How much is alpha pension worth?

michaels

I am thinking about taking a civil service job and trying to compare salaries with my current job.

Made up numbers but what would 40k plus 2.32% pa DB pension costing 5.45% compare to with 50k plus 5% employer contribution?

I guess the alpha pension is worth £925 pa for each year of service.  An annuity at 67 paying this would cost 37k (at 2.5%) but presumably as this is about 15 years away I would also need to factor in average real terms fund growth - say this is 2% then the 37k in 15 years would be 27.5k pension contribution to a DC so the employer 5% plus 25k - this sounds much to much to me.

Final numbers govt 40 - 5.45% = £3780 gross. Private 50 - 25 (sal sac) = 25k.  Surely not right?

Can anyone help with the maths please and thank you

MX5huggy

Without checking your maths, it’s probably about right but remember with Alpha the employer contribution is over 27% on top so closing the gap. https://www.civilservicepensionscheme.org.uk/members/contribution-rates/

michaels

MX5huggy said:

Without checking your maths, it’s probably about right but remember with Alpha the employer contribution is over 27% on top so closing the gap. https://www.civilservicepensionscheme.org.uk/members/contribution-rates/

Thank you so if I compare 50k + 5% with 40k + 27% that would be approximately fair?

NedS

Comparing a single year at today's values probably makes it easiest to understand.

A 40k salary with Alpha will get you a DB pension of £928 and will cost you £2180 in contributions

If you had a £50k salary and assume a 4% SWR, you'd need a pot of £23,200. The employer contributes 5% (£2,500) so you'd need to contribute another £20,700 per year to roughly match the Alpha pension. Clearly the CS/Alpha numbers stack up better. You'd need a private sector salary closer to £60k for the pension provisions and take home pay after contributions to match up.

I once calculated that to buy my accrued CS Alpha pension each year (that £928 above) as Added Pension would cost around 1/3rd of my salary, so that gives you an indication of the value of your pension. Ignore the 27% the employer is contributing as that is meaningless to you.

kinger101

It's hard to give a concrete answer, as with a DC scheme, contributions made when you're 20 have more years of capital growth than those made at 65.  Though the risk is all the member's.  In that sense, the DB schemes are more valuable the nearer you get to retirement age.

The only certain way of getting as safe a pension (spouse/civil partner benefits, index linking) would be buying some kind of annuity which would be very expensive as you've already worked out.

The real benefit with the DB scheme though is the transference of risk.  Maths, and predicting future returns* cannot adequately calculate this as the value of the peace of mind this brings will be worth different amounts to different people.

Those who need to be absolutely sure they'll get the minimum amount they need to retire will probably contribute over the odds, and might not have as much disposable income as they might have had with a safe DB scheme.  Others won't give it too much thought, but have a higher probability of financial difficulty in retirement.

All I can say is the civil service pension scheme is still amongst the most generous.  I'd say it's at least worth the employer contribution, and more so for anyone in the late 40s onwards.

Don't compare jobs just on pension though.  I'd happily drop at least 20% of my salary if I meant I didn't have to manage anyone.

*the irony is as much as we all try to predict future returns, all of us will almost certainly be wrong.   

ChocolateWombat

NedS’ comparison data is very useful.

It shows you just how much you’d have to contribute yourself into the DC pension to get the equivalent.
And of course the DB pension is exactly what it says - defined and certain.  That seems worth quite a lot, given it’s an index linked defined, plus has the extras like death in service and a spouse pension.

I agree about not choosing a career based on pension.  However, lots of people look to get 10 years or more into a DB public sector scheme later in their careers, to provide rock of certain income for retirement.

The employer contribution is a red herring.  Your outcome in the DB pension aren’t determined by that. The pension is unfounded and the government is committed to paying the oension from taxpayer money, regardless of whether the contributions (by employer and yourself)  cover the cost (they won’t ) or not.

Accumulating almost £1k per year for your pension is good stuff.  As mentioned, the cost for something similar in DC is hugely more expensive to you in terms of contributions than the DB pension.  Given you can take it early too and take actuarial reduction, you actually do have the flexibility.

Comparing the old DB final salary pensions with a younger NPA to the new DB career average pensions with older pension age, because the accrual rate in the new schemes is better, after taking off an actuarial reduction for early retirement, the actual yearly pensions are very similar.  Yes you dont get the lump sum in the Career Average.

My view for anyone who has many years in Final Salary and who wants to retire early at 60 or late 50s, who will have a few years in Career Avearge after 2022, is dont hang onto 67 to get the full pension.  Take it at 60 or late 50s with the actuarial reduction, as time is more valuable.  This especially applies if you have a DC pension pot other other money you can drawn on to bridge the gap to state pension payout.

kinger101

ChocolateWombat said:

The employer contribution is a red herring.  Your outcome in the DB pension aren’t determined by that. The pension is unfounded and the government is committed to paying the oension from taxpayer money, regardless of whether the contributions (by employer and yourself)  cover the cost (they won’t ) or not.

I wouldn't say it's a complete red herring.  While the civil service scheme is unfunded, the employer's contribution is similar to many funded DB contributions and indicative of the overall contributions one might need to put into a DC scheme to get something vaguely similar.

When comparing remuneration packages between two employers, you do need some way of comparing the overall packages.  

hugheskevi

kinger101 said:

ChocolateWombat said:

The employer contribution is a red herring.  Your outcome in the DB pension aren’t determined by that. The pension is unfounded and the government is committed to paying the oension from taxpayer money, regardless of whether the contributions (by employer and yourself)  cover the cost (they won’t ) or not.

I wouldn't say it's a complete red herring.  While the civil service scheme is unfunded, the employer's contribution is similar to many funded DB contributions and indicative of the overall contributions one might need to put into a DC scheme to get something vaguely similar.

When comparing remuneration packages between two employers, you do need some way of comparing the overall packages.  

Looking at employer contribution rates has several major drawbacks:

• Instability - back in 2014 the employer contribution rate was 18.9%, between April 2015-2019 it was 21.1% and is currently 27.3%. These differences are primarily driven by changes to the scheme discount rate.
  
• Use of SCAPE discount rate - the appropriate discount rate to use can be much-debated, but the rate at which a member discounts the future is very unlikely to be CPI+2.4%. If the scheme for example used the IAS19 accountancy discount rate based on high quality bond yields the employer contribution rate would be a bit over 40%
• Inclusion of past service costs - these are irrelevant for a member considering the value of their pension, but adds 3.1% to employer contribution rates
• Inclusion of cost allowance for 2016 cost cap breach (which subsequently didn't happen) - adds 4.6% to employer contribution rate and are irrelevant for a member considering the value of their newly accruing pension
• Inclusion of admin costs - another 0.3% to employer contribution rates and are again irrelevant for value of member pension
  
• Averaging across membership - the employer contribution takes no account of individual characteristics. This is fine if a member is representative of an average member. However, if a member is not typical very large differences will emerge. In particular, the alpha scheme is very generous to older members due to the high accrual rate and low revaluation rate, so if a member is aged 60+ the scheme is worth far more than it is to a 20 year old member.
  

So placing any weight on employer contribution rate as a proxy for value is at best a very speculative estimate. If you did want to do that, you would presumably at the very least strip out the cost of past service, the cost allowance for 2016 cost cap breach and the admin costs, leaving an employer contribution rate of about 19%.