4 ms·

Final salary pensions are outlandish˜. Utterly so. Using a realistic (inflation + 5%) investment return and 40 years of service, such a pension funded through

by Ntrails 14y ago

Final salary pensions are outlandish˜. Utterly so. Using a realistic (inflation + 5%) investment return and 40 years of service, such a pension funded through DC would be ~30% of your salary contributed every year. The fact that they might be based on a relatively modest salary doesn't change the value of them as a benefit. ˜I am assuming based on article language this is what they have, it is also consistent with the civil service in the UK.

_delirium 14y ago
They were pretty common until recently, in both the private and public sectors; it's not a particularly unusual arrangement only for these employees. My father was a non-unionized employee at a Fortune 500 firm and retired on a variant of a final-salary pension in the 2000s (variant because "final salary" was defined as an average of the final 3 years). Presumably his company is not going to decide to retroactively decide they don't feel like paying it, either, since it was the agreed remuneration. edit: As one concrete example, it looks like IBM had a final-salary plan until 2009, when it was (non-retroactively) phased out, http://www.theregister.co.uk/2009/07/07/ibm_final_salary_pension_killed/ http://www.theregister.co.uk/2009/07/07/ibm_final_salary_pen...
- Ntrails 14y ago
  Yes, the issue is that when they were introduced you had government bond yields of well over 10%. Equities were expected to return even more. Pension promises seemed like a cheap benefit to offer, and one that was mutually beneficial. Couple this with mortality rates falling (expected lifetime increasing) and you have a bunc of completely unaffordable promises. There is a very very good reason that final (and even career average) salary schemes are being phased out. Companies have finally discovered just how expensive their promises are, and they are closing schemes as fast as they can get away with it. The government, meanwhile, buries it's head in the sand because the taxpayer cannot go insolvent. And even small changes to pension terms result in strikes. The mathematics is pretty trivial for this rough estimate, but 30% of salary is low ballpark of the contributions required to meet obligations with a 95% probability over 40 years. Admittedly I'm using an internal asset model which is relatively prudent, with long term derisking, and merely using todays retirement age, and mortality tables. It's probably a lot worse than that (but could be better, I mean this recession malarky can't go on forever right?).

by Ntrails 14y ago

_delirium 14y ago

They were pretty common until recently, in both the private and public sectors; it's not a particularly unusual arrangement only for these employees. My father was a non-unionized employee at a Fortune 500 firm and retired on a variant of a final-salary pension in the 2000s (variant because "final salary" was defined as an average of the final 3 years). Presumably his company is not going to decide to retroactively decide they don't feel like paying it, either, since it was the agreed remuneration. edit: As one concrete example, it looks like IBM had a final-salary plan until 2009, when it was (non-retroactively) phased out, http://www.theregister.co.uk/2009/07/07/ibm_final_salary_pension_killed/ http://www.theregister.co.uk/2009/07/07/ibm_final_salary_pen...

Ntrails 14y ago
Yes, the issue is that when they were introduced you had government bond yields of well over 10%. Equities were expected to return even more. Pension promises seemed like a cheap benefit to offer, and one that was mutually beneficial. Couple this with mortality rates falling (expected lifetime increasing) and you have a bunc of completely unaffordable promises. There is a very very good reason that final (and even career average) salary schemes are being phased out. Companies have finally discovered just how expensive their promises are, and they are closing schemes as fast as they can get away with it. The government, meanwhile, buries it's head in the sand because the taxpayer cannot go insolvent. And even small changes to pension terms result in strikes. The mathematics is pretty trivial for this rough estimate, but 30% of salary is low ballpark of the contributions required to meet obligations with a 95% probability over 40 years. Admittedly I'm using an internal asset model which is relatively prudent, with long term derisking, and merely using todays retirement age, and mortality tables. It's probably a lot worse than that (but could be better, I mean this recession malarky can't go on forever right?).