Is 4% CAGR for 30 year pension ok?

[dundas666]

I recently dug out the details of an old, small pension from a company I left in 1991, and was wondering if it's performance over the last 30 years could be considered scandalously poor at just under 4% pa?

The numbers: in 1991, when I left the company and so stopped contributing, it stood at paying out £1,252 per year, and a recent quote says this is now, after 30 years, £4,006 per year. This represents an annual growth rate of around 3.95%

Am I being unfair in being disappointed in this? After all if the pension administrators, instead of employing highly-paid, Porsche-driving investment bankers to invest the funds for me, hired a monkey to throw darts at a dartboard to select equities, then with the FTSE returning an average of 10.7% I would be taking home more than £26,000 per year instead of £4,000. Quite a difference. And if they'd hired an American monkey which simply bought the S&P 500 then I'd have been even better off.

The numbers are so different I suspect I must be missing something - any comments?

Thanks, d6

[Alaric]

The numbers are so different I suspect I must be missing something - any comments?

You are missing that you have a defined benefit scheme. In other words, the pension scheme has to provide you with the stated income regardless. This will have been determined by the rules of the scheme. That it's increased at all implies the rules must say that it revalues with RPI or NAE (average earnings). It's the scheme's risk as to how well or badly the investments perform, so it takes the profit or absorbs the loss. It's not even the case that it invests in equities, as accounting and solvency rules may require investment in bonds to help meet the underlying guaranteed pay out.

The two common usages of the word "pension" are unhelpful. It can mean either the entitlement to a retirement income expressed as an annual income or the funds invested to provide one expressed as an amount of capital.

[PhaseThree]

This sounds like a DB pension. Try looking at it from the point of view of what it would cost to buy a similar pension in the open market today (i.e an annuity)
If you were to buy a £4k annuity with 50% joint life cover and annual increases at RPI it would cost you around £140,000 at age 65
Now compare that with the money you put into the scheme and see if you got a good return on your investment.

[mc2fool]

Assuming it is a DB scheme then, if it isn't already in the quote you've received, ask the scheme for a breakdown of how the figure is arrived at.

Exact details will vary with the scheme but (if you contracted out) it will be split into a GMP part (with pre-88 and post-88 GMP parts), which will be revalued either by National Average Earnings or by a fixed % amount (7.5%pa since 1990)*, and a non-GMP part split into pre-85 and post-85, of which there is no statutory increase required for the pre-85 part, and increased by the The Occupational Pensions (Revaluation) Orders ** for the post-85 part.

* https://www.barnett-waddingham.co.uk/co ... -is-a-gmp/
** https://www.legislation.gov.uk/uksi/2020/1332/made

[dundas666]

Thanks everyone for your replies - very illuminating.