# Net Worth calculation: how to value government defined benefit pension



## kevinB

Hello All!

Every quarter I put together a personal Net Worth calculation including all assets, income, liabilities and debts. I've been having trouble knowing which value to enter for my government defined benefit pension. My pension statement has two lines when I look at the Transfer Value of the pension: Amount within tax limits, and Amount in excess of tax limits. Should I leave my current job, the first amount would get put into a locked-in RRSP or other pension plan. The second amount would be paid out and added to my income for the year.

When I do my Net Worth calculation, should I include both amounts?

Any guidance, especially from people familiar with government pensions would be greatly appreciated.

Many thanks,
Kevin


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## Spudd

I'm not familiar with government pensions but it seems to me that you'd take the full value of Part A (the locked in part), and you'd pro-rate Part B by the tax you'd have to pay if you take it.


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## OhGreatGuru

OTOH, it is common practice to appraise the "asset value" of a DB pension as 15 x annual pension (or 180 x monthly pension).

(I have a long actuarial paper somewhere that says the multiplication factor can be anywhere from 10 to 17, depending on whether the pension has survivor benefits, is indexed, and other factors. I believe an indexed pension with survivor benefits comes to about 17 actually. But you see 15 used in a lot of financial articles as a rule of thumb.

It doesn't really matter what method you use, as long as you are consistent.


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## MoneyGal

Well, this is an interesting question. 

Do you also put the value of your CPP contributions in your net worth statement? Like your DB pension they have a value today.

Do you put the after-tax value of your assets in your net worth statement? I do, but I have met very few people who do this. 

The value of your DB pension can be calculated in a number of ways. There's the cash transfer value, which you see on your pension statement. But unless you are going to cash in your pension, that isn't really a very helpful number. 

The "true" value of your DB pension is the income it will provide in retirement -- and that income stream has a value today, but it isn't necessarily the same value that you see on your pension statement, for a number of reasons. 

One way to value your DB pension on your net worth statement is to put the amount it would cost today to purchase the same income stream in retirement on the open market. That's the "true" value or amount you'd need to create that income stream if you wanted to do it outside the DB pension...but it will be a higher number than the amount on your pension income statement. 

Most people probably just leave these amounts off a net worth statement. But if you are going to value your DB pension, why would you not value your CPP income in retirement as well?


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## Daniel A.

I also wonder why someone thinks this number should be part of their net worth statement.
The commuted value that could be transferred to a locked in RRSP those numbers are there but mean little from a net worth point of view.

How much would it cost in an annuity to receive what I already have in pension income say I receive 32,000.00 per year and have some indexing protection think I will collect for 30 years and the wife has 100 % coverage on my pension she may live 5 years past me likely based on family history.
The value before I turned 55 was 450,000.00 it is likely that by the time we both pass the pension will have paid more than a million dollars.
Value CPP add another 200,000.00 based on 22 years. OAS add another 120,000.00


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## Guigz

You guys are looking at it from the point of view of someone that actually intends to collect the pension or that is already retired. 

If you intend to leave public service or want to retire early, it could make sense to withdraw the pension as cash and invest on your own. If you want to do this, it makes sense to include the entire transfer value in your net worth.


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## MoneyGal

I'm not. I'm saying that if you want to *replace the income stream that is provided by the DB pension in retirement,* you will need to use a different figure and/or different assumptions than are used in the DB plan. You cannot get the same income in retirement that is provided by a government-backed DB pension at the same cost and/or without taking much more risk. Either way, in order to replace the same income in retirement, you are either going to have to (a) add to your cash transfer value, or (b) assume higher levels of risk/return than are assumed in the calculations which support the pension, or (c) some of both. 

Bottom line: you can't simply take the cash transfer value and say, for planning or net worth purposes, that it represents the same value in or out of the pension. It does not.


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## cedebe

MoneyGal said:


> <snip> There's the cash transfer value, which you see on your pension statement. But unless you are going to cash in your pension, that isn't really a very helpful number. <snip>


Is the cash transfer value actually present on gov't pension statements?? I ask this because I work for a community college and I've never seen such an item on my MPP statements. 

I have a few weeks left to decide whether it's worth it to buy back ~9 mos. of service (I have to pay for both the college's and my portions) and I'm still undecided as to what to do after speaking off the record with an actuary. (His recommendation was a 'weak yes.')

Anyway, if I had a better sense of what I'd be getting in commuted value terms, I'd feel more confident in my decision. As it stands, it seems that there are too many factors to accurately determine today what the value 'might' be 10 years from now.

(Sorry for the potential hijack.)


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## Guigz

MoneyGal said:


> Bottom line: you can't simply take the cash transfer value and say, for planning or net worth purposes, that it represents the same value in or out of the pension. It does not.


I am not saying that the cash value is the same as what it would cost to replace the income stream. I am saying that there are situations where the cash value is a more appropriate metric to be included than the valuation of an annuity that would replace the income stream that you would derive from the pension at some point in the distant future.

Let me illustrate my point; suppose that you want to retire early at 40 y/o. You calculated that you need $1.2M to do so. For planification purposes it makes a lot of sense to include your cash value (minus taxes) in your calculations since you don't care about the value of the stream of income 20 years from now. You care about the number that you need right NOW to retire in the present.

@cedebe Cash value is present on pension statements issued by PWGSC


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## MoneyGal

Good answer and good discussion.


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## cedebe

Guigz said:


> <snip>
> 
> @cedebe Cash value is present on pension statements issued by PWGSC


Thanks, Guigz. Lucky PWGSC members... :/


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## steve41

I still prefer the 'net income' measure..... given all your assets (investments, pension/cpp/oas, anticipated salary) and liabilities..... what is the maximum after tax income you can enjoy which will see you out to a particular age (90-95-100) and just run out. A much more useful metric.


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## InvestingForMe

Great answers. 
To the question: _Why would anyone include the calculated value of their pension in their Net Worth Statement?_ 

I think the answer has its roots within the investment industry. in my last couple of years working as an Advisor, I began to sit thru _Head Office_ presentations that told us we should include the market value of a client's pension in our calculation of investable assets. By doing so, we could then create a sales argument for client to have more and more of their investments in the stock market. For example, let's say my client has a $400,000 portfolio which is invested $280,000 (70%) in fixed income(individual bonds/GICs/Preferred Shares) and $120,000 (30%) in the stock market (Fee Account/Mutual Funds, etc.), the client would pay the investment firm, let's say, $3,400.00 per year.
But now if we include the clients current pension, say we value it at $400,000, in the Net Worth Statement and as part of their total investment portfolio (now $800,000), the client's current (actual) investment portfolio allocation would need to be shifted more toward the stock market ($160,000 in Fixed Income, $240,000 in the stock market), thus, increasing the client's annual payment to the investment firm by $2,100 or 61.7%. This is because we were told that the client's pension should be categorized as _Fixed Income_ for the purposes of Asset Allocation. (Also, remember as interest rates continue to decline the theoretical market value of a pension increases, so an Advisor can revisit this process and easily increase their, and the firm's, income.)

I cannot think of any other reason to view one's pension as a brand new asset.


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## MoneyGal

Hey IFM, you should probably eliminate the part of your post that describes how you increase the firm's compensation when you move your clients into higher equity allocations. :02.47-tranquillity:


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## Daniel A.

Thanks for the above explanation this I can understand.

cedebe if your cash number is not on your statement contact the plan admin. they can get you those numbers.

As for buying back time it is very unlikely that any investment could match the return of a government pension, I know there are many factors ie age, years to go, if your guy thinks it is worthwhile than I would go that route.


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## skiwest

I looked at different way. Recently when my wife left a job she was given the option of keeping the pension or being cashed out into a combo of LIRA and RRSP ( as long as she had enough room). Previous to this I had carried the cash /LIRA value in the net worth calc. When they gave me the pension value I plugged that value in as a stream of payments and looked at its effect on reducing the pot of cash required to required. As the value drop from the pension was higher value I had carried we elected to keep it as a pension and reduced the net worth required to retire.

So I treat the pension the same way I treat CPP , a stream of payments per year inflated to the year in which they are received.


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## cedebe

Daniel A. said:


> Thanks for the above explanation this I can understand.
> 
> cedebe if your cash number is not on your statement contact the plan admin. they can get you those numbers.
> 
> As for buying back time it is very unlikely that any investment could match the return of a government pension, I know there are many factors ie age, years to go, if your guy thinks it is worthwhile than I would go that route.


Thanks for your reply, Daniel A. I've talked with the MPP people and they only do the commuted value calculation when an employee quits. I've looked into actuaries and they're terribly expensive, especially since I won't quit anytime soon. I was hoping for some quick-and-dirty formula that I could plug numbers into myself, but it appears that according to the actuary I spoke with and MPP, it's pretty much on par with rocket science...


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## MoneyGal

If you are going to commute the value, but you want the same income stream, then get a quote for a deferred annuity paying out the same amount at your normal retirement age (or whenever). You need an insurance agent, not an actuary. 

If you just want to know the approximate commuted value, then use the formula Oh Great Guru provided earlier in this thread. 

A consulting actuary, ONLY providing an estimate of the commuted value of a public service pension plan, should run you about $600.


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## cedebe

Thanks, MoneyGal.

I tried Oh Great Guru's formula of 180X using my 2011 statement 'as is' and with the estimated monthly increase added in. Unless I ran the numbers wrong, I'd actually be _*behind*_ over $500 if I buy the time back...

Original commuted value: 76,860
CV with buy-back: 83,160
Difference: 6,300
Cost to buy back time: 6,836.71


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## loggedout

I try to include my pension in my net worth calculation to make myself feel "richer". I just count whatever my contributions (and employers) contribution to the pension as the asset value. My employer was a crown corporation and since been privatized, our pension is going from one of the best in the country (PSSA) to a run of the mill DC plan. We have a 3 year period where we are still contributing to the PSSA, after which we transition. I predict a lot of people will leave the company at that time.


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## MoneyGal

loggedout said:


> I try to include my pension in my net worth calculation to make myself feel "richer". I just count whatever my contributions (and employers) contribution to the pension as the asset value. My employer was a crown corporation and since been privatized, our pension is going from one of the best in the country (PSSA) to a run of the mill DC plan. We have a 3 year period where we are still contributing to the PSSA, after which we transition.* I predict a lot of people will leave the company at that time*.


So they can go to...all those other companies that are rolling out new DB plans? :apthy:


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## Guigz

MoneyGal said:


> So they can go to...all those other companies that are rolling out new DB plans? :apthy:


A major incentive of working for a crown corporation or Gov. was/is the DB plan. Without it, many will seek to join the private sector.

@Logged Do you work for CP by any chance?


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## HaroldCrump

Guigz said:


> A major incentive of working for a crown corporation or Gov. was/is the DB plan. Without it, many will seek to join the private sector.


Where a defined, fully indexed, 100% matched, bridge benefit plan will be awaiting them with open arms.
Perhaps, these folks have been working there too long.
Time to step outside and smell the air.


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## Guigz

I don't get why you are being sarcastic.

Obviously, the private sector is not offering DB pensions by the boat load. If you look at total compensation without the Gov. DB in the picture, things might be more favourable on the private sector side.


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## loggedout

MoneyGal said:


> So they can go to...all those other companies that are rolling out new DB plans? :apthy:


No, but for many, it's the only thing keeping them there - for now. The company is private now, having become a subsidiary of a large engineering and construction firm.

These people will go to the highest bidder for their services, or simply retire and become very expensive contractors. Only the ones without options will stay. In all other aspects besides the pension issue, the company isn't that attractive to be a salaried employee of, even in comparison to some other engineering companies without ANY pension plan. I started my career in engineering with such a company so I know both sides of the coin.

And no it's not CP.


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## Daniel A.

There is a fair bit of resentment when it comes to public sector pensions as most of the private sector has been converting to DC if they had a DB.

Total compensation in any company without the DB likely would not be much better, that golden egg is just that.
Very few companies that don't offer pensions care about the issue.

I spent my work life in a profitable company that had a DB and retired, they no longer offer the DB and have converted to DC still better than not having a pension.
My DB does not hold a candle to the public sector pensions fully indexed, bridge, Guaranteed without risk. 

I do wonder if the average public sector worker really understands the real value of their package.
What appears as sarcastic is simply the private sector chocked trying to figure out how they will retire knowing that no matter what it will be very hard to come close to having a guaranteed pension.


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## loggedout

The resentment is understandable but my point was, in my company's case, that the DB pension is the only thing retaining staff dying to leave and with other options. This clearly implies that they understand the value of their DB pension. But when it's over, their other options which will likely not include DB plans or any pension plan at all, will become more enticing in comparison.


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## Daniel A.

Agreed the private sector has now come down to wages and potential for advancement.
Loyalty from either side was lost years ago.
The work place has changed.
Funny thing that as people get down to the two years to go mark the big thing is coasting.


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## marina628

I would not put any pension in net worth you may not live to collect it.I use Investments ,cash on hand and equity in RE and I am very conservative with the estimates on my RE investments.


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## Guigz

marina628 said:


> I would not put any pension in net worth you may not live to collect it.


I don't really think that this is a good reason for not including it in your networth. You include cash in your networth, yet you could easily die prior to using it all up...

In any case, most DB pensions have a minimum payout of 2-5 years of benefits to the heirs in case of death prior to collection. If you have a spouse, there are usually survivor benefits (usually 50% of the pension amount for as long as the spouse lives).


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## Spudd

There's no real point to calculating net worth anyways as far as I can tell, except to look at it and tell yourself you're rich (which I fully admit to enjoying doing).


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## marina628

The bank people want to know every time I update my investment questions ,other than that I am not concerned and most times I guess the answer


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## Square Root

My pension represents about 35% on our net worth and about 40% of our after tax income. 100% to surviving spouse. Why wouldn't I include it? The real question might be why someone calculates net worth. Only reason I can think of to do this in retirement is ego. Oh oh. I should stop doing this.


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## marina628

I am 15 years from collecting a pension so although i know i will get x dollars if I live to collect it , I do not count on it for planning.Of course if i were collecting it now i would consider it as part of the package.


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## OhGreatGuru

The only reason for including DB pension in your net worth estimate is to relieve your anxiety when you read financial articles saying you need to save "X Million Dollars" in order to retire comfortably, because those articles (nearly) always ignore value of pensions.
Otherwise, it's true these pensions have no cash value or estate value, so they should just be a footnote to your net worth calculation.


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## MoneyGal

They do have a (non-tradeable) economic value. The stream of pension income can also function like a form of fixed income in your portfolio, so if you were interested in doing a holistic personal balance sheet and adjusting your asset allocation (for your investable wealth) accordingly, you might want to take the pension and/or the pension income into account. Someone around here wrote a book on that. I think.


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## marina628

MoneyGal that blue book in your photo sits with Doyle Brunson's Super System which he signed for me in 2010 and the Theory of Poker.I have read them all more than once :0).I came to conclusion as long as my ROI on cash games is 120% a day I should be fine .I will then write my own book and open a Poker school with the proceeds :chuncky:


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## Daniel A.

My DB pension is my only income every month, some day I will get use to the idea that I get paid to play.


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## sags

So...........if you have 1,000,000 in cash and you buy an annuity.......is it no longer considered net worth?

For the purposes of divorce or bankruptcy.................pensions certainly have a cash value.

A clearly defined benchmark would be necessary for net worth calculations to have any meaning..........no?


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## Square Root

Agree MG and SAGS. In my case I treat the pension as a FI substitute and put our portfolio into equities. This works pretty well I think given the fact that the portfolio yields close to 4% and the dividends are growing nicely. FI yields are pretty sad at this point.


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## My Own Advisor

To the OP, how to define the value? I'd say after 30 years, "a lot of money" comes to mind


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## fraser

I used the lower or my employer's DB pension cash value (as per my pension statement) and the cost of a deferred annuity.

I did this as part off an analysis of my overall investment and asset allocation strategy. My DB plan is well funded so I view the value as a low risk bond or fixed income portion of my total assets.


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