Richer than you thought

Andrew Oswald bets you didn't know you could retire on two-thirds of your salary instead of half.

Would you like to retire on two-thirds of your salary or just half? It is a tough one. If you are anti-materialist, anti-market forces, in favour of inefficient recycling and sandals and think that money does not buy contentment, you are probably happy with the latter. The ratio of one half is the proportion stated in our contracts, after all. We are British, for heaven's sake. We were brought up to go with the flow. In that case, you should stop reading now. All I have to offer is lucre. The rest of this piece is for the half dozen university teachers in the UK who are still with me.

The good news is that you and I are a great deal richer than is realised by 99.9 per cent of academics in this country. Our pension scheme is stuffed with more money than it knows how to deal with. It has an unspendable surplus of, very probably, between Pounds 1 billion and Pounds 2 billion and is going to have to think what on earth to do with the shekels. Nothing, probably, if it gets its way.

There is an explanation. It is simple but sounds drier than a mathematical economics textbook. The first and more interesting part is that the stock market has massively outperformed the expectations of the actuaries who started the Universities Superannuation Scheme. The other is that we all have something called a defined-benefit pension scheme, and not, like American academics, a defined-contribution pension scheme. All this means, in English, is that when you retire the cash you will get to live on will depend on your final pay packet. In other words, the pension is a ratio of your final salary.

In the United States your retirement income as an academic depends on the amount that you have paid in. In that sensible country, you even get to choose your own shares. But the British are not allowed to do anything as libertarian as that with their money. The USS is one of the largest funds in the country. Its assets may be somewhere at the thick end, between Pounds 20 billion and Pounds 30 billion, and it has more than 100,000 members and pensioners. In the old days, people thought the stock market would grow at about 6 per cent or so a year. So that is the kind of number the actuaries punched into their adding machines. Then they worked out, given your payments and mine, how rich you could be on retirement. Hence the retire-on-half-your-pay if you did plenty of years in universities.

Well, actually, stock markets have printed money for as long I can remember. The average return has been about 11 per cent a year (compare that with betting on the UK lottery, where the average rate of return if you work it out is minus 50 per cent a week, or in other words, so low that it would be against the law as an investment, which is why I never buy lottery tickets).

The rest, as they say, is arithmetic. If you thought shares would go up 6 per cent, and they actually went up 11 per cent, every year you would be able to salt away the 5 per cent extra. And the USS has. It has reinvested that - again and again and again. There is no bad behaviour here. Nothing wrong has been done, unless, perhaps, you count keeping silent about things that members would have found rivetingly interesting.

There is only one problem with this excellent strategy. Soon you have so much money bulging out of every pocket that it gets embarrassing. Given the surplus in the USS, there is a good chance we could, with the mildest bit of pressure, go over to a two-thirds not one-half retirement pay ratio. If you do not believe me, ask yourself and look at the numbers. Big numbers. Very very big. Although charming people if you ring them up (I have and they are), those ladies and gentlemen are still keeping things to themselves. Quiet. Very, very quiet.

And you thought your economist colleagues down the corridor would never turn out to be useful for anything.

Andrew Oswald, professor of economics, University of Warwick.

* How could academics bring pressure on the USS? Email us on soapbox@thes.co.uk