A small pension conundrum...

C_Mababejive

Sums has never been my strong point so the answer to this might be straightforward !

Consider two distinct groups of workers Group A and Group B.

Both groups are members of the same DB Pension scheme.

Group A had their pensionable salary frozen at the levels attained a certain time ago..lets say 6 years ago. The only enhancement to their pensionable pay is an RPI increase which is assessed annually in July.


Group B did not opt to have their pensionable pay frozen. Increases in their pensionable pay occur due to annual pay rises if granted.

Which group has made the best long term decision?

atush

Too many outside variables.

years to retirement, prospects for advancement, sector of employment, more.

Linton

Surely it depends on many unknown factors. Presumably Group A stopped contributing 6 years ago whereas Group B are still contributing. So the level of contribution is a factor.

Now say someone in Group A only had 1 year's pension accrued. His equivalent in Group B would be a lot better off now as he would have 7 years accrued. So it depends on the number of years a person has accrued. Someone close to retirement could be better off in Group A if there were no wage increases and the contribution rate was high. Someone just having started work would be better off in B especially as they would be more likely to be promoted.

C_Mababejive

Both groups are still contributing at a rate of around 3% and of course the company dollops some money in too.

atush

In a FS/DB pension, the rate always depends on the total number of years. Yes the end salary is getting uprated, byt you aren't buying new years. So the best would be the one with the highest number of years in the scheme. Which could be either

C_Mababejive

Hmmm....so if we took two people of similar age/service,one from group A and one from group B who had both already paid say 23 years contributions before the change/agreement illustrated and then both had a further 18 years or so to retirement...?

Even though group As pensionable pay has been frozen,their pensionable years continue to accrue.

jamesd

In the long term, group B will probably have made the best choice. This is because wages tend to increase at about RPI plus 1%.

Groups A and B are presumably different in some other way as well and there may well be other significant differences in the pension rights they would accrue. Otherwise group A is likely to be severely worse off compared to group B, with the severity increasing for those who are further from retirement age.

I see little reason for the group A decision to be taken if all other facts are the same. It's clearly to the disadvantage of the employees unless they expect severely limited pay raises and promotions from the time of the decision until retirement.