Pension vs. Alternative (Need to know if worth the fight)

[Juicy88]

[Topic is now in Personal Finance (Not Investing) - mod mkc]

Hi forum.

So my employer got rid of their pension plan for new hires (let's say those hired in 2024). The employees hired prior to 2024 received a pension plan that calculates as follows:

Final Average Compensation x Pension Factor x Years of Service
The typical calculation

For those hired after 2014 the retirement plan is a defined contribution of 6% base salary

My question is, how do I calculate what the difference in value is in these plans (assuming I take a monthly pension and retire at 65)

Let's say my Final Average compensation (30 years from now) is $362, 272 (if currently making $200,000 and I assume a conservative pay increase of 2% yearly)
The Pension Factor is 1.45% of Salary
The Years of Service is 35

Compare that against a retirement plan where employer contributes 6% base salary and the portfolio grows at an average 7% rate of return

I know the Pension is going to yield a higher result overall, but I'm just trying to figure out if I can argue a higher than 6% contribution (say 8%) would be considered fair.

Thanks in advance.
any recommended online calculators/models would be great too

[retired@50]

Hi forum.

So my employer got rid of their pension plan for new hires (let's say those hired in 2024). The employees hired prior to 2024 received a pension plan that calculates as follows:

Final Average Compensation x Pension Factor x Years of Service
The typical calculation

For those hired after 2014 the retirement plan is a defined contribution of 6% base salary

My question is, how do I calculate what the difference in value is in these plans (assuming I take a monthly pension and retire at 65)

Let's say my Final Average compensation (30 years from now) is $362, 272 (if currently making $200,000 and I assume a conservative pay increase of 2% yearly)
The Pension Factor is 1.45% of Salary
The Years of Service is 35

Compare that against a retirement plan where employer contributes 6% base salary and the portfolio grows at an average 7% rate of return

I know the Pension is going to yield a higher result overall, but I'm just trying to figure out if I can argue a higher than 6% contribution (say 8%) would be considered fair.

Thanks in advance.
any recommended online calculators/models would be great too

Are you in the "new hire" group or the pension group?

If new hire, then I don't think I'd bother to bring the up the "fair" argument.

I presume you knew the terms of your employment before accepting the job. Just because someone else who has worked there longer is treated better, or differently, than you doesn't change the deal you agreed to.

Regards,

[fabdog]

your base assumption that the employer is open to an argument to improve the contribution from 6% to some higher number for post 2014 hires is likely flawed

When they change was made they likely didn't try and make it match $ for $ with old plan, but reduce cost and uncertainty going forward (which they've changed again for 2024 hires going forward)

You are free to take them whatever numbers you want to calculate, but they likely did some bench marking before rolling out the changed cash balance plan for post 2014. This has been a fairly common occurrence at a number of companies

Mike

[123]

...I know the Pension is going to yield a higher result overall, but I'm just trying to figure out if I can argue a higher than 6% contribution (say 8%) would be considered fair..

They really don't care about what happens to employees, they are just concerned with reducing their costs.

This sounds like its likely a cash balance plan where the employer contributions (the annual 6%) grow in an account based on an interest rate based on something like 30 year treasury which periodically resets. When you retire or leave you get access to the balance and can either purchase an annuity or roll it over to an IRA. There is no stock market type return usually because that would be too much risk for the plan.

[tibbitts]

I know the Pension is going to yield a higher result overall, but I'm just trying to figure out if I can argue a higher than 6% contribution (say 8%) would be considered fair.

Are you asking for your personal account to have a higher match, or would this apply for everyone? I'm guessing the former might encounter some regulatory hurdles but I'm not an expert.

[RetiredAL]

...I know the Pension is going to yield a higher result overall, but I'm just trying to figure out if I can argue a higher than 6% contribution (say 8%) would be considered fair..

They really don't care about what happens to employees, they are just concerned with reducing their costs.

One way for the employer to meet that goal is to get rid of the complainers.

[adamthesmythe]

The whole idea of changing from a pension to a defined contribution plan is to reduce costs.

So being less "fair" (if fair means the same net benefit) is a feature not a bug.

[Kenkat]

We used to get a benefit statement every year at my employer before I retired. I was in a pension plan that sounded fairly similar to the one you described. My employer also discontinued the pension plan and offered a plan like you mentioned where they would put an extra 6% in your 401k every year. That happened around 2008 I believe. New hires after that time got the 6% plan.

They gave existing employees a choice whether to stay in the pension plan or switch to the 6% plan. I noticed on the benefit statement they gave us that they were contributing 11-14% every year for my pension benefit. That pretty much told me everything I needed to know; I stayed in the pension plan and took a lump sum distribution when I retired.

[Doctor Rhythm]

You're better off just asking for a raise, since that just affects you and your employer, not potentially every other employee hired in the last decade.

[Enolacs]

Hi forum.

So my employer got rid of their pension plan for new hires (let's say those hired in 2024). The employees hired prior to 2024 received a pension plan that calculates as follows:

Final Average Compensation x Pension Factor x Years of Service
The typical calculation

For those hired after 2014 the retirement plan is a defined contribution of 6% base salary

My question is, how do I calculate what the difference in value is in these plans (assuming I take a monthly pension and retire at 65)

Let's say my Final Average compensation (30 years from now) is $362, 272 (if currently making $200,000 and I assume a conservative pay increase of 2% yearly)
The Pension Factor is 1.45% of Salary
The Years of Service is 35

Compare that against a retirement plan where employer contributes 6% base salary and the portfolio grows at an average 7% rate of return

I know the Pension is going to yield a higher result overall, but I'm just trying to figure out if I can argue a higher than 6% contribution (say 8%) would be considered fair.

Thanks in advance.
any recommended online calculators/models would be great too

With some rough napkin math I came up with a 15k a month pension vs a 2m portfolio.

You could some SPIA calculators to see how much a 15k pension would cost and compare the difference.

Its certainly notably worse.

[Grt2bOutdoors]

Don’t make assumptions on your career longevity or final average compensation especially since you chose a linear 2% increase. The employer could choose to let you go or keep you but at a lower rate of compensation. That sure would throw any calculation out the proverbial window.

Just save, and keep saving as you can and invest it as soon as you can.

[Onlineid3089]

You can choose to argue anything you want, just be fully prepared for them to not make any changes. Google suggests the 6% employer contribution is already on the high end of normal so unless there is something specific about your location or industry where others are paying more I can't imagine why they'd feel a need to increase it.

[henry]

I know the Pension is going to yield a higher result overall, but I'm just trying to figure out if I can argue a higher than 6% contribution (say 8%) would be considered fair.

There is no "fair" here. Your company is trying to reduce its obligations to retirees, so it was never going to be "fair" or equivalent. The new plan was always designed to cost them less than their current pension plan.

I don't think this is worth fighting over. If you are already in the pension plan, it doesn't affect you. Be glad that you are one of the lucky ones who can stay in the pension plan. If you are a new hire, or are just trying to go to bat for new employees, I guess that's admirable of you to complain to your benefits people, but I'm pretty sure your efforts will fall on deaf ears.

[Juicy88]

Thank you everyone for your response

I guess I should've started the conversation stating that I have the potential to fight for this increase (it has been done within my company in other cities and departments, so that's the only reason why I would think it would possible to fight this fight).

As one of posts noted above, I came up with roughly 14-15k/month via pension or a 2M payout with the alternative.

[Rex66]

If you or your peers deserve a “raise” to retain employees then that’s one issue but it’s really weird you think you need to be treated the same or better than past deals out of fairness.

[Juicy88]

That's not what I'm implying. I know the retirement plan of the past is better and that we would never achieve an equal plan, but I was just hoping to narrow the gap a bit. I'm not expecting to have what they have, but you have to admit it's a very noticeable difference.

[Rex66]

That’s the way for many if not most companies in the US

They all purposely reduced the benefit bc of costs

[retired@50]

Thank you everyone for your response

I guess I should've started the conversation stating that I have the potential to fight for this increase (it has been done within my company in other cities and departments, so that's the only reason why I would think it would possible to fight this fight).

As one of posts noted above, I came up with roughly 14-15k/month via pension or a 2M payout with the alternative.

I'm confused.

Do you work for a local government, or a for profit company?

Regards,

[the_wiki]

It is very hard to value a pension because there are too many variables. Salary progression, number of years worked, company solvency, etc.

The vast majority of new hires will never make it the full 35 years you need to reach the full retirement benefit. Working your whole career at one place is quite rare these days

If you work 5 years and change jobs, that pension might only be worth 7.5% of your final salary. And that salary would be in long ago dollars that are worth less after inflation. $30k in 1994 was a pretty good starting salary. Imagine someone retiring right now and getting a pension based on 7.5% of $43k for their first job out of college. $187 a month here in 2024 really isn't much. Taking the guaranteed 401k money, they can roll it over when they leave and it should grow to a lot more money than $187 check every month - if the pension stays solvent.

Just using your numbers and some quick excel, it looks like pension starts pulling ahead at about 14 years of service. How many people will work that long?

[Doctor Rhythm]

Are you saying that employees at your organization receive different retirement benefits (eg, % employer contribution) depending on their department and geographic location? On the one hand, I suppose that does make it more likely you could successfully argue for equal treatment. However, it also suggests you work for a large organization with a lot of employees, where your voice may not have a lot of influence.

If it were me, I'd put out feelers and get a realistic sense of where I stand in relation to my peers and my superiors. Is this something that many others would push for, or am I the unsatisfied outlier? How do others think of me? Do I have the standing to even bring it up? At my job, my supervisor's supervisor's supervisor's supervisor would be the lowest ranking person who could directly appeal to those who determine retirement benefits.