DB Inflation protection myth ?

QrizB

Phossy said:

MeteredOut said:

Can you give specifics of your -23% and +41% calculations?

Projected. 
From the ONS you can see price index is 1.42 (so 42%) - with average over the 10 years of 3.54%.
My projections since that time has grown 19% 

Projections are synthetic.

When you deferred your pension in 2015, you will have been given a value at that date. Eg. if you had 20 years in an 80ths "final salary" scheme and your salary at that time was £40k pa, your value will have been (20/80 x 40) ie. £10k pa.

You'll also have been given a projection based on some sort of assumption about inflation that would say what you might get at NRA. But that would only be worth the same amount as £10k was worth in 2015.

From what you've said, your projection today is lower which probably means inflation has been less than the 2015 projection assumed. But that projection is still £10k pa in 2015 money.

zagfles

It doesn't sound right. Deferred DB pensions must use at least the factors specified in The Occupational Pensions (Revaluation) Order 2024 which are based on CPI compounded. For service post 2009 schemes can use a 2.5% cap rather than a 5% cap, if the rules allow and the trustees decide. But the cap is based on compounded total over the years, so occasional years of high inflation won't matter as long as average inflation doesn't exceed the cap. 

Note that any GMP element is revalued differently, usually using fixed revaluation, and usually at a better rate than average CPI. But it depends on leaving date. 

Does the deferred DB pension have a current salary link, if it was in a job you're still in and they closed the FS scheme? Or is it based on the FS when you left? 

Cobbler_tone

I thought this thread was 'stating the obvious' but it is a minefield trying to fully understand the mechanics of how rises are applied to deferred DB schemes.
Here are some real life numbers to play with:

March 2021 - final pensionable salary £51,585. Pension accrued of £24,967 (full amount, i.e. without lump sum)
June 2024 - projected pension £38,102.

15 years 5% RPI protection, 11 years 2.5% RPI protection. You can also request to take those respective periods of pension at different times. i.e. take one and not the other until later.

Try picking the bones out of that with your spreadsheets!  I don't bother and assume it is correct and have made my plans accordingly.

When I request formal quotes at any given date they are spot on, so I am lucky to have live visibility and full confidence in our portal. 

Phossy

zagfles said:

It doesn't sound right. Deferred DB pensions must use at least the factors specified in The Occupational Pensions (Revaluation) Order 2024 which are based on CPI compounded. For service post 2009 schemes can use a 2.5% cap rather than a 5% cap, if the rules allow and the trustees decide. But the cap is based on compounded total over the years, so occasional years of high inflation won't matter as long as average inflation doesn't exceed the cap. 

Note that any GMP element is revalued differently, usually using fixed revaluation, and usually at a better rate than average CPI. But it depends on leaving date. 

Does the deferred DB pension have a current salary link, if it was in a job you're still in and they closed the FS scheme? Or is it based on the FS when you left? 

Based on the FS when I left. 
The current value is given every year and projected forward to NRA (the synthetic bit that QrizB mentions).

Moonwolf

Cobbler_tone said:

I thought this thread was 'stating the obvious' but it is a minefield trying to fully understand the mechanics of how rises are applied to deferred DB schemes.
Here are some real life numbers to play with:

March 2021 - final pensionable salary £51,585. Pension accrued of £24,967 (full amount, i.e. without lump sum)
June 2024 - projected pension £38,102.

15 years 5% RPI protection, 11 years 2.5% RPI protection. You can also request to take those respective periods of pension at different times. i.e. take one and not the other until later.

Try picking the bones out of that with your spreadsheets!  I don't bother and assume it is correct and have made my plans accordingly.

When I request formal quotes at any given date they are spot on, so I am lucky to have live visibility and full confidence in our portal. 

My scheme had the bad habit of giving the quoted figure with projected inflation growth, assumed to be 2%, so the figure I was given used the revaluation order to the point of the quote then projected it forward by 2% a year. This means the figure on paper will be closer to the actual final amount but it was more difficult to check the maths. The last quote I had was a year before the Truss budget.

I had £2883.02 at deferment on 30/04/2004, all at 5% cap. I think when I hit the scheme retirement age of 60 in December this year and it comes into payment it should be £5,249.97 although I’m currently using the previous lower projection in case I have misunderstood the occupation pension revaluation tables.

Cobbler_tone

Moonwolf said:

Cobbler_tone said:

I thought this thread was 'stating the obvious' but it is a minefield trying to fully understand the mechanics of how rises are applied to deferred DB schemes.
Here are some real life numbers to play with:

March 2021 - final pensionable salary £51,585. Pension accrued of £24,967 (full amount, i.e. without lump sum)
June 2024 - projected pension £38,102.

15 years 5% RPI protection, 11 years 2.5% RPI protection. You can also request to take those respective periods of pension at different times. i.e. take one and not the other until later.

Try picking the bones out of that with your spreadsheets!  I don't bother and assume it is correct and have made my plans accordingly.

When I request formal quotes at any given date they are spot on, so I am lucky to have live visibility and full confidence in our portal. 

My scheme had the bad habit of giving the quoted figure with projected inflation growth, assumed to be 2%, so the figure I was given used the revaluation order to the point of the quote then projected it forward by 2% a year. This means the figure on paper will be closer to the actual final amount but it was more difficult to check the maths. The last quote I had was a year before the Truss budget.

I had £2883.02 at deferment on 30/04/2004, all at 5% cap. I think when I hit the scheme retirement age of 60 in December this year and it comes into payment it should be £5,249.97 although I’m currently using the previous lower projection in case I have misunderstood the occupation pension revaluation tables.

As I am getting close to taking mine (early) I stay close to it and must say that I am very impressed with the info to hand and physical quotes I receive. There is a delay of 2-3 weeks after requesting a quote but I guess that is standard, or better than standard. The document set comes through electronically with all the relevant forms. The live system is great (a bit slow) and the only thing missing on mine is the ability to select a variable lump sum on the bridging option, but the computation rate is easy to work out and you can get it within a few hundred quid. I tested that on a quote too.
I'm assuming mine gets adjusted each time an actual rise is applied. You can fall into the trap of thinking "If I leave it another month I can get another £x a year" but that's the same with work I guess.

Moonwolf

Cobbler_tone said:

Moonwolf said:

Cobbler_tone said:

I thought this thread was 'stating the obvious' but it is a minefield trying to fully understand the mechanics of how rises are applied to deferred DB schemes.
Here are some real life numbers to play with:

March 2021 - final pensionable salary £51,585. Pension accrued of £24,967 (full amount, i.e. without lump sum)
June 2024 - projected pension £38,102.

15 years 5% RPI protection, 11 years 2.5% RPI protection. You can also request to take those respective periods of pension at different times. i.e. take one and not the other until later.

Try picking the bones out of that with your spreadsheets!  I don't bother and assume it is correct and have made my plans accordingly.

When I request formal quotes at any given date they are spot on, so I am lucky to have live visibility and full confidence in our portal. 

My scheme had the bad habit of giving the quoted figure with projected inflation growth, assumed to be 2%, so the figure I was given used the revaluation order to the point of the quote then projected it forward by 2% a year. This means the figure on paper will be closer to the actual final amount but it was more difficult to check the maths. The last quote I had was a year before the Truss budget.

I had £2883.02 at deferment on 30/04/2004, all at 5% cap. I think when I hit the scheme retirement age of 60 in December this year and it comes into payment it should be £5,249.97 although I’m currently using the previous lower projection in case I have misunderstood the occupation pension revaluation tables.

As I am getting close to taking mine (early) I stay close to it and must say that I am very impressed with the info to hand and physical quotes I receive. There is a delay of 2-3 weeks after requesting a quote but I guess that is standard, or better than standard. The document set comes through electronically with all the relevant forms. The live system is great (a bit slow) and the only thing missing on mine is the ability to select a variable lump sum on the bridging option, but the computation rate is easy to work out and you can get it within a few hundred quid. I tested that on a quote too.
I'm assuming mine gets adjusted each time an actual rise is applied. You can fall into the trap of thinking "If I leave it another month I can get another £x a year" but that's the same with work I guess.

In this case, because I have already retired, because it has just been bought out and because it is only four months, I have decided to take it when it is due. Also, it is one of 3 DB pensions and 25% of my total if I take my NHS 2015 at 60 as well.

I’ve just had a letter telling me I’ll get my completion paperwork at the end of October.

I had a letter a few weeks ago confirming the policy had been set up and giving the April 2004 figure which matched all my other paperwork. I had been sweating as the buy out process was overlapping with my pension falling due.

Pat38493

Phossy said:

zagfles said:

It doesn't sound right. Deferred DB pensions must use at least the factors specified in The Occupational Pensions (Revaluation) Order 2024 which are based on CPI compounded. For service post 2009 schemes can use a 2.5% cap rather than a 5% cap, if the rules allow and the trustees decide. But the cap is based on compounded total over the years, so occasional years of high inflation won't matter as long as average inflation doesn't exceed the cap. 

Note that any GMP element is revalued differently, usually using fixed revaluation, and usually at a better rate than average CPI. But it depends on leaving date. 

Does the deferred DB pension have a current salary link, if it was in a job you're still in and they closed the FS scheme? Or is it based on the FS when you left? 

Based on the FS when I left. 
The current value is given every year and projected forward to NRA (the synthetic bit that QrizB mentions).

What Zagfles said is my understanding too - deferred DB pensions must be revalued using the OPRO (or at least they cannot use a method that leaves you worse off) - this means that if there was a 5% cap this should not have massively impacted it.

Do the estimates include any element of ERF or commutation for lump sums - these can also change.  In some cases, even if you think you are getting information for the normal retirement age, ERFs can come into play because the pension may have different tranches behind the scenes based on different legislative periods, which could even have different retirement ages (this was the case for me).

Failing that, as others have said it could be because the original projections used different assumptions about inflation compared to what really happened.  

If the pension is deferred and you are asking for estimates at future dates, the number they give you may include an revaluation to the latest available date for inflation / OPRO information, plus a revaluation based on future forecasted inflation (often they use 2.5%).  

If ERF is involved, it also makes a difference whether their method is to revalue the pension forward to normal retirement age from the original deferral date, and then apply the ERF backwards, or to revalue to the actual requested payment date, and apply factors from there.  In the former approach, the ERFs will be higher but of course it's the scheme who can change the ERF whenever they deem it necessary.  This can also make a difference to how many full years of inflation you get from the factors in the government table.

(side note if you the future pension estimate includes future inflation estimates, obviously you cannot then use it to compare to current spend in real terms without adjusting it).

However if you are in doubt, ask them to explain in detail because they have also been known to make mistakes.

Cobbler_tone

Moonwolf said:

Cobbler_tone said:

Moonwolf said:

Cobbler_tone said:

I thought this thread was 'stating the obvious' but it is a minefield trying to fully understand the mechanics of how rises are applied to deferred DB schemes.
Here are some real life numbers to play with:

March 2021 - final pensionable salary £51,585. Pension accrued of £24,967 (full amount, i.e. without lump sum)
June 2024 - projected pension £38,102.

15 years 5% RPI protection, 11 years 2.5% RPI protection. You can also request to take those respective periods of pension at different times. i.e. take one and not the other until later.

Try picking the bones out of that with your spreadsheets!  I don't bother and assume it is correct and have made my plans accordingly.

When I request formal quotes at any given date they are spot on, so I am lucky to have live visibility and full confidence in our portal. 

My scheme had the bad habit of giving the quoted figure with projected inflation growth, assumed to be 2%, so the figure I was given used the revaluation order to the point of the quote then projected it forward by 2% a year. This means the figure on paper will be closer to the actual final amount but it was more difficult to check the maths. The last quote I had was a year before the Truss budget.

I had £2883.02 at deferment on 30/04/2004, all at 5% cap. I think when I hit the scheme retirement age of 60 in December this year and it comes into payment it should be £5,249.97 although I’m currently using the previous lower projection in case I have misunderstood the occupation pension revaluation tables.

As I am getting close to taking mine (early) I stay close to it and must say that I am very impressed with the info to hand and physical quotes I receive. There is a delay of 2-3 weeks after requesting a quote but I guess that is standard, or better than standard. The document set comes through electronically with all the relevant forms. The live system is great (a bit slow) and the only thing missing on mine is the ability to select a variable lump sum on the bridging option, but the computation rate is easy to work out and you can get it within a few hundred quid. I tested that on a quote too.
I'm assuming mine gets adjusted each time an actual rise is applied. You can fall into the trap of thinking "If I leave it another month I can get another £x a year" but that's the same with work I guess.

In this case, because I have already retired, because it has just been bought out and because it is only four months, I have decided to take it when it is due. Also, it is one of 3 DB pensions and 25% of my total if I take my NHS 2015 at 60 as well.

Ah, a bit different to my circumstances. Taking mine will be the driver of my early retirement.