Pension black holes

Black holes in space are regions where gravity is so powerful that even light cannot escape its grasp.

In pension terms black holes are simply a way of describing a difference between the assets of the pension scheme and its liabilities to pay member benefits.

So whilst pension black holes cannot grasp light they are still things that are best kept away from.

Recent headlines have indicated that the Universities Superannuation Scheme has a “black hole” of at least £7.9 billion although some commentator put it at closer to £10.5 billion.

This is a quite phenomenal amount of money even bearing in mind the scheme has assets valued at some £37.9 billion.

In other words the USS has a deficit of between 21% to 28% of its assets vs liabilities.

Should this worry USS scheme members? Well it isn’t something to be ignored but actually it doesn’t mean that the scheme is going bust and will not be able to pay out benefits.

There are always going to be strategies for dealing with such shortfalls.

For example the scheme can choose  a different investment approach perhaps one that adopts a greater risk/reward potential (always noting of course that greater risk could result in an even greater shortfall.

Or it could change the benefits structure or ask for greater member contributions towards benefits costs.

When schemes ask for greater contributions or change benefits, for example by asking members to retire later, this often provokes a negative response.

Some employees take action though protest and strikes demanding that their employer “keeps their hands off their pay and pensions”.

When these actions come from professions such as Teachers and Lecturers it always makes me smile.

All of us are faced with having to pay more into our pensions, expect lower future benefits and work longer- fact!

The suggestion that one group of employees should be favoured over the rest of us and not have to suffer the consequences of economic reality is really quite daft.

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