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

Platanakis, Emmanouil
; 
Sutcliffe, C.
Publication Date
End of Embargo
Supervisor
Keywords
Defined benefit, Pension scheme, Redistribution, USS, Scheme design, Risk shifting, Risk management
Rights
© 2016 Elsevier. Reproduced in accordance with the publisher's self-archiving policy. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Peer-Reviewed
Yes
Open Access status
openAccess
Accepted for publication
01/04/2016
Institution
Department
Awarded
Embargo end date
16/10/2017
Collections
Management and Law Publications
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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.
URI
http://hdl.handle.net/10454/8145
Version
Accepted manuscript
Citation
Platanakis E and Sutcliffe C (2016) Pension scheme redesign and wealth redistribution between the members and sponsor: The USS rule change in October 2011. Insurance: Mathematics and Economics. 69: 14-28.
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Link to published version
Link to Version of Record
https://doi.org/10.1016/j.insmatheco.2016.04.001
Type
Article
Qualification name
Notes
The full text will be available at the end of the publisher's embargo; Oct 16 2017