Defined benefit pension

[MrFoolish]

I'm in a defined benefit final salary pension scheme of a previous employer. When I last requested a transfer value, they also told me what I will receive in the first year when I'm 65 (which is some years off). Let's invent a figure and say this is £10k in that year. My question (and please excuse my ignorance) is will this actually be £10k or will this amount be adjusted upwards to account for inflation between now and then? The documentation (which is pretty poor) doesn't seem to make it clear. I'm pretty sure it is inflation adjusted once I start taking it, but I'm questioning what happens before then.

Thanks.

[Dicky99]

They can't know what inflation will be between now and when you reach 65 so they can only tell you what your pension is worth in today's money and then adjust that each year according actual inflation.
Mine is a public sector pension and the annual increase is based on the inflation reading from the previous September.

[mc2fool]

I'm in a defined benefit final salary pension scheme of a previous employer. When I last requested a transfer value, they also told me what I will receive in the first year when I'm 65 (which is some years off). Let's invent a figure and say this is £10k in that year. My question (and please excuse my ignorance) is will this actually be £10k or will this amount be adjusted upwards to account for inflation between now and then? The documentation (which is pretty poor) doesn't seem to make it clear. I'm pretty sure it is inflation adjusted once I start taking it, but I'm questioning what happens before then.

Thanks.

That's potentially complicated as it depends on quite a large number of factors, including choices your company and scheme made in setup.

Best is you ask your scheme for a breakdown of the components of your pension and the revaluation methods that have/are/will be applied to each component, both in deferment and in payment.

Here is a summary of the revaluation requirements for various components in deferment up to 2012, just to give you a taster and the excess ones are statutory minimums, the company/scheme may (or may not) be more generous.
https://www.barnett-waddingham.co.uk/comment-insight/blog/revaluation-for-early-leavers/

P.S. Here's another, just to give you an idea of the complexities -- and it doesn't even touch on pre-88 and post-88 GMP!
https://www.pensions-pmi.org.uk/media/x1fjg4lx/1revaluationandpensionincreasesfordefinedbenefitpensionschemes.pdf

[MrFoolish]

Thanks. It's reassuring and makes sense that the amount will be adjusted for inflation (though subject to limits). I struggle to understand though why my statement doesn't make this clear. It just says you get £X at age 65. I'll have to look for some earlier statements which will presumably show a lower figure.

I've noticed the transfer value has increased a fair bit over the years. Is this in itself because of inflation?

And is there any simple rule-of-thumb linking the transfer value to the annual pension?

[mc2fool]

Thanks. It's reassuring and makes sense that the amount will be adjusted for inflation (though subject to limits).

Don't get ahead of yourself, that's not an assured generalisation. If, for example, your pension consists entirely of pre-88 GMP then there will be no increases at all in payment. If it consists entirely of post-88 GMP then increases will be CPI to a maximum of 3%, and if it contains a mix there will be a pro-rata mix of those. If there is any excess over the GMP component(s) then there is no statutory increase in payment on pre-1997 accrued benefits, CPI max 5% on 1997-2005 accrued benefits and CPI max 2.5% on benefits accrued thereafter, with, again, a pro rata mix, but the company/scheme may choose to be more generous. Or not.

Increases in deferment are similarly complicated, but not in the same ways; the components, dates, rates, etc are different and there are several different methods the scheme may use.

I can only emphasise again that you should make no assumptions and get the breakdown and details from the scheme.

I've noticed the transfer value has increased a fair bit over the years. Is this in itself because of inflation?

And is there any simple rule-of-thumb linking the transfer value to the annual pension?

No to both. Transfer values are determined largely by an actuarial calculation of the value of providing your estimated benefits for the rest of your life, and are heavily influenced by the "discount" rate, i.e. interest rates. The higher interest rates are the lower the transfer value will be and interest rates have shot up massively in the last year or two and transfer values will have gone down, probably quite a lot.

Here's a good summary: https://rossnaylor.com/pension-transfer-value/

[Alaric]

Transfer values are determined largely by an actuarial calculation of the value of providing your estimated benefits for the rest of your life, and are heavily influenced by the "discount" rate, i.e. interest rates. The higher interest rates are the lower the transfer value will be and interest rates have shot up massively in the last year or two and transfer values will have gone down, probably quite a lot.

If however the interest rates and other elements have not changed, the transfer value will increase with time as the date when the benefits become payable appoaches.

[MrFoolish]

Thanks all. I contributing to this scheme from 1997 to 2009. If I read my paperwork right, the "increases in deferment" table suggests I'm entitled to "Statutory (CPI, max 5% pa compound)"

I can see my pension figures for age 65 have gone up over time. Though when I plug some of my figures into a CPI calculator, the calculator suggests my numbers should be going up faster than my pension provider seems to reckon. Expect I'm doing something wrong.

[mc2fool]

Transfer values are determined largely by an actuarial calculation of the value of providing your estimated benefits for the rest of your life, and are heavily influenced by the "discount" rate, i.e. interest rates. The higher interest rates are the lower the transfer value will be and interest rates have shot up massively in the last year or two and transfer values will have gone down, probably quite a lot.

If however the interest rates and other elements have not changed, the transfer value will increase with time as the date when the benefits become payable appoaches.

Yes, the present value of the future cash flows (the pension in payment) becomes greater as time gets closer to the first payment. Also 'cos of increases in deferment.

[abbeymeadster]

Thanks all. I contributing to this scheme from 1997 to 2009. If I read my paperwork right, the "increases in deferment" table suggests I'm entitled to "Statutory (CPI, max 5% pa compound)"

I can see my pension figures for age 65 have gone up over time. Though when I plug some of my figures into a CPI calculator, the calculator suggests my numbers should be going up faster than my pension provider seems to reckon. Expect I'm doing something wrong.

You may be in a scheme similar to one I'm in. Mine says the deferred pension will increase each year by RPI up to a maximum of 5%. However, the key information (which is buried in the small print), is that the figure they send me of predicted annual pension at retirement age makes the assumption that RPI will be 2.5% each year. Consequently, when RPI is 2.5% in any given year, I see no increase in my predicted annual pension. When it's above 2.5% I do see an increase, but less than expected when just looking at inflation. When it's below 2.5% my predicted pension goes down.

[mc2fool]

Thanks all. I contributing to this scheme from 1997 to 2009. If I read my paperwork right, the "increases in deferment" table suggests I'm entitled to "Statutory (CPI, max 5% pa compound)"

I can see my pension figures for age 65 have gone up over time. Though when I plug some of my figures into a CPI calculator, the calculator suggests my numbers should be going up faster than my pension provider seems to reckon. Expect I'm doing something wrong.

Ok, well 1997 to 2009 makes thing simpler. GMP stopped being accrued on the 5 April 1997, so there won't be any of that component (except possibly a smidgen if you started earlier in 1997 than that and were contracted out).

There's a couple of reasons why your calculations may not match the scheme's numbers.

Firstly, the statutory minimum revaluation LPI (limited price index, i.e. capped) changed from RPI to CPI from 6 April 2011 for revaluations after that date. So if you're comparing with any pre-2011 figures it's more complicated than just CPI.

Secondly, and more likely, the revaluations are based on RPI/CPI changes over complete calendar years. So, if you left on, say, 31 March 2009 and you retire (or try to calculate up to), say, today, the revaluation will be for 1 Jan 2010 to 31 Dec 2022, and as all government inflation based calculations are done using the previous September's figure, you need to use the annual LPI (capped RPI/CPI) changes from Sep 2009 to Sep 2022 (and not 31 Mar 2009 to today).

But you don't have to go searching for RPI/CPI figures and calculating the LPI for each year: you can find it all in the The Occupational Pensions (Revaluation) Orders. The latest, for 2022, is at https://www.legislation.gov.uk/uksi/2022/1229/made.

The "higher" figure is for benefits accrued before 5 April 2009 and the "lower" for benefits accrued after then, as the LPI cap was lowered from 5% to 2.5% for benefits accrued from 6 April 2009 onwards. So, if you have no post 6 April 2009 accrued benefits then the order tells you that for the complete calendar years since you left your pension in deferment will have increased by (a statutory minimum of) 42.2%. If you do have any post 6 April 2009 accrued benefits then you'll need to pro rate the increases across the two figures correspondingly.

If you want to figure out the increases to previous years you can either derive the figures from the 2022 orders or you can google for The Occupational Pensions (Revaluation) Order yyyy.

[MrFoolish]

You may be in a scheme similar to one I'm in. Mine says the deferred pension will increase each year by RPI up to a maximum of 5%. However, the key information (which is buried in the small print), is that the figure they send me of predicted annual pension at retirement age makes the assumption that RPI will be 2.5% each year. Consequently, when RPI is 2.5% in any given year, I see no increase in my predicted annual pension. When it's above 2.5% I do see an increase, but less than expected when just looking at inflation. When it's below 2.5% my predicted pension goes down.

Yes, I've been pondering on the possibility of something like this. I can see no such assumed inflation rate but that doesn't mean it isn't written in some document somewhere. They don't seem to make much effort to make things clear. I'm thinking of sending them a question about it... just wondering how to word it in a concise way.

[MrFoolish]

Thanks mc2fool.

From March 2009 (when I stopped contributing to the scheme) to June 2022 (the latest figure I have), I calculate a pension uplift of about 27% (using the pension scheme's indicated pension value).

[mc2fool]

Thanks mc2fool.

From March 2009 (when I stopped contributing to the scheme) to June 2022 (the latest figure I have), I calculate a pension uplift of about 27% (using the pension scheme's indicated pension value).

Possibly 29.2%? That's the 1st January 2010 - 31st December 2021 figure from The Occupational Pensions (Revaluation) Order 2021.

(The previous year's figure of 27.4% won't be it 'cos of the complete calendar years rule.)

If it is just 27% then I'd dig out your previous figures and lookup the Occupational Pensions (Revaluation) Orders for the year prior to see if they've all been understated, and if so ask the scheme why.

Of course, you need to know if the indicated pension value is the actual amount at date of leaving revalued by the Revaluation Orders or something else written in some document somewhere...

[MrFoolish]

Possibly 29.2%? That's the 1st January 2010 - 31st December 2021 figure from The Occupational Pensions (Revaluation) Order 2021.

Well that's close enough to my figure that I think I'll stop worrying about it (for now). I guess it rules out that my figures already have some assumption of 2.5% pa built in.

Many thanks!