# Value of a DB Pension Plan



## Daryl-Manitoba (Sep 14, 2010)

I was wondering if any of you have a good way to value a DB pension plan. Specifically when looking at other jobs without a DB plan, how do you compare salaries between Job A and Job B.

The best I've been able to come up with so far is take the annual amount of my pension at 55 and multiply by 25 to represent a 4% annual withdrawl. I then calculate the monthly investment contribution that I would require to reach that value at a 5% investment return. I got the 5% by taking an annual investment return of 8% and subtracting 3% for inflation (since my salary receives an annual COLA increase and my pension is partially indexed) and management fees.

However this value increases my "Net" Income by around 50%. Is my pension really worth that much?


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## the-royal-mail (Dec 11, 2009)

Annual investment return of 8%?

Uh huh.

A DB plan is golden. If you can get one, take it and hold on with both hands. There's no comparison to doing it yourself. Most people can't even save a few thousand to protect themselves in case of immediate adversity, much less the kinds of savings required to even come close to the offerings of a DB plan.


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## kcowan (Jul 1, 2010)

I would use something like 6% less 3%= 3% these days. Then discount that number by the number of years to 55 or 65. At age 50, my DB pension was worth $750k (immediate payment). Since that time I have drawn down $1100k and expect to do another $600k or so...like RM says, they are golden but only if you are nearing the end (after 45). If you are under 35, it is a long time to wait.


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## steve41 (Apr 18, 2009)

Daryl-Manitoba said:


> I was wondering if any of you have a good way to value a DB pension plan. Specifically when looking at other jobs without a DB plan, how do you compare salaries between Job A and Job B.
> 
> The best I've been able to come up with so far is take the annual amount of my pension at 55 and multiply by 25 to represent a 4% annual withdrawl. I then calculate the monthly investment contribution that I would require to reach that value at a 5% investment return. I got the 5% by taking an annual investment return of 8% and subtracting 3% for inflation (since my salary receives an annual COLA increase and my pension is partially indexed) and management fees.
> 
> However this value increases my "Net" Income by around 50%. Is my pension really worth that much?


rrifmetic does this extremely well. Enter each scenario (salary with no pension, salary with pension) project each out over time either at the same ATI, or amortize (die-broke calc) each. The resulting projections will incorporate income tax over time, inflation and any other financial entities (RRSPs, loans, CPP/OAS....) as one integrated computation.

Overkill for some, but hey, you asked.


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## Four Pillars (Apr 5, 2009)

This might be a bit simplistic, but I would just look at the annual amount of contributions made to the DB by the company and add that to the annual salary.


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## MoneyGal (Apr 24, 2009)

To get an apples-to-apples comparison, you would get the actuarial present value (that is, the value today of a lifetime of payments) of the expected DB pension payments in retirement. 

It is not really an apples to apples comparison to compare stock market investing with a DB pension plan, because the DB pension payments are not subject to market risk. 

You *can* take on more risk to (try to) match the expected payments from the pension plan, but you are then also taking on the risk that you will not meet their payments. 

A true apples to apples comparison would show you how much you need to invest in guaranteed products to produce the same income stream at retirement - an income stream that is guaranteed for as long as you live. 

My main point is that you are not subject to stock market risk when you make DB pension contributions, so whether or not you could potentially "beat" the implied return from the pension contributions is not really the comparison you want to make.


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## Daryl-Manitoba (Sep 14, 2010)

the-royal-mail said:


> A DB plan is golden. If you can get one, take it and hold on with both hands. There's no comparison to doing it yourself.



My wife and I both have DB pensions however, between the two of us we drive 330 km a day to get to and from work (in opposite directions). That equals a ton of gas, wear and tear on our vehicles.

If we both lived and worked in the same town that would clear up a ton of expenses. If there was a situation, this would have to be close as an option as any to matching a DB pension.


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## Daryl-Manitoba (Sep 14, 2010)

MoneyGal said:


> To get an apples-to-apples comparison, you would get the actuarial present value (that is, the value today of a lifetime of payments) of the expected DB pension payments in retirement.
> 
> [...]
> 
> A true apples to apples comparison would show you how much you need to invest in guaranteed products to produce the same income stream at retirement - an income stream that is guaranteed for as long as you live.


Hmm...good point

I'm going to look at that


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## steve41 (Apr 18, 2009)

Again, just looking at the PV of the pension stream doesn't take into account the effect of income tax. The ONLY true measure is the 'apples to apples' after-tax effect of the two options.... the option which delivers the best lifestyle (beer/groceries/gas) after tax.... is the better choice.


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## MoneyGal (Apr 24, 2009)

Except...that's not what he's asking. In this model, tax is a complicating factor which doesn't add to how you model it. 

Of course, if his tax situation changes, his after-tax situation will change. But that is true of any course of action, not just this one. 

In this case, he asked how to model the before-tax implications of a job with a DB pension, and a job with no DB pension. He didn't ask, "how can I arrange my affairs from a tax perspective to deliver the most tax-efficient income over time?" Instead, he is going to have tax-sheltered savings in both cases, so tax becomes a secondary, and I would argue "complicating" factor that does not add to the analysis. 

While I would never argue that tax is not important, and I do think that people need to think in after-tax terms, I also think that when you are constructing mathematical models, you need to be careful to include _all the relevant inputs which allow you to make the comparison effectively_, which is not necessarily the same as including every financial planning input possible. Even a big one, like tax.


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## steve41 (Apr 18, 2009)

There is a continuum stretching from the coin flip to the full blown needs-based modelling approach. You choose to ignore tax and investments, I don't. 

I prefer the inclusive approach (tax, investments, loans, other entitlements...) Pick your poison.


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## MoneyGal (Apr 24, 2009)

How did I ignore investments? (shrug)


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