Comparing NHS pension

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However if you use this calculator to work out the cost when you are very close to retirement age it seems to use a factor of about x20 which would be an incredibly cheap deal compared to buying that extra pension in the open market.

This gets to the long-standing issue of comparing like with like and factoring in risk.

If you are saving in a Defined Contribution pension, it is extremely unlikely that you would invest in bonds and gilts throughout your working life, and at retirement purchase an index-linked annuity. But if you are trying to replicate a Defined Benefit pension with no risk, you may use the assumptions above. This will very significantly inflate the cost.

So the question is whether there should be no risk premia, a cautious return assumption (ie something like a defensive portfolio) or a best-estimate return assumption (ie something like a multi-asset portfolio). There is no right answer, it depends on what you want the number to be for a particular purpose.

For example, on an IAS 19 standard (international accounting standard) the value of the NHS pension is slightly over 51% of salary. This is because the discount rate used by the NHS is CPI+2.4% whereas for IAS 19 the discount rate is based on bonds.