Final Salary Pension Stories

[SomptingGuy]

I just got out of a management communication concerning our company's final salary scheme and how they (read we) are going to reduce its deficit. Simply put, our "final salary" is now going to be today's salary index linked, but with the annual increase capped. A few years of hyper-inflation above the cap and it'll all be worthless.

Anyone else got any similar stories about their final salary pension?

 

[SnTMan]

Who's got a pension?

 

[ivymike]

I've got a pension at work (and a 401k), but no interesting stories.

 

[Ashereng]

You have a pension.

"Do not worry about your problems with mathematics, I assure you mine are far greater."
Albert Einstein
Have you read FAQ731-376 to make the best use of Eng-Tips Forums?

 

[pso311]

If you can count 2% of salary per year, I have one too.

 

[SomptingGuy]

Well, in the great UK tradition of final salary pensions, ours was to be 2/3 of final salary. Now it's 2/3 of today's salary plus inflation. Ok if you're 60+ already and at the top of your promotion tree. But I'm not yet 40 and would hope that my salary exceeds inflation. Plus there's that hyper-inflation worry.

 

[corus]

It's not unsual to cap final salary pension schemes to something like 4% rise per annum. Companies can get away with it now because inflation is so low and people don't expect inflation to rise, which makes me think that people have the memories of golfish. Historically , inflation used to be 20-25% and there is concern now that world inflation will rise again so the value of your pension may disappear if history repeats itself.

Your value of 2/3 salary assumes that you have worked for the same company for 30 years or more. These days jobs aren't for life and you can expect to change jobs, or the company to be sold with loss of pension rights before you retire. I wouldn't bank on your pension in any event but think of it only as an investment for when you have to sell the Big Issue.

For horror stories you only have to look at what happened to the pension fund run By Robert Maxwell of the Daily Mirror and the millions he stole, or the employees of Enron who lost both their jobs and their investments. These days your pension will apparently be stolen only by the ravages of inflation. My guess is that some deserving stockbroker or investment banker will do very well out of your fund when inflation and interest rates rise again. That's not classed as theft though, stangely.

corus

 

[ScottyUK]

Hi corus,

I was one of the employees of Enron at the time of the collapse. Our pension was always a 'money-purchase' scheme, not final salary, which I have a great deal of scepticism towards. We didn't lose our pensions in Europe, unlike the States, because of the way the pension scheme was implemented. Northern jobs weren't lost either, but the trading guys in London all went. The London employees supposedly were ransacking the place for anything saleable after their expenses and salaries were unpaid. An acquaintance was reputedly playing Quake on a £60k data server which had come into his posession.

My parents, and especially my father, were caught up in the Equitable Life debacle. His pension was being reduced on an almost continual basis in order the meet the costs of funding those members with guaranteed benefits after Equitable's financial mismanagement left them unable to meet all their commitments. Meanwhile the directors of Equitable Life are sitting pretty, having orchestrated the greatest pension mess since Robert Maxwell's efforts. I fail to see why their earthly assets can not be seized and sold to shore up the pensions of the customers whose retirement they stole. I would cheerfully see them sold into slavery.

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I don't suffer from insanity. I enjoy it...

 

[zdas04]

If there is any way to take your pension in a lump sum, then do it. When I retired three years ago I got out of the plan with a big check that I rolled over to an IRA. I'm managing the IRA and have increased its value 12% per year. Three more years of that and I could re-invest it in a money-market fund or CD's and live modestly off of it for the rest of my life in pretty rough inflation. Five more years and I can live better than modestly.

My point is that no one cares more about your "golden years" than you do, so take control the minute you can.

David

 

[corus]

Thanks for the information and advice zdas04 but quite frankly I don't have a clue what you are referring to. The IRA as far as I am aware is the Irish Republican Army but I believe they are no longer fund raising. Investing in CD's (or Compact Disks) is fine but somehow I don't think my CD collection of Max Bygraves top hits from the 1970s will make much money in the future. Can you just explain your acronymns?

My opinion is that contributing to a company pension scheme is more to the benefit of the directors than the rank and file employees. In this article from the Guardian directors are able to build up their pot twice as fast as an employee - "directors' final salary pension pots usually build up twice as fast as those of employees, meaning it takes twice as many years for staff to reach a full pension as it does directors" -

http://www.guardian.co.uk/executivepay/story/0,,1649313,00.html

There's something wrong somewhere.

I have heard zdas04's advice before about taking as much of your pension as a lump sum as you can when you retire. Given the chance of high inflation (above 4%) it's probably good advice. If you're a director though, you're probably not bothered.



corus

 

[moltenmetal]

Defined-benefits pension plans are going the way of the passenger pidgeon here in North America. Those who still have them tend to introduce themselves to colleagues in meetings talking like people doing hard time in prison, "Hi, I'm so and so from such and such division, and I've got 13 more years to go (before my pension is fully vested)"

Personally, I like the portable retirement savings co-contribution option that has tended to replace the defined-benefits plan in most places. The only one screwing with your plan is the market. No worries about whether your organization remains solvent to keep paying out pensions, and no benefit to rotting away in a horrible job merely to collect on it.

 

[zdas04]

corus,
Since we share so much of our heritage, it really is a shame that we don't share a language.

IRA is (in government-tax-speak) is Individual Retirement Account and it is a tax-defered account for retirement. You pay the taxes on the income you remove from the account at retirement, but the money going in and the earnings on that money is tax free.

CD is Certificate of Deposit that pays a fixed return for a set period of time and I'm sure there is a similar financial instrument in the UK. They generally don't return the same rate as equities, but they carry much less market risk.

The plan that I retired under was a predecessor to the "portable retirement savings" that moltenmetal speaks of--under that plan you could either take a lifetime annuity or a lump sum upon retirement. The company saw the handwriting on the wall and set the interest rate for the annuity just a touch lower than the interest rate for the lump sum so you have to be pretty dim to opt for the annuity. The year after I left they changed the plan to eliminate the annuity altogether for new hires.

David

 

[SomptingGuy]

I must admit I used to find the term IRA amusing when I lived in America. My American colleagues just didn't get the joke when I asked them why they were investing in a illegal foreign army for their retirement.

Similarly my comments that "401K" was a much more understandable term than the silly British equivalent of "pension".

Anyway, to cut to the chase...

My view is that the company I work for is hoping that hyper-inflation will solve its deficit problem. We've been told over and over again that the biggest problem is increasing longevity. And reading between the lines, that means us younger members, not current pensioners.

 

[zdas04]

I recently saw an article that said most pension plans are in trouble because they are assuming an average life expectancy after retirement of less than 10 years (retire at 65 and die before 75) and people are retiring sooner and dieing later. If they have to pay out an annuity for 15 years that is only funded for 8 years then somebody (say a 30 year old) has to either pay more or lose benefits. The more I learn about this shell game the happier I am that I decided to cash out at 50 and invest it myself until I finally decide to retire.

David

 

[ozmosis]

the bottom line is: no body knows. Not even the (so called) experts.
If you analyse all the 'advice' given from the financial experts over the past 20~30 years, it all seems to change, in 6~8 year cycles.
Take Endowment Mortgages: The people who were selling you these 'fantastic' plans that will 'guarantee' a comfortable income all seemed to be chastised in the public eye for doing something wrong. They then started saying, after most average folk had handed over large sums of their hard-earned income, that the predictions are that the guarantees are now not guaranteed and actually may be worthless. You'd better sell them. In fact. you'd better be quick and sell them otherwise you might get nothing. So, the wind has changed direction, Mars is in line with Venus and suddenly our precious investment is worthless.
So why is it the people who sold us these investment plans are the same people 'willing' to take them off our hands for next to nothing?
but hey, what do we know, we're only engineers...

 

[niallmacdubhghaill]

can someone please explain to me what the 401k plan is?

 

[duck0601]

A 401(k) plan is a retirement savings plan where the tax on your contributions is deferred until you withdraw from the account. It is named after the section of the (U.S.) tax law which describes it.

 

[ScottyUK]

illegal foreign army

That description sounds more appropriate for the occupying forces in Iraq.

The IRA are terrorist scum, just like al Quaeda are terrorist scum. Don't glamourise either of those organisations by comparing them to soldiers.


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I don't suffer from insanity. I enjoy it...

 

[moltenmetal]

The portable plan I was talking about is simpler than that- no annuity or lump sum on retirement: the boss simply matches your own payments to your own registered retirement savings plan (RRSP in Canada, 401k in US etc.) in a set proportion to a set maximum % of salary. When you leave, you take the plan and all its money with you. You make all the investment choices based on your own goals and risk tolerance. Nobody messes with the money but you (and the markets of course!)

 

[tripleZ]

With regards to 401(k) plans, don't forget the vesting part of the deal. In addition to your employer matching a certain portion of the money you put in, there is also a vestment period on portion of money the employer contributes. For example, if you leave before 5 years is up, you may only be eligible to take 50% of what your employer contributed. The rest goes into the company's general 401(k) fund. That value varies from employer to employer. In some cases it's more, in others it's 0%. The vestment periods and rules vary among employers.

If you're looking for concrete examples, my employer's plan contributes $0.35 for every $1.00 I contribute to the plan, up to 5% of my annual compensation. Anything I contribute above and beyond the 5% would not be matched. In my case, it's best to contribute up to the set amount of cash matched by my employer and then contribute the rest that I have available to a Roth IRA (up to what I think is now $4K annually...at least for this youngster).