Value of DB Pension when Comparing Salaries

[DB Pension]

Hi Folks,

Can you help me with a pension / salary related query?

I earn approx 100k per annum, bonus of approx 10% with a defined benefit pension. The DB pension scheme is currently healthy, not in deficit and targets 50% of income (including state pension) at retirement age. I have 15 years DB pension....with a few decades to retirement!

I am considering options in other companies but always struggle to value my defined benefit pension when comparing packages - almost without exception the pension will be defined contribution.

Has anyone any guidance / rules of thumb on how to do this?

Thanks for any help in advance!

 

[Conan]

Very difficult to determine.
You say that your current DB scheme promises a total pension of 50% (inclusive of State Pension). Based on current salary of €100k that currently equates to a pension of circa €37,000 pa.
If you change Employer, presumably it will involve an increase in salary, even if the new employer offers a DC scheme.
It’s difficult to say what level of DC contribution would equate to the 50%(integrated) , but I would suggest that a total of circa 12% pa might be a reasonable target.

 

[Zebedee]

Do you know your current employer and employee contribution rate? This might give you some guide (especially if the scheme is healthy).

 

[Steven Barrett]

The old method of calculating the value of the DB pension was multiple it by 20. Easiest way to do it.

If moving job, you'll have a lot more factors to consider such as the new salary and more important, the work environment. No point in staying in a job for a few decades because they have a better pension scheme. The work/ life balance may be better in a new role, how do you price that?


Steven
www.bluewaterfp.ie

 

[Duke of Marmalade]

Lots of moving parts in this question. I attach an Excel spreadsheet I cobbled together for you. It might have errors so don't take it as gospel but it illustrates what is at stake. So taking each line:
Gross pension based on current salary less pension already accrued: So on you current salary your pension is 50K but you will probably still retain some of that if you leave, so you need to make some sort of adjustment here.
Years to retirement: self explanatory
Current State Pension: self explanatory
Salary Escalation: a gold plated DB scheme is Final Salary and if you are a rising star that could be a significant factor. I assume that your DC salary would similarly escalate
State Pension escalation: should be less than your salary expectations
Value of pension at retirement: sorry but this one is anywhere from Steve's 20x to 50x. depends on such things on whether the pension will be index linked, if you will have cover for a dependent spouse, how much your investments can earn in retirement (could be quite low), how long you will live in retirement (I don't think He subscribes to AAM so there will be no help there but longevity insurance is a big positive of a DB situation)
Investment growth in DC scheme: Another huge imponderable and remember in a DC scheme it will be after various charges.

I haven't bothered with complications concerning tax free lump sums. It's not a huge differentiating factor and can be rolled into the Value of Pension at Retirement Date.

So I have put in plausible figures and reckon it is worth about 29k p.a. increasing with salary.

 

[John Locke]

So I have put in plausible figures and reckon it is worth about 29k p.a. increasing with salary.

Less your pension contribution if you make one!
I worked in a job previously with a DB pension, the scheme was also in good health and was also a 50% scheme, think it was final salary, but it's a while since I left, can't remember all the details.
The total contribution per annum was around 25%, with me putting in 10% and the employer 15%.

Do you know your current employer and employee contribution rate? This might give you some guide (especially if the scheme is healthy).

As Zebedee suggested, this might be a simple way to get a rough idea of the value of the DB pension to you. Find out what your employer puts in. Then you can compare vs what a prospective employer will contribute to a DC scheme. The figure Duke came up with (29k pa based on a 100k salary) is not a long way off the ~25% total contribution in my old job.

Edited to add: The fact that the employer takes on the risk in a DB scheme does make it more attractive, so perhaps add a bit more to the DB value.