# How valuable is a defined benefit pension



## KTM (12 Aug 2013)

Hi All,
I have been offered a new job which i am very exited about, however the new company operate a defined contribution pension which is 5% employer funded. The scheme with my current employer is defined benefit with 10% employer contribution ( I've been enrolled in this for 8 years and i have 33 years until retirement).

Even though the new employers contribution is smaller then the current, the overall package is still better. My question is 
1. How valuable is a defined benefit pension
2. Are there any pit falls i should watch out for moving from DB to DC

Thanks.


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## orka (12 Aug 2013)

KTM said:


> The scheme with my current employer is defined benefit with 10% employer contribution


This doesn't really make sense. The whole point of a DB scheme is that it is the benefit that is promised to you, not a particular contribution. For example, if the scheme promises, say, 50% of average salary as the defined benefit, what happens if the employers 10% doesn't add up to enough to pay the benefits? Normally with a DB scheme there is a periodic review of funding and the employer is advised what % contribution needs to be made to ensure the contributions are sufficient to pay the promised benefits. Obviously depends on any funding issues and the level of benefits but 10% sounds low as a contribution level for a DB scheme. 



KTM said:


> 1. How valuable is a defined benefit pension
> 2. Are there any pit falls i should watch out for moving from DB to DC
> 
> Thanks.


Obviously depends on the level of benefits - typically DB schemes provided 50%-67% of final salary as the main benefit - is that what your current employer offers? A well-funded, sure-to-be-there-when-you-retire DB scheme offering a % of final salary is a very valuable benefit (would probably cost you at least 15%-20% of salary pa even if you could buy such a product separately) but given how long-term that outlook is, you have to consider what happens if the scheme is wound up.


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## Brendan Burgess (13 Aug 2013)

Hi Orka

I presume that she meant "10% employ*ee*" contribution 

KTM

Defined Benefit schemes used to be great. But they have huge disadvantages.


Most are underfunded, which means that there is huge uncertainty over whether they will actually pay the benefits or not when you retire. Even if the company is rock solid now, it might suffer over the next 33 years
If there is a problem with the fund, those who have retired get paid in full. Those who are still working share the deficit between them.
If you leave at any stage, you may not get your fair share of the benefits.
So with 33 years of working life ahead of you, you should not make your career decision based on such an uncertain outcome.


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## orka (13 Aug 2013)

Brendan Burgess said:


> I presume that she meant "10% employ*ee*" contribution


Hopefully KTM will clarify but I don't think so - as she says "Even though the new employers contribution is smaller then the current, the overall package is still better" - ie the new employers contribution is 5% whereas the current is 10% so she is trying to decide if losing the 5% contribution is worth the better new package - the question wouldn't make sense if talking about employee contributions.


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