Why is final salary projection different?

Savannah02K

I admit it, I'm your archetypal dunce when it comes to pensions! Anyway, couple of years ago I asked for projections from our pensions dept of what my final salary scheme pension would be. I kept the print out of the projected pension and the projected cash sum. I've now asked for another projection, to the same date, and the figures have come back a lot less on both the pension and the cash sum, almost a third lower.

I know the markets crashed etc but given that it's a final salary scheme, I just assumed that would have no effect as the scheme paperwork says 'the pension you will receive when you retire at your normal retiring date will be equal to one-sixtieth of your final pensionable earnings' Basically the calculation seems to be £final salary x number of years worked x 1/60. So how can the figures go down given that I've worked another couple of years ............... Confused.

dunstonh

Defined benefit schemes work on the basis of time in service. Not investments.

The markets havent crashed. It's not been that bad. However, defined benefit schemes work on the basis of time in service. Not investments. So, any difference in the figures will be based on changed assumptions.

Such a large difference could suggest one projection is service accrued to date only vs service accrued plus projected service based on current pensionable salary. Look at the assumptions on both and see if there are any differences.

System

Hi

You don't say who the Pension is with.

So if it is an LGPS then the 2014 scheme could have an effect.

So you take the Number of Years and Days; EG:- 07/200 is seven years and two hundred days.

Divide the days by 365; 200 / 365, and go to 6 decimal places. 0.547945, then add the years + 7 = 7.547945.

Now divide by 60 ( or 0.6 and get a figure of 12.5 which is your percentage) and then multiply by 100 to get 12.5%.

So now you know that your service is equal to XX% of your final salary in the scheme, whether that goes up or down.

Savannah02K

What I can't get my head round is why the two projections are so different though? I'm no longer in the scheme so the years I've worked aren't any different, I was in the scheme for 16 years yet when I asked for a projected figure back in 2010 they said my retirement benefits if I retired end 2016 would be cash sum of £19K plus annual pension of £6K, now the projection I've received in last week says cash sum of £16K and annual pension of £5.4K.

I've got a meeting with them to go through the figures and just wanted to try and figure out what I should be asking them to explain the discrepancies. How are people supposed to plan for retirement when you can't get consistent information?

ffacoffipawb

Savannah02K wrote: »

What I can't get my head round is why the two projections are so different though? I'm no longer in the scheme so the years I've worked aren't any different, I was in the scheme for 16 years yet when I asked for a projected figure back in 2010 they said my retirement benefits if I retired end 2016 would be cash sum of £19K plus annual pension of £6K, now the projection I've received in last week says cash sum of £16K and annual pension of £5.4K.

I've got a meeting with them to go through the figures and just wanted to try and figure out what I should be asking them to explain the discrepancies. How are people supposed to plan for retirement when you can't get consistent information?

For 2010 to 2015 they would have assumed 5% pa / RPI revaluation or say 25% over that period. Inflation has been more like 15% over that period so that would knock over 10% off the older projected value which is what appears to have happened here.

mgdavid

As dunstonh said in post #2,
" Look at the assumptions on both and see if there are any differences."
Hint: especially the RPI/CPI revaluations.

PensionTech

So how can the figures go down given that I've worked another couple of years ............... Confused.

This is what gives it away to me.

It sounds like you left in 2012 or thereabouts. So at the time that you asked for a statement in 2010, you were still an active member.

Benefit statements for active members tend to be calculated on the assumption that you will remain in the scheme until retirement. So while they will not necessarily have made any assumptions about salary increase, inflation, etc. - they will have made an assumption about your service, which would be that your service would continue all the way up until 2016.

Now you have left the scheme so they know your service won't go to 2016. So your retirement quotation is based only on the service up until when you left in 2012 (or thereabouts). It is therefore lower than your benefit statement in 2010 because the service is lower.

What other people have said about inflation assumptions etc. may be correct, but my experience is that it is not common to project inflation when calculating retirement quotations for the future, and I think this is the most likely explanation.

Savannah02K

I don't think it can be that though because when I asked for the previous projection, I'd already come out of the pension scheme. I actually left my employer in 2004 and when I returned in 2007, they'd closed the final salary scheme and I had the option of joining the new scheme (which wasn't very good) or a monthly payment in lieu (which I chose). So I wasn't a member of the final salary scheme at the time of either of these projections.

PensionTech

Aha. It has to be some kind of change in assumptions then - or potentially a mistake with one figure or the other. Or, just possibly, if 2016 is before your Normal Retirement Date in the scheme, it could be something to do with a reduction for early retirement (which either wasn't applied in the previous quotation at all, or has changed).

Do you have a statement from 2004 giving you your pension at date of leaving and an explanation of how it should increase in deferment?

Savannah02K

Don't have all the paperwork with me but I don't think they gave me anything re the pension scheme when I left. I know I'm a complete thickie when it comes to this (as in sits at the back of the classroom and gazes out of the window when the pension lesson was on, ooh that squirrel is running up that tree, oh that's a nice bus driving past etc) but what do you mean by 'change of assumptions?'

Thanks so much for your input on this. I promise, I will pay more attention and not just draw in my rough book.:)

xylophone

You joined a DB Scheme in 1988 and left in 2004.

I am assuming that the scheme was contracted out so that up to 1997 you would have earned a GMP, presumably all post 6 4 88.

Are you sure that you do not have a statement of benefits on leaving showing your GMP and excess?

Are you sure that you do not have a scheme booklet?

Your GMP will revalue in deferment either by Fixed Rate or Full Rate NAE) - see here

https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

If Full Rate the administrator can only make an educated guess?

For revaluation of the excess see https://www.barnett-waddingham.co.uk/comment-insight/blog/2012/07/24/revaluation-for-early-leavers/ - again, the administrator can only make assumptions unless there are particular rules relating to your scheme.

If you have no scheme booklet, the administrator should be able to supply one or you might even find one on the internet.