The Lemon Fool

Hi Fools

Possibly I asked this many years ago. If so, I apologise for asking again and blame middle-age!

Assuming typical investment guidance to have a mix of equity and bond investments, how do I treat DB pensions? Within DC pensions I can see the actual investments and that their performance will directly impact my pension pot. With DB I can see the current and projected annual pension but not directly the investments.

QUESTION - should I assume the DB's are fully or majority invested in bonds? And does that help me anyway in looking at equity/bonds ratio in the DC funds? Or should I put the DB's to one side and focus on the ratio in the DC pots?

I've got a couple of DB pensions - one in the local government pension scheme and another in the pension protection fund.

Taken as a whole I'm 72% equities, 28% bonds. However, DC on its own is 91% / 9%. For DB I've actually weighted a little into equities for the PPF, so I'm 15% / 85% in DB funds.

DB pension stands alone as a sure income stream-not under your control
Your other investments have to generate the extra required income
You have control here-so £100000 of a 60/40 equities/bonds portfolio gives you a £3000 pa income as a rough guide
Have you saved enough-do you have to work longer or both?
This is part is in your hands
xxd09

xxd09 wrote:DB pension stands alone as a sure income stream-not under your control
Your other investments have to generate the extra required income
You have control here-so £100000 of a 60/40 equities/bonds portfolio gives you a £3000 pa income as a rough guide
Have you saved enough-do you have to work longer or both?
This is part is in your hands
xxd09

I seem to recall that many here in the past have stated that they see the regular guaranteed inflation protected (to at least a limited extent) income from DB pensions as bond-like and have either reduced their bond allocation in other investments (or been happy having that backup to be fully invested in equities). Since you get a guaranteed income from a DB pension it is irrelevant what it's underlying investment strategy is and how much it is itself invested in bonds.

Myself I have a reasonably large DB pension which will be available to me in six years time and currently have no exposure to bonds. I did have some limited exposure to bonds in the past but don't see them as good value at the moment.

Maybe consideration on how you view your State Pension would help you choose a category pot.
Eg do you consider SP to be bonds or a totally separate income pot out of scope that you ignore when balancing?
Likewise other things like property (main & additional), gold, art, classic cars etc.

Many thanks for the replies.

xxd09 - still working, in early 50s, and adding to pensions through current employer's DC scheme (where I've gone 60/40% equity bonds since 2017). If I diverted that to 100% bonds it would shift the overall pot ~2% p.a. (thus 70/30 in 12 months time, from 72/28, all things being equal).

ursaminortaur - yes, that's what I was driving at. Treating DB 'as if' it's a bond, 'freeing' me up to invest more DC into equities.

FluffyOverload - SP seems a long way off (currently early 50s), and I'm likely one of those who'll aim to retire at 60 and then bridge the seven years till SP kicks in.

Roughly speaking, the two DB schemes will generate around 20% of target income (present values). That leaves 80% to come from the DC schemes (from age 60) and the SP as well when that kicks in (currently 67). So, I am somewhat reliant on the DC schemes. Although we do have other assets (chiefly property, not just main home).

I've been retired 7 years, with another 7 years to go until state pension. DC pension only. I am and always have been 100% equities plus a large cash buffer (premium bonds + cash ISAs).

No bonds, no regrets.

Scott.

Difficult to envisage a DB scheme as a Bond-unwise to treat it as such.
It’s not transferable to anyone unlike a bond (though it might have a surviving partners pension )
It dies with your death unlike a bond
It is a very personal income stream at retirement and that’s all though it can be a big all!
xxd09

xxd09 wrote:Difficult to envisage a DB scheme as a Bond-unwise to treat it as such.
It’s not transferable to anyone unlike a bond (though it might have a surviving partners pension )
It dies with your death unlike a bond
It is a very personal income stream at retirement and that’s all though it can be a big all!
xxd09

Agreed. But it was more about how to consider DB when applying a fairly typical mantra of equity/bond splits. With my current employer’s scheme I’ve gone with self selection rather than a lifestyle approach that automatically shifts from equity to bonds to cash as retirement approaches, because that approach would not take account of other DC or DB schemes. I can therefore use new monies going into the current scheme to rebalance. On pure DC I’m 91/09, whereas if I make some assumptions about the DBs I might be 72/28. At 91/09 I feel in need (in my early 50s) of a material rebalance. At 72/28, less so.

My example of the 60/40 portfolio generating £3000 pa would probably apply to a 70/30 equities/bond right through to a 30/70 equities/bond portfolio
You have to set your Asset Allocation to your own personal stomach acid test
(Do not be caught at retirement with a large equities % in your portfolio as a market drop at this time could stop the portfolio ever recovering)
As a practical example I have had for many years a income stream split very much like yours -now aged 75 retd 18 years with the portfolio set up of 30/65/5 -equities /bond /cash split
xxd09

A DB pension is an index linked (normally) pension guarantee. Like any guarantee it is only as good as the party liable to pay it (though the PPF gives some additional security). As others have said there are no 'investments' to which you are entitled, only an income stream. It is increasingly difficult to cash in in for a capital amount as HMG seeks to protect people from themselves.

xxd09 wrote:My example of the 60/40 portfolio generating £3000 pa would probably apply to a 70/30 equities/bond right through to a 30/70 equities/bond portfolio
You have to set your Asset Allocation to your own personal stomach acid test
(Do not be caught at retirement with a large equities % in your portfolio as a market drop at this time could stop the portfolio ever recovering)
As a practical example I have had for many years a income stream split very much like yours -now aged 75 retd 18 years with the portfolio set up of 30/65/5 -equities /bond /cash split
xxd09

I understand all of that. Perhaps I didn't ask my initial questions clearly. I'm curious whether to include or ignore the DB pensions when looking at allocations. If I ingore the DB pensions then I'm 91/09 equities/bonds currently (concerning, and should make some adjustment), whereas if I make some assumptions about the DB's I could see I'm at something like 72/28 (probably ok, but one to watch as the years roll by).

I really don’t think the OP should worry unduly about the % in bonds because it does not comply with an accepted portfolio allocation standard.

A high equity allocation is not necessarily an investment problem but could well be an investor problem…

My personal take is for bonds /cash be sufficient to cover a period of years (4 to 8 years of ‘comfortable’ living ) and after that, then all equities.

If I had 20% of my income from a DB pension then I would reduce my bond allocation by 20%. ( I would treat the state pension in the same way when it’s payable)

So the bond allocation is a £ amount and that happens to be around 12%. The cash amount determines the % not the other way round, I take a view about the ‘level’ of the market to determine how many years of income I hold

Ie Jan 2020 , 10 years of income held , mid 2020 down to 3 years, and at present rebuilding, 7 years today. ( 10 years in Jan 2020 as I was travelling for 3 months without ability to trade, on the off chance the market might do something odd, I did not see Covid coming but I filled my boots in late Match on return to the UK.

This works for me, when I retired in late 2007, the cash allocation was barely one year, portfolio was just 25x the required income, not large enough to carry more cash, or so I thought ! (It worked out even in 2009 fortunately) now with the portfolio getting close to 60x then one could argue that you could hold 20 years of income and still have an equity portfolio with just a 2.5% swr and a massive contingency fund. It’s always a personal decision.

xxd09 wrote:Difficult to envisage a DB scheme as a Bond-unwise to treat it as such.
It’s not transferable to anyone unlike a bond (though it might have a surviving partners pension )
It dies with your death unlike a bond
It is a very personal income stream at retirement and that’s all though it can be a big all!
xxd09

Some DB schemes come with a widow's (or widower's) pension, so the income stream continues after the pensioner's death.

The scheme booklet will tell you about that.

TJH

Hariseldon58 wrote:If I had 20% of my income from a DB pension then I would reduce my bond allocation by 20%. ( I would treat the state pension in the same way when it’s payable)

That's a practical way of looking at it, thank you. It's roughly how I got from 91/09 split on just the DC pensions to an approx 72/28 for all pensions. I just need to work out an allocation split (incl cash and property (non-main home)), and factor something in for the DB, like 20% off the cash/bonds, and more when the state pension kicks in.

If you have the time and inclination then make a copy of the spreadsheet at this site earlyretirementnow.com and then fill in your final parameters, after this fill in your pension income under the cash flow assist tab including your state pension. You can now try modelling the effect of different equity/bond splits. The way the sheet works is it assumes that you reduce your drawdown when other income streams come on board. Be sure to delete the social security payments that may be pre-populated in the cash flow tab.

There is guidance on the web site but it will still take some time to fully understand everything that the sheet can tell you. If intending to leave a bequest then be careful to model the minimum acceptable residual value as this has quite an effect on drawdown rates.

This is a great tool and has more to it than first meets the eye.

Hi All.

May I have another crack at this, because JohnnyCyclops question also interests me. I'll try restating it in a different way.

Many people have a DB (Defined Benefit) and DC (Defined Contribution) or similar components to their retirement savings plans. Let's assume you can measure the DB component fairly accurately and that it has no risk - and is for sake of argument £15K per annum. Let's also assume that the person also believes the old 60/40 equity/bond split has merit (though for the purposes of the below, it could be any ratio)

There are three obvious approaches one might take knowing the above DB information ...

1. Ignore it, and keep the D/C 60/40
2. Look at target retirement income, and adjust the 60/40 accordingly, e.g. target a bond ladder for retirement to complement the DB piece, the rest in equities
3. Adjust the split to achieve a notional 60/40, assuming that the DB component is partially or wholly a proxy for bonds - i.e. look for allocation optimisation (assuming you had it right with 60/40) not a target retirement income

I think JohnnyCyclops was asking about (3) or something close to it - whereas most answers seem closer to (2) in nature, or perhaps (1) - though xxd09's touched a bit on it. Of course, I may have the wrong end of the stick!

If not, and anyone has a means of approximating a defined benefit income stream as a bond holding (it might have other factors, like interest rates, assumed longevity etc, into the calculation) I'd be very interested - and JohnnyCyclops may also be. If it helps, Vanguard's VGOV ETF (or UK bonds) yields 1.09% or so at the minute (but of course, unlike a DB, you get to the keep the capital, so you'd have to factor its gradual sale in to mirror the DB effect). And it might be better to consider linkers rather than normal bonds, as many people's DB's have an inflation component - meaning Blackrock's INXG is a better comparator, which I believe has a 0.24% yield at the minute.

Of course, it may be too hard to do - in which case, I'd be very happy if someone said that too

Regards, Newroad

Newroad wrote:Of course, it may be too hard to do - in which case, I'd be very happy if someone said that too

The simple if inaccurate approach would be to take the annual DB Income and multiply it by an arbitrary factor to get a capital value. Lifetime allowance rules use 20. But what is 60/40 or whatever supposed to be measuring? Is it capital value or annual income?

Hi Alaric.

For me, my 66/34 (adults) and 75/25 (kids) measure marked-to-market capital values. As our affairs are relatively simple, this means the closing prices on the LSE in most cases.

Whether that the conventional view of the classic 60/40 split, I had always assumed it to be the case, but maybe I was wrong?

I suppose using the LTA makes as much sense as anything else. But let's say I took the £15K above and multiplied if by 20 to give £300K. What that £300K is of relates to the real question in this post. Is it (the equivalent of) for example, £300K of Gilts?

Regards, Newroad

Newroad wrote: What that £300K is of relates to the real question in this post. Is it, for example, £300K of Gilts?

If you aren't looking at the income generated, does it matter? If by some magic of legislation it was possible to turn a DB entitlement into cash, what would you do with reinvestment of the proceeds?

Hi Alaric.

I think it does, if you are trying to figure out case (3) above.

Let's say you had £700K DC to invest as well. If targeting 60/40 and the £300K could be assumed to be a bond proxy, then you would add £100K of the £700K also to bonds use the other £600K for equities.

If it was some other proxy, you'd probably have more than £100K of the £700K in bonds (and commensurately less in equities).

Regards, Newroad