme and also argue against big increases in pension contributions. But little attention has been placed on a change to the USS conditions that were introduced a few years ago which strip away a lot of the protection against inflation.

The rules state, in effect, that the pension income will be fully protected for only the first 5% of annual inflation. Above that only HALF the inflation will be matched by increases in the pensions.

For example, of annual inflation rate hits 50% this means that the value of an academic pension will decline, in one year, by 22.5%. And inflation could get worse than that with the Government printing the amount of money that seems set to happen!

Of course in recent years inflation has been low, but under the new conditions many people in the financial world fear that inflation will take off as the Government, in effect, prints money. We may have been lulled into a false sense of security by the Government's policies of 'quantitive easing' in recent years which did not lead to inflationary consequences. The effects were contained within the banking system itself. But what the Government is going to do now is to give lots of money direct into the real economy. That is a different matter. History does not record good outcomes for this strategy which leads to hyperinflation. The most recent example is Venezuela, historically The Weimar Republic. Enough said!

Sure, printing money reduces the value of Government debt, but it ruins anyone on a fixed, or partially fixed income including people on pensions that do not fully uprate pensions benefits in line with inflation.

No doubt in present circumstances University managers will seek to 'persuade' lots of academics to take early retirement. But they won't find many volunteers. Most people might risk jumping out of a plane if they have a parachute. But not without one.

Of course there are remedies. One is to alter the terms of the USS so that pension payments are fully protected against inflation as measured by the CPI. Another broader measure os form the country in general to pay a much higher level of taxation to get the country out of the terrible mess we are in without turning us into another example of Venezula or the Weimar Republic.

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