Valuing a final salary pension

Andy_L

No, the PCSPS does not provide that option, the pension and the AVC are treated separatly for lump sum purposes.

Sunnysider

When looking at the contribution rate that an employer is paying there are a number of other factors that need to be taken into consideration before you can work out how much it costs to provide 'your' benefits.

Take the example above with a 6% employee contribution and an 12% employer contribution. If this scheme consisted of just one individual then this could be a reasonable contribution rate based on accrual, age, sex etc...

Lets however take another situation, the employee contribution rate could be 6% and the employer rate could be 25%. This does not necessarilally mean that the cost of providing the pension is 31%.

Imagine the scheme is made up of the following

Active Members (those currently accruing benefits) = 100
Deferred Members (those who have left but have a benefit in the future) = 500
Pensioner Members (those currently in receipt of a pension) = 250

Now lets assume that the scheme is only 80% funded and there is a shortfall that needs to be made up. Neither the deferred or pensionser members are currently contributing to the scheme, therfore when setting the funding rate, the actuary will have to set an employer contribution which will make up any shortfall (or indeed just fund the pensions being paid even if no shortfall) which will be based on the salaries of the active members. In this (imaginary) case the rate has been set at 31% of each active members salary of which the employer pays 25%, although of that perhaps only 10% is funding the members benefits, and 15% is being used to fund the cost of providing the deferred members and current pensioners pensions.

This is why it is so difficult to compare money purchase and final salary schemes, in money purchase you have your own pot of money, in a final salary scheme there is one big pot from which everyone is paid, and as long as there is enough there you shouldn't be too concerned with the amount that the employer is paying - think back to the day's of the employer contribution holidays, nothing was going in but the pension being earned remained the same.

As mentioned in a post above, the best way to compare is to project the pension you would receive in the final salary plan, then using a projection tool (I'm sure one could be found quite easliy on the web but don't have a link) work our what level of contributions would have to be paid into a money purchase scheme to provide that level of pension.

hope this helps - I often see people mistakingly comparing employer rates across the two types of schemes but they really can't be done that way.