Pension Changes

Andy_L

Stargazer57 wrote: »

You may think this is not clear cut but I do.

I don't think it is, I'm asking a question. The non-FS pension option is unusually generous compared to whats normally offered in DC schems (about 5% IIRC) and is close enough to the typical estimates of NRA 65 1/60ths schemes that is must be worth looking at individual circumstances & scheme rules of:

age
sex
personal health
tax rate
spouse/dependants
CPI vs RPI indexation
Final salary definition
Treatment of deferred members
Likely future pay rises
Contracting out vs S2P

Andy_L

Zelazny wrote: »

If you move to 3, the final salary benefits will be deferred. They will continue to increase in deferment, but there will be no additional years added, and the salary used will be the one at the time you become deferred.

So the benefits to look at are: 9% contributions for 1/60 FS, versus 10% contributions for a total of 15% of salary put into DC.

Consider someone with a salary of X.

Under the final salary scheme, they pay in 9% of x and get 1/60th of X per year as a benefit (at normal pension age).

Under the DC scheme, they pay in 10% of X and get 15% of X added to a DC fund.

Assuming salary increases at the same rate that the investments increase, then the benefits at retirement date in respect of that single year of service are:
FS: X/60 p.a. (= 0.01667 X)
DC: 15% of X multiplied by annuity rates. Assuming retirement date is age 60, annuity rates (for an index linked pension with spouse benefit attached, so we're comparing like for like) are something like 2.5%, meaning you'd get 15% x 2.5% x X = 0.00375 X

The FS benefit is more than 4 times as much.

Now, you will want to bear in mind that annuity rates do change, and it may be that you won't get any pay rises, where you could get reasonable investment returns, but on the face of it the FS benefit is worth a lot more.

With 14 years to go, if the investment return is 10% better than the salary increases, the FS benefit is still better, although the difference is cut down to 17%. (bear in mind as well that the FS scheme costs 1% of your salary less).

But the choice is 19% DC plus deferred indexation vs pay rises and an extra 1/60ths service. Plus you have the flexibility to invest outside your own pension if that makes financial sense.

Really its all coming down to can you predict the future

Stargazer57

Andy_L wrote: »

I don't think it is, I'm asking a question. The non-FS pension option is unusually generous compared to whats normally offered in DC schems (about 5% IIRC) and is close enough to the typical estimates of NRA 65 1/60ths schemes that is must be worth looking at individual circumstances & scheme rules of:

age
sex
personal health
tax rate
spouse/dependants
CPI vs RPI indexation
Final salary definition
Treatment of deferred members
Likely future pay rises
Contracting out vs S2P

Well we know the OP is male and in his 50s. I've produced some numbers (on neutral assumptions) suggesting you'ld need a real return of 13% per annum on the DC plan merely to equal the DB offering. Can you come up with a scenario where the DC offering is better?

I think DB pensions for people in their 50s are worth a lot more than you realise.

Zelazny

Andy_L wrote: »

But the choice is 19% DC plus deferred indexation vs pay rises and an extra 1/60ths service. Plus you have the flexibility to invest outside your own pension if that makes financial sense.

Really its all coming down to can you predict the future

Deferred indexation will be in line with RPI (or CPI, depending on scheme rules) whereas if you stayed in the scheme, it would be in line with your salary. Typically wages increase by more than RPI, but this is not always the case, and perhaps you'll know better than I whether you're likely to receive any pay rises in the future.

I did read the first post wrong - with a 9% employee contribution, you're looking at 19% total DC. That said, as above the 60ths FS is currently worth a total of about 40% of salary. Again, this may change, but even 10 years ago, it was about 25%, which is still better than the DC (and life expectancy is going up, so I'd expect annuity rates to get worse, rather than better).

If you're looking at no more pay rises before retirement (at all, not even to keep in line with inflation) then you may be better off deferring the benefit and switching to the DC, but otherwise I'd still say Final Salary all the way.

Andy_L

Stargazer57 wrote: »

Well we know the OP is male and in his 50s. I've produced some numbers (on neutral assumptions) suggesting you'ld need a real return of 13% per annum on the DC plan merely to equal the DB offering. Can you come up with a scenario where the DC offering is better?

I think DB pensions for people in their 50s are worth a lot more than you realise.

I see where I've gone wrong - forgotten to allow for pay rises being "back dated" accross all years of service making them, as you say, worth more to those with long service.

However that does mean the calculations are very sensitive to variations in pay rises, a period of pay rises below the schemes inflation indexation would favour the DC option. As Zelany says only the OP knows their likely career future

Stargazer57

Andy_L wrote: »

I see where I've gone wrong - forgotten to allow for pay rises being "back dated" accross all years of service making them, as you say, worth more to those with long service.

I'm afraid this isn't correct. My calculation made no allowance for the length of past service. The comparison I made was between the value of the final salary benefits the will accrue in future and the DC offering. Using neutral assumptions the DC offering would only be better if you could guarantee to earn an investment return of 13% in excess of RPI inflation.

Andy_L wrote: »

However that does mean the calculations are very sensitive to variations in pay rises, a period of pay rises below the schemes inflation indexation would favour the DC option. As Zelany says only the OP knows their likely career future

I'd agree that if pay rises over the next 13 years were expected to be less than RPI on average the DC option would be less bad. There are too many variables to make it worth running the numbers without any details of the scheme, but if I were the OP I'd need to be fairly certain of the poor prospects for pay before abandoning the final salary scheme.

StephenM_2

I've spotted something in the documentation which I think tips the balance in favour of staying in the final salary scheme. If I move to the DC scheme I'll become a deferred member of the FS scheme, and as such I will have less favourable early retirement terms than I would have as an active member (e.g. 20% reduction at 60 for active members as opposed to 32% for deferred members).

StephenM_2

Thought I'd resurrect this thread because we've had the "final" results of the consultation process. The increase in contributions for those staying in the 1/60th scheme will now be phased in, 7% in 2012 and 9% in 2013, instead of jumping to 9% in one go.

I think that's the option I'll be taking.

RichandJ

StephenM wrote: »

Thought I'd resurrect this thread because we've had the "final" results of the consultation process. The increase in contributions for those staying in the 1/60th scheme will now be phased in, 7% in 2012 and 9% in 2013, instead of jumping to 9% in one go.

I think that's the option I'll be taking.

Good man.

Even better that the increase is phased rather than in one hit.