How do Defined Benefit pensions work?

hugheskevi

Agreed, my employer currently contributes 27.1% of my salary and I contribute a further 5.45% making 32.55% total contributions which probably gives you a reasonable expectation on the amount you should be saving or the 'value' of a DB scheme.

That is the Civil Service Pension Scheme.

Note that the reported 27.1% employer contribution on your payslip:

• includes a 3.1 percentage points to account for notional past service deficits
• includes a 4.6 percentage point adjustment to account for a cost cap adjustment which did not take place due to the Treasury suspending the cost cap process in January 2019
• the financial requirement is spread across the entire workforce - the value of pension accrued by older workers is much more costly than the value of pension accrued by younger workers
• includes an unstated amount for the cost of administration

The best figure to use for the average value of benefits being accrued is 24.9%, of which 5.6% comes from member contributions (see page 27 of 2016 Valuation Report).

This means the value of the employer contribution relating to pension you will benefit from is 19.45%, which is much lower than the 27.1% stated on your payslip, which includes many additional costs on the employer from which your pension will not benefit.

If you are particularly young the pension benefit will be considerably lower than this, and if you are approaching Normal Pension age the benefit will be much higher.

bostonerimus

newbinvestor wrote: »

Can you get a DB pension if you're self employed? I like the idea of it being guaranteed.

No, but you could invest conservatively and then buy an annuity which would be guaranteed. However, this will very probably give you far less income that a more aggressive approach and drawdown.

The key factor about a DB plan is that it pools mortality risk and so you need a group of people to make one work properly. People contribute money that is invested so that it grows. Then the pension is paid from the accumulated funds and you should get a larger amount than from a similarly invested DC plan because some people will die early and their pension amounts get divided between the surviving pensioners.

Albermarle

The key factor about a DB plan is that it pools mortality risk

Another key factor is that if the fund is struggling the employer is obliged to pump in more money , sometimes Big Bucks .

Aretnap

newbinvestor wrote: »

Is there any way you can see where the NHS or other DB pensions are invested for example?

The NHS pension scheme is not invested anywhere. It is an unfunded scheme, ie its future liabilities are to be met by the government out of future tax receipts rather than out of any pot if money that exist at the moment.

Funded schemes (ie all private sector schemes and some public sector ones) publish annual reports which will give details of their total assets and some information on their biggest holdings. though not necessarily a detailed list of every single share that they hold.

bigadaj

Isn't a GP an example of someone who is self employed with a defined benefit pension?

bostonerimus

Aretnap wrote: »

Funded schemes (ie all private sector schemes and some public sector ones) publish annual reports which will give details of their total assets and some information on their biggest holdings. though not necessarily a detailed list of every single share that they hold.

I’m in a US state government employee pension fund and every quarter it publishes its investment returns. It is invested in a range of equity and fixed income funds. Part of the issue with DB pension failures is their lack of adequate funding and investment returns (because they are too conservative ) to fulfill their pension commitments.

Terron

mark88man wrote: »

If you are being offered one or have a choice of employment with one then from that point of view go for even the worst of the scenes are livery likely to be gold plated and well protected

No, the worst are certainly not gold plated. One of mine has been complained about in parliament. It seemed a fairly standard company scheme when I joined - 1/60th of final salary for each year of contributions. But increases once in payment were "entirely at the discretion of the trustees". Increases were in line with inflation initially, even after the company was taken over. But since that company was taken over there have been 2 years with 1% rises and nothing for the rest.
I just started mine this year. It is possible that in about 10 years the GMP will be larger than the pension so there would be some increases.


That said a minimum increase of inflation capped to 5% was brought in around 1997. The cap has been reduced to 2.5% so any modern private sector ones would be better than my first one. The public sector ones are the truely gold plated ones with inflation proof rises guaranteed and lots of extras.

hyubh

Terron wrote: »

That said a minimum increase of inflation capped to 5% was brought in around 1997. The cap has been reduced to 2.5% so any modern private sector ones would be better than my first one.

Do you mean modern private sector DB? Because for modern private sector DC (the sort that actually exists in any substantive sense for new members), that would be completely 'off' - a modern Auto-Enrolment DC pension is nowhere near comparable to 1/60 final salary, even with limited pension increases. An equivalent annuity with uncapped increases would be very expensive.

The public sector ones are the truely gold plated ones with inflation proof rises guaranteed and lots of extras.

Yours remains closer in nature to them then it does to contemporary occupational DC pensions though...

Terron

hyubh wrote: »

Do you mean modern private sector DB? Because for modern private sector DC (the sort that actually exists in any substantive sense for new members), that would be completely 'off' - a modern Auto-Enrolment DC pension is nowhere near comparable to 1/60 final salary, even with limited pension increases. An equivalent annuity with uncapped increases would be very expensive.



Yours remains closer in nature to them then it does to contemporary occupational DC pensions though...

Yes I meant modern private sector DB schemes. I know they are rare, except perhaps for bankers.


Yes mine is closer in appearance to the gold plated DB pensions, but the gold plating turned out to be fake in our case. It is even closer in practise to an old fashioned fixed annuity with (almost) no rises once in payment.


According to a statement made during the parliamentary debate only 10% of DB schemes do not pay indexation. It is the guarantee to maintain the real value of the pension that seems the gold plating to me.