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

michaels

I don't think what the DB pension costs the DB pension fund is relevant to this discussion that is about how big a pot someone with a DC pension would need to get the equivalent pension.  
Apologies for using RPI indexing for the pension, the first annuity calculator I found only offered the choice of RPI or LPI.

Agree that RPI plus 3% may be unrealistic but it is a bit cyclical, recently real wages have been pegged back but that was after a period of faster growth under Labour.  Going forward who knows, the 'traditional' 2% seems to have broken down for everyone not just the public sector since the GRC and C19 will probably make things worse rather than better.  If wage growth is lower it will reduce any difference between final salary and career average but not reduce the proportional value of the pension.

Emmia

MovingForwards said:

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.

The salary band in the CS is not especially meaningful - if you get a promotion you start at the bottom of the band, and you stay there with the band minima being increased along with the 1% pay rise -  the only time you are not on the minima is if you transfer from a higher paying department to a lower paying department.

Pension contributions also work in percentage bands (centrally defined) - and it is possible that due to the fact departments pay differently; your departments "payrise"' will tip you into a higher contribution band, with the result that the 1% payrise means you actually receive a cut in your take home pay - which you can do nothing about, other than going part time.

Yes, the future pension is boosted a bit, but in the here and now you have less income. 

hugheskevi

michaels said:

I don't think what the DB pension costs the DB pension fund is relevant to this discussion that is about how big a pot someone with a DC pension would need to get the equivalent pension.  
Apologies for using RPI indexing for the pension, the first annuity calculator I found only offered the choice of RPI or LPI.

I think it is relevant, as the insurance company will have about a 25% load-factor (ie profit) on an index-linked annuity. The research is 10 years old, but I'm not aware of anything more recent. Note the load-factor is much lower on level-annuities. Looking at the cost for the DB provider removes that large profit margin and gives a better idea of the cost of providing a DB pension.

In particular since the research above was conducted, the changes from pension freedoms mean there is not a deep competitive market for index-linked annuities. Using the least competitive form of annuities as the basis for price-comparison is going to exaggerate the comparison. I would expect that a comparison of 99% success probability using drawdown would give a significantly different result.

drummersdale

Albermarle said:

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, 

Thanks - I’ve always wanted to be a millionaire 😂

Albermarle

Thanks - I’ve always wanted to be a millionaire 😂

Glad to have made your day 

MarkCarnage

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

From 2025 or 2030 at latest, CPI will = RPI. 

Thrugelmir

Andy_L said:

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.

That's the pay of a senior Director of xxxx level in a sizable trust. Far from an nursing average role.  
With public sector roles after 10 years you hit a ceiling . Then it's inflation rises only. Like the private sector. Pyramids narrow towards the top.
BP is cutting half of it's senior management, around a 100 roles. No one is immune to change either. Private or public sector. Reorganisations being common place. 

atush

michaels said:

SO I set up an excel spreadsheet and imagined someone who retires at 62 after 40 years employment with a pension that gave 1/80ths of final salary so a pension of 16k if the retirement salary is 32k.

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

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.

I'm not sure what the current level of pension benefit a typical public sector worker gets now but a rule of thumb might be that you need to add 40% to a public sector salary to work out what an equivalent non-DB remuneration package would be.

A DB pension, to be replaced in the real world would cost around 30% of annual salary

drummersdale

My first salary when joining HMCE in 1981 as a clerical assistant was around £2500-£3000 per annum and by the time I retire in perhaps 2 years time I expect it will be around £52000 - that’s based on various promotions and various pay rises although had we not had the pay freeze for the last 10 years I imagine it would be more than that. I‘m certainly not complaining and no idea what that equates to year on year - I recall one year (I think around 20 or more years ago) receiving a gargantuan 5% payrise - that will never happen again in my lifetime, especially after Covid 19.

nigelbb

I work in the NHS so this is the scheme that I have knowledge of. Pension is accrued at 1/54 of salary.  The average life expectancy at pension age is over 20 years so it is most useful to consider the pension as deferred salary paid in retirement & is worth around 40% on top of your current salary.