How big should my pension pot be ?

Paul_Herring

bendix wrote: »

Perhaps because they are, in fact, real liabilities and should be accounted for.

Perhaps, but not in the way (I understand) they *are* accounted for.

(Over-simplistic) example:

You have 10 employees.

• They earn 20K per year
• They are all 30
• They can take retirement at 60
• They all have 6/60ths built up.
• You 'plan' on them living to an average of 90

Now my understanding of this is: 6/60ths of 20K is 2K per year, for 30 years, for 10 employees = 2K x 30 x 10 = 600K.

That means this small company of 10 employees should have 600K in their pension fund. Today. Any less and the company is in deficit.

That means that you should have in your pension fund, monies for outgoings that aren't expected for at least 30 years hence, and some of which are expected to remain there for another 30.

Now I'm all for future planning, but this is overkill is it not? Expecting to have 100% of all future pensions in your company's pension fund?

Baz_2

Paul_Herring wrote: »

Perhaps, but not in the way (I understand) they *are* accounted for.

(Over-simplistic) example:

You have 10 employees.

• They earn 20K per year
• They are all 30
• They can take retirement at 60
• They all have 6/60ths built up.
• You 'plan' on them living to an average of 90

Now my understanding of this is: 6/60ths of 20K is 2K per year, for 30 years, for 10 employees = 2K x 30 x 10 = 600K.

That means this small company of 10 employees should have 600K in their pension fund. Today. Any less and the company is in deficit.

That means that you should have in your pension fund, monies for outgoings that aren't expected for at least 30 years hence, and some of which are expected to remain there for another 30.

Now I'm all for future planning, but this is overkill is it not? Expecting to have 100% of all future pensions in your company's pension fund?

It doesn't work like that, you need an actuary to calculate the amount to show as a liability and they base it on an expected rate of return, inflation rates etc. You would not need £600,000 in a bank account now to pay a liability of £600,000 in 20 years. Investment returns etc would reduce that massively.

It is a very nasty and complicated calculation and one which I am glad I have never had to come across.

taktikback

marklv wrote: »

Final salary pensions could have been sustainable had it not been for four things:

1) employers taking 'pension holidays' when the funds were (very temporarily) in surplus
2) government legislation to tax dividends in pension funds
3) new accounting rules forcing companies to declare pension deficits on the balance sheet
4) employers being allowed to place most pension funds in high-risk and unpredictable investments (e.g. stockmarket funds)

-interesting and well argued debate....

..a couple of points in my view..

1 - Pension holidays were often enforced. I used to be part of a final salary fund that had a lengthy pension holiday - mainly because legislation limited the amount by which a pension could be over funded, and the fund had reached that level. It was something modest like 15%.

2- Agreed - that hurt - but then too much investment in stock markets caused a disproportionate impact.

3 - Agreed, but then not including them was a distortion of the real position of the company which is legally obliged to make good the deficit.

4 - Not strictly true - the trustees are responsible for the portfolio balance. Funds, like everyone else, were blinded by potential returns in the stock market and risk was underplayed

Personally, I believe that final salary pensions were victims of demographics. Too many aging people living too long. That did for them. Public sector final salary schemes are just as unsustainable. It will just take longer to wind them down because of the politics involved.

Unions will resist, but they will just slow down the inevitable. The money won't be there to fund them...we spent it all on quantitative easing.

The argument about who deserves what seems a bit pointless. Pensions are just deferred salaries. Lower wages bigger pension and vica versa, it all balances out in the end. The public sector have had a good run over the last 10 years and are now a bit better off than the private sector...that will not be the case over the next 10 years as the private sector recovers

marklv

Well, if final salary pensions go in the public sector they will need to be replaced by generous money purchase schemes that pay 15-20% of salary into pension funds. Nothing less will be acceptable.

bendix

marklv wrote: »

Well, if final salary pensions go in the public sector they will need to be replaced by generous money purchase schemes that pay 15-20% of salary into pension funds. Nothing less will be acceptable.

Why?

Again, what makes you guys so special that you deserve significantly better deals than the private sector?

marklv

You keep forgetting that in the public sector there are no profit related bonuses and various other fringe benefits.

chesky369

Not EVERYBODY in the private sector gets profit related bonuses and fringe benefits; not everybody is a banker.

Aegis

marklv wrote: »

You keep forgetting that in the public sector there are no profit related bonuses and various other fringe benefits.

A lot of private sector jobs have no bonus scheme either. It's certainly not fair to assume that all private sector jobs are better in terms of earnings than public sector.

marklv

"It's certainly not fair to assume that all private sector jobs are better in terms of earnings than public sector."

Compare the pay of people like lawyers and accountants in the public sector to those in the private sector and - trust me - you'll see a big difference.

Baz_2

marklv wrote: »

"It's certainly not fair to assume that all private sector jobs are better in terms of earnings than public sector."

Compare the pay of people like lawyers and accountants in the public sector to those in the private sector and - trust me - you'll see a big difference.

I am an accountant and my wife works for the NHS as a radiographer. Granted I'm not a partner or anything flash like that, but then again I'm not a trainee either, fully qualified. She comes home with more than I do.