What is a DB pension worth compared to the typical salary?

michaels

Dox said:

michaels said:

I then assumed the 32k salary had seen annual increases of 3% more than inflation for the 40 years and that investments had grown by 5% per year over inflation.

Crunch the numbers and this would mean that the final salary contributions would have been worth 40% of the annual salary paid each year - ie someone in without a DB pension would need to have been earning 40% more each year (so £44.4k in the retirement year) and contributed 28.6% of their gross salary each year to get the same pension value.

Wildly inaccurate assumptions if you look back at the history of wage increases.

Also a completely inaccurate model of how DB schemes are funded. Contributions in the earlier years are very much lower than in later years.

The NHS is tackling the lack of knowledge (and creating further confusion in the process, but at least they're giving it a go): https://www.nhsbsa.nhs.uk/employee-section/understanding-my-statement/hypothetical-annuity-cost

What do you mean by how DB schems are funded?  I am just looking at how much someone would have to put into a DC scheme to receive the same benefit?

Durban

I actually find this very interesting.

I have a DB scheme and I have often wondered how much it would be worth in the private sector and I realise how lucky I am

drummersdale

Funnily enough I’m not that far off the Ops example - I’m in a DB “Classic” scheme will have 42 years in by the age of 60 (the last couple will have been in alpha) and expect to take a pension of around £26k Per annum plus TFLS (assuming the present government don’t decide to start taxing them for the greater good) and have often wondered had I worked in the private sector what that would have worked out as - value wise? However it’s all immaterial when you get towards retirement age - having a pension to look forward to is good enough.

Thrugelmir

michaels said:

I then costed buying an index linked annuity of 16k joint life, 50% for surviving spouse, RPI linked.  This costs 758k.

Public sector now receives CPI linked increases. Significantly lower than RPI. 

MPD

Try running your figures again based on some realistic, and easily obtained, figures.

All schemes are career average with CPI indexation. Accrual rates of 1/49 LGPS, 1/57 TPS, 1/54 NHS or 1/42 CSPS. I'm sure you can find average pay for a selection of jobs and try not to lump all occupations into one e.g. for NHS run figures separately for HCAs, nurses and doctors. Once you have some more feasible figures then consider if its worth switching careers.

Albermarle

and expect to take a pension of around £26k Per annum plus TFLS

If this was a private sector pension , they will often offer a Transfer value to buy you out of the scheme. For this level of pension ( assuming it is inflation linked ) you could expect an offer of around One Million Pounds +/- 15% Seems a lot but these pensions are very expensive to fund for 25/30 years. 

To be clear this would not be a Million Quid in your bank account, but it would go into a new pension as a pot of money . You could take 25% tax free and then invest the rest to provide a ( non guaranteed ) income, 

GunJack

and another inaccuracy in your calcs, the Civil Service have had a pay freeze (well, real-terms reduction, actually) of max 1% for 10 years, which has drastically undercut inflation for that period which has duffed pensions as well as buying power. 
The other reason the comparison DB/annuity pot is wrong, is that the scheme holds a collective pot of assets, which are used to pay the pensions, NOT an individual pot to buy an annuity with - comparing apples and oranges..

MovingForwards

Compared to the 1/?? I've a pretty poor one at 1/75. I've not compared to see what would happen if I put my 10% in to a private pension over the same period as I've got left before retirement.

Also, not everyone starts or stays in public sector work, especially those who were in private for several years before moving to public, seeing the amount of red tape restricting day to day work, lack of prospects and capped salary; when you are at the top of your banding that's it.

Plus, the career progression isn't always available for the lower roles (not NHS / nurses / doctors etc) and there tends to only be a few steps up before reaching the limit, compared to the higher levels.

hugheskevi

All the main public service pension schemes publish their Valuations which set out the cost of funding benefits, and also publish annual resource accounts which give the figures on different assumptions.

For example, the Civil Service Valuation shows that the cost of funding newly accruing benefits at the 2016 Valuation is 24.9 percent of pensionable earnings, of which 5.6% comes from employee contributions.

Meanwhile, the 2018/19 Resource Accounts show the cost of newly accruing pension is 47.4% (with 5.6% of this coming from member contributions. The key difference between the figures is the discount rate used, with the Valuation using the SCAPE discount rate of CPI+2.4% whilst the Resource Accounts uses the standard accounting discount rate, which is taken from the yield on high-quality corporate bonds.

That illustrates the key issue with valuing Defined Benefit pensions - the assumed discount rate. That drives the cost of everything. It isn't too long ago that SCAPE was set at RPI+3.5%, which would give a much lower figure.

Andy_L

michaels said:

My understanding is that long term real wages increase by about 2% per annum.  However over the typical career an employee does not stay in the same job, they progress up their pay spine and potentially get promoted to a higher grade.  I agree that recently the public sector have not seen annual increases at all (let alone real terms) but I am sure most at least those in 'professions' have seen the sort of salary progression I am talking about. 

A nurse starts on 25k. 40 years of 3% above inflation gets them to 80k. It's impossible for every nurse to achieve that sort of career progression.

This is the same mistake that the "trillion pound pensions black hole" report made back in the day