Pension calculation

Empty_pockets

Hi,

Sorry, another pension question from me again. I've tried ringing the providers but neither will talk about each others schemes which is understandable but doesn't solve my query.

I'll try an keep it succinct. I have been with the same employer (Network Rail) for 5 and a bit years. The offer a Network Rail (career average salary) CARE pension from day 1 and after 5 years you are eligible to swap to Railway Pension Service (RPS 65) Final Salary pension scheme. Both are defined benefit.

The CARE scheme is kept entirely within Network Rail and is fairly new. The RPS scheme is well established and has been running decades. All Railway companies are signed up to it. It is supposed to be a far better pension. I was in CARE for 5 years (2009-14) and have just moved over to the RPS 65.

http://www.mynrpension.co.uk/

http://www.mynrpension.co.uk/media/1494/NR-CARE-Scheme-book.pdf

http://www.mynrpension.co.uk/media/1518/RPS-65-NR-Scheme-booklet.pdf

This is my query. After sighing up to RPS 65 they sent me a statement and the annual pension is LOWER than what I had been forecast on the CARE system. I can't understand why a pension on average pay would be lower than a final salary one.

My last statement from CARE shows a figure of £28331

My first statement from RPS 65 shows a figure of £22245. I have 5 years of deferred benefits in the old scheme which will pay £3863 so to give an equivalent for 34 years of payments, 22245+3863 = £26109.

£26109 is £2222 less per year than what I would have got in the old CARE scheme.

Salary has remained the same, retirement date is the same. I pay about £30 less a month on RPS 65 but if it's calculated on salary, not contributions, surely that should not make a difference.

Thank you

Empty_pockets

Reading through the documents i've tried ti do a calculation showing each scheme after 5 years. The CARE is coming out higher but can't seem to see if I need to take out something for state pension.

RPS
Final salary 47605 less 75% of state pension 5787 = 41818
(41818 / 60) * 5 = £3484

CARE is worked out on salary each year but I think gets revalued on RPI, not sure if this is where the difference is?? Have calculated at 3% per year.

2010 - 41359 / 60 = 689. 689 + 15% = 792
2011 - 43717 /60 = 728. 728 + 12% = 815
2012 - 45247 / 60 = 754. 754 + 9% = 821
2013 - 46650 / 60 = 777. 777 + 6% = 823
2014 - 47605 / 60 = 793. 793 + 3% = 816

792+815+821+823+816 = 4067 per year.

Am I calculating this right?

Thank you.

Empty_pockets

Bump...Can anyone help with this?

SeekTruth

Empty_pockets wrote: »

...
This is my query. After sighing up to RPS 65 they sent me a statement and the annual pension is LOWER than what I had been forecast on the CARE system. I can't understand why a pension on average pay would be lower than a final salary one.
...

I think you mean you can't understand why a pension on average pay would be higher than a final salary one.

I haven't actually performed any calculations for you but do have a couple of observations:
1. Each year of CARE benefit is revalued in line with RPI until retirement
2. Your statement of RPS benefit is presumably based on current salary, less a proportion of current State Pension.

So a couple of differences. The deduction of a proportion of State Pension will make the RPS figure lower. If RPI has been rising faster than your salary then the revalued CARE from your earlier years will be worth more than 1/60th of current salary.

In looking at the RPS booklet, at the 3rd link you provided, I noticed a couple of things, both on page 10/11, that I've never seen before and don't fully understand the likely effect of:

1. Any increase to pensionable pay is capped at RPI + 0.5%.
2. Any increase due to change in Grade or Band will be treated as pensionable for future service only.

I'd also point out that once in payment the CARE scheme increases pension by RPI capped at 5% whilst the RPS scheme apparently increases at CPI, without cap.

Empty_pockets

SeekTruth wrote: »

In looking at the RPS booklet, at the 3rd link you provided, I noticed a couple of things, both on page 10/11, that I've never seen before and don't fully understand the likely effect of:

1. Any increase to pensionable pay is capped at RPI + 0.5%.
2. Any increase due to change in Grade or Band will be treated as pensionable for future service only.

I think this is just in relation to pay. We usually get RPI + 0.5%.

The pay grades are all defined in bands.

Empty_pockets

The CARE system is also contracted out of 2nd part of state pension but I can't see this being removed anywhere like I can on the RPS system.

Have I made an error switching over to RPS?

xylophone

Contracting out will end within around a year and a half.

https://www.gov.uk/new-state-pension/youve-been-in-a-workplace-personal-or-stakeholder-pension

SeekTruth

Empty_pockets wrote: »

...

Have I made an error switching over to RPS?

Don't know!

The main reasons I don't know are:
1. What pattern pay rises will be in future. You imply that 'normal' is RPI + 0.5%. If this is precisely what happens every year in future then RPS is probably better. However, if the average pay rise is RPI + 0.5%, but it varies significantly from year to year then CARE is probably better.
2. I still don't understand 'Pensionable Restructuring Premium' (increases in pay as a result of promotion involving a change in Grade or Band are treated as pensionable from date of promotion). I suspect that, in effect, this makes the RPS act very like a career-average rather than a final salary scheme.
3. What your personal preferences are for increases in payment being linked to RPI capped at 5% or CPI uncapped.

You should also note that both RPS and CARE appear to be shared-cost schemes with the employer paying 60% and the employee 40%. You've stated that your contributions are lower under RPS; this implies that the cost of RPS is lower and so, presumably, for the average employee the benefits are lower.

Empty_pockets

Thanks, re your 2nd point I think RPS counts pensionable pay as your average over the final 3 years of employment.

SeekTruth

Empty_pockets wrote: »

Thanks, re your 2nd point I think RPS counts pensionable pay as your average over the final 3 years of employment.

All references to page numbers are to the RPS Scheme Booklet.

Page 22/23: Your pension is ... your final average pensionable pay ...

Page 4 (Glossary): Final average pensionable pay ... pensionable pay averaged over 12 months before ... take your benefits ...

Page 4 (Glossary): Pensionable pay ... yearly rate of pensionable pay on each 1 April [this definition seems a bit circular to me!]

Page 10 / 11: Increases to pensionable pay ... capped at RPI + 0.5% ... result of promotion ... treated as pensionable for future service only ...


So, as I read it, final average pensionable pay is not necessarily closely related to final salary. The scheme, I would suggest, is much more like a career-average scheme rather than a final-salary scheme.