It is not unusual for someone who has been in a defined benefit scheme for a large part of their career to have pension assets worth more than the house they are living in.
The value of deferred pension benefits is something very few of us really understand, even those of us who work in the financial services industry.
The fact someone’s pension could be worth more than a home they have spent their life scrimping to pay for seems too counter-intuitive for many clients to comprehend.
How can something you get as a perk from work be worth more? It is not that painful to pay for; most people do not even notice the money going out. Surely it is just financial mumbo-jumbo to say they are worth that much? But, of course, it is not. It is just that, for many in workplace DB schemes, the value of the contribution made by their employer is grossly underrated.
A “good” DB scheme provides a pension of a 60th of an employee’s salary at or near retirement for every year of pensionable employment completed. A 40-year career could thus provide a pension of around two thirds of the income the employee was used to receiving while at work. Such schemes are regarded as the gold standard in the world of workplace pensions.
Yes, employees are usually required to pay something towards the cost of such a pension but nowhere near the true cost of the benefit. For a “good” DB scheme, the total annual cost averages out at something like 23 to 25 per cent of payroll. The employer pays the lion’s share of that. And very few employees in such schemes understand or appreciate that.
But here is the thing those people not in workplace DB schemes fail to understand: to get a “good” pension in retirement, something equivalent to the sort of pension they would get from a “good” DB scheme, they need to save something like one pound in every five earned through the whole of their working life.
I do not know what the statistics are on that but I would hazard a guess that someone who did so from the age of 18 to 68 (a typical 21st century working life?) would be pretty unusual.
I certainly do not think many with growing families and a mortgage, or high rental costs, and probably saddled with the task of repaying the price of their higher education, would be in a position to defer a fifth of their earnings year on year. It just does not seem possible.
And yet we once made this “impossible” idea possible through the active engagement of employers in the provision of DB schemes. Schemes that worked real financial magic for generations of British workers. We need to discover how we might engage employers in making the pension magic work once again.
Steve Bee is director at Jargonfree Benefits