DB pensions projections - how accurate are they?

dunstonh

So there's conflicting advice here. The IFA says it's guaranteed. Other people are saying no.

Not guaranteed.   But defined.    The majority of scenarios are catered for by defined scheme rules and defined figures.     

Indexation to cover inflation will usually have a cap.  But that cap will be defined in the scheme rules.  You don't know what future inflation will be but the majority of the time, it will be less than the cap.   The figures given on the benefits statement will usually be in today's terms (at the date they printed it) and your expectation is that the value of that, in real terms, will be maintained or thereabouts.

If inflation was to continue at 10% a year forever more, then you will lose spending power.   If you get the odd year that it is above the cap but the majority of the time it is below (which is where it tends to be historically) then you will broadly get what you expected in spending power.

Of all the types of pensions, DB schemes give the most reliable figures to plan on.   You have your pensionable salary figure. you have your years(and days) of service giving you the multiplier and you have a reasonable assumption that the majority of inflation is covered.

Tommyjw

LV_426 said:

So there's conflicting advice here. The IFA says it's guaranteed. Other people are saying no.

Is it safe to plug these numbers into my Voyant plan, and rely on that level of income from this pension, or not?

If your IFA is saying its guaranteed, you need to ask why.

In overhwhelming amount of cases it will be e.g.

1. You have a pension of (say) £1,000 p.a. equivelant when you left in 2003
2. The administrators known inflation between 2003 and 2022. This increases your pension to £1,500.
3. The administratos dont know inflation between 2023 and 2031. They will assume what this is for the purposes of providing a future estimate. They could assume 2.5%, they could assume 5%, they may even actually assume inflation is 0% for future years. You'll need to know what this is for your / your IFA to have your own thoughts on how accurate it is. E.g. if a Scheme assumes inflation will be 5% each year, you can likely guess the figures will end up lower.

Marcon

LV_426 said:

Dazed_and_C0nfused said:

Unless it has fixed inflation proofing, which seems highly unlikely, then it can only ever be a guesstimate.

If you had a projection from say 3 years ago it's highly unlikely that that the 2023 increase would be based on current inflation figures as no one is going to have foreseen the sudden large increase that we've had.

When you say guesstimate, what do you mean? I just want to be sure that the number I have on the report is what I will get, at the NRA. Which from dunstonh's reply I assume it will.

Not if the 'real life' inflation figures are below those used for the projection. On the plus side, it could be more than the figures shown. Why not follow the suggestion I've already made to get an updated statement, which is better than relying on comments from strangers who have no idea of the basis of the projection you've been given, let alone a crystal ball to predict inflation!

SarahB16

LV_426 said:

Dazed_and_C0nfused said:

Unless it has fixed inflation proofing, which seems highly unlikely, then it can only ever be a guesstimate.

If you had a projection from say 3 years ago it's highly unlikely that that the 2023 increase would be based on current inflation figures as no one is going to have foreseen the sudden large increase that we've had.

When you say guesstimate, what do you mean? I just want to be sure that the number I have on the report is what I will get, at the NRA. Which from dunstonh's reply I assume it will.

I understand that the projection is based on various factors, which are outlined in the statement, and I won't go into. But of course the real year by year inflation figures are variable. So the cost of living in 2031 may not match the level of income provided by this pension.

I am in a similar position to you and also wished to see what a DB pension I have from a previous employer would pay me in 2037 (when I'm 65) however they said and this may be the same for you they can only provide an estimate 5 years (at the earliest) before wishing to draw on the pension.  Assuming you are over 50 and can draw your pension at 55 then you could request a forecast.  That is what I intend to do when I am 50 despite having no intention of drawing my pension at 55.  I think you should request a forecast for 2027 which they should be able to provide for you and then request one in every subsequent year.  

I have details of the forecast for my pension when I left a previous employer in 2008 (with a retirement age of 65) however as the deferred benefits increase by the lower of RPI or 5% there is no way in 2008 they could have forecast what RPI would be from that date to when I take my pension. 

As many people have said look to see what your scheme rules say regarding how much the uplift will be each year and if it's connected to inflation then, in my opinion, it can only be an guesstimate.  

LV_426

Marcon said:

LV_426 said:

Dazed_and_C0nfused said:

Unless it has fixed inflation proofing, which seems highly unlikely, then it can only ever be a guesstimate.

If you had a projection from say 3 years ago it's highly unlikely that that the 2023 increase would be based on current inflation figures as no one is going to have foreseen the sudden large increase that we've had.

When you say guesstimate, what do you mean? I just want to be sure that the number I have on the report is what I will get, at the NRA. Which from dunstonh's reply I assume it will.

Not if the 'real life' inflation figures are below those used for the projection. On the plus side, it could be more than the figures shown. Why not follow the suggestion I've already made to get an updated statement, which is better than relying on comments from strangers who have no idea of the basis of the projection you've been given, let alone a crystal ball to predict inflation!

Well I will indeed do that. But part of my question was to people who may have had similar projections, and what their actual experience was.

LV_426

SarahB16 said:

LV_426 said:

Dazed_and_C0nfused said:

Unless it has fixed inflation proofing, which seems highly unlikely, then it can only ever be a guesstimate.

If you had a projection from say 3 years ago it's highly unlikely that that the 2023 increase would be based on current inflation figures as no one is going to have foreseen the sudden large increase that we've had.

When you say guesstimate, what do you mean? I just want to be sure that the number I have on the report is what I will get, at the NRA. Which from dunstonh's reply I assume it will.

I understand that the projection is based on various factors, which are outlined in the statement, and I won't go into. But of course the real year by year inflation figures are variable. So the cost of living in 2031 may not match the level of income provided by this pension.

I am in a similar position to you and also wished to see what a DB pension I have from a previous employer would pay me in 2037 (when I'm 65) however they said and this may be the same for you they can only provide an estimate 5 years (at the earliest) before wishing to draw on the pension.  Assuming you are over 50 and can draw your pension at 55 then you could request a forecast.  That is what I intend to do when I am 50 despite having no intention of drawing my pension at 55.  I think you should request a forecast for 2027 which they should be able to provide for you and then request one in every subsequent year.  

I have details of the forecast for my pension when I left a previous employer in 2008 (with a retirement age of 65) however as the deferred benefits increase by the lower of RPI or 5% there is no way in 2008 they could have forecast what RPI would be from that date to when I take my pension. 

As many people have said look to see what your scheme rules say regarding how much the uplift will be each year and if it's connected to inflation then, in my opinion, it can only be an guesstimate.  

The wording is exactly this, and it doesn't mention inflation:

Pension in excess of the GMP earned before 1 April 2004 will be increased by 5% p.a. compound. The pension in excess of the GMP earned after 31 March 2004 will be increased by the lesser of the change in the RPI, or 5% p.a. compound, between the date you ceased active membership and retirement.

Both elements of GMP shown above will be increased by the number of complete tax years from the date you ceased membership, at the rate of 6.25% p.a.

Prism

The current projection that they give you often doesn't take into account previous inflation either. For example my wife's yearly statement is identical each year and has been for the last 10 years even though we have obviously had inflation over that time. The final 'actual' amount won't be calculated until around time of payment. In the meantime, the best we can do is apply inflation increases for each year to get a rough approximation of what it is currently worth in todays money.

Silvertabby

That's why the LGPS (and probably other public sector pensions) only issue statements based on 'today's' money.  Trying to guess the unknown would only lead to complaints XX years hence.

Notepad_Phil

LV_426 said:

SarahB16 said:

LV_426 said:

Dazed_and_C0nfused said:

Unless it has fixed inflation proofing, which seems highly unlikely, then it can only ever be a guesstimate.

If you had a projection from say 3 years ago it's highly unlikely that that the 2023 increase would be based on current inflation figures as no one is going to have foreseen the sudden large increase that we've had.

When you say guesstimate, what do you mean? I just want to be sure that the number I have on the report is what I will get, at the NRA. Which from dunstonh's reply I assume it will.

I understand that the projection is based on various factors, which are outlined in the statement, and I won't go into. But of course the real year by year inflation figures are variable. So the cost of living in 2031 may not match the level of income provided by this pension.

I am in a similar position to you and also wished to see what a DB pension I have from a previous employer would pay me in 2037 (when I'm 65) however they said and this may be the same for you they can only provide an estimate 5 years (at the earliest) before wishing to draw on the pension.  Assuming you are over 50 and can draw your pension at 55 then you could request a forecast.  That is what I intend to do when I am 50 despite having no intention of drawing my pension at 55.  I think you should request a forecast for 2027 which they should be able to provide for you and then request one in every subsequent year.  

I have details of the forecast for my pension when I left a previous employer in 2008 (with a retirement age of 65) however as the deferred benefits increase by the lower of RPI or 5% there is no way in 2008 they could have forecast what RPI would be from that date to when I take my pension. 

As many people have said look to see what your scheme rules say regarding how much the uplift will be each year and if it's connected to inflation then, in my opinion, it can only be an guesstimate.  

The wording is exactly this, and it doesn't mention inflation:

Pension in excess of the GMP earned before 1 April 2004 will be increased by 5% p.a. compound. The pension in excess of the GMP earned after 31 March 2004 will be increased by the lesser of the change in the RPI, or 5% p.a. compound, between the date you ceased active membership and retirement.

Both elements of GMP shown above will be increased by the number of complete tax years from the date you ceased membership, at the rate of 6.25% p.a.

Well RPI is a measure of inflation so it is mentioned, but if you left in 2003 then it appears from your post that your pension in excess of GMP gets a guaranteed 5% increase per year whilst the GMP is increased by 6.25%. So it appears that everything gets guaranteed increases (assuming the pension scheme remains solvent) but is there anything on there which states how the total pension figure is shown, e.g. does it say anything about it being in todays money?

If you have a calculator and the original figures for 'excess of GMP', 'pre Apr 1988' and 'post Apr 1988' from when you left your employment there, then you should be able to calculate the pension yourself and from what you've said above that calculated value should then be 'guaranted' on the proviso that the pension scheme remains solvent - but what it will actually be worth will depend on what inflation does before you start receiving it e.g. if we have a combined 100% inflation then the pension will be worth half of what it would have been if there had been no inflation, even though you will receive the same monetary amount in both cases.

P.S. are you sure you left in 2003, a GMP increase of 6.25% would normally be for people who had left after 6 Apr 1997 but before Apr 6 2002.

Parking_Trouble

Edited due to a lightbulb moment.

As pointed out by Phil - it's all fixed % so the forecast should be accurate.