Understanding what pay rise I'd need to beat my employer's pension contribution

[blearyeyedmonster]

I work in systems development for a university IT department, and I'm in the University Superannuation Scheme (USS). My employer contributes 21.6% of my salary to the scheme. I'm looking around for a new job, and saw one today with a multinational company that interested me, but the employer only contributes 3% of salary to their scheme. I don't know what the salary is, because the job spec doesn't say. It may be negotiable. But would I be right in thinking it would need to be at least 18.6% above my current salary to break even? (Assuming everything else is equal, which obviously it probably isn't because USS has a Defined Benefit element to it and zero fees, whereas the potential new employer's pension probably doesn't, and I'd probably get get less annual leave with the new employer, etc etc).

Recent leavers making similar moves have got up to 50% pay rises, so it's definitely worth looking, but it's helpful to understand where the break even point approximately lies.

So to calculate your overall package (current salary + pension) you need to multiply your annual salary by your employer's pension contribution rate and add it to your salary.

Say your current salary is £20k:

20,000 x 0.261 = £5,220
£5,200 + £20,000 = £25,220

To work out how much your new salary needs to be if you know the new employer's pension contribution (3%) you need to divide your current overall figure by 1.03

So £25220 ÷ 1.03 = £24,485

So my current salary is just over £57k, so the overall package is that number multiplied by 1.261, which is approx 72k. Dividing that by 1.03 gives me just under £70k.

Thanks, that's helpful..Now I just need to work out what my degined benefit schemebis worth relative to whatever pension the new employer has, and to put a price on each day's leave. (I already suspect I'm going to talk myself out of applying before I get to the end of this process. I think it's a US company, so the leave may well be dire in comparison to the uber-generous 35 days I get currently).

I don't think its as simple as that, as she's currently in a defined benefit scheme, so the employer's contribution does not necessarily match what she will gain from the scheme at the end.

I don't know how to work it out, but a defined benefit scheme is worth loads, and a defined contribution of 3% is worth diddly squat.

Defined benefit scheme pensions are rare now, and not comparable with defined contribution pensions. It's what keeps me in the NHS...though it's not so appealing now it's linked with state pension age and will probably go up again.

As an example, in the NHS, under the 2015 pension scheme, you contribute a monthly amount (at 57k you would contribute 12.5% of your pre tax salary each month), and the NHS pays 20.6%. But this has no bearing on what goes into your pension pot: it's a defined benefit scheme where each year 1/54th of your salary for that year goes into a pot. So if you earn 57k, that's £1055 in a pot for that year. This is guaranteed and goes up each year with something (not quite inflation, can't remember what). When you draw your pension, you are guaranteed to have that income every year til you pop your clogs.

Defined contribution pensions I don't know that much about, but they aren't guaranteed and it depends on how well invested they are etc.

Does your current employer have anyone you could speak to to understand how your current pension works?

Do keep in mind though that not all the employer contributions go to your pension - a lot of it is going to clear the (huge) historic deficit in the fund. The good thing about USS is the certainty, which is difficult to quantify. I'd just see what you can get privately, hopefully as you say it will be a big enough pay rise you don't need to worry.

Thanks. It's frustrating that so many employers don't put the salary range and full package details in the job ad. I understand why, if it's negotiable, but applying for jobs takes a huge amount of time and I want to know whether it's worth bothering. (I already turned down one job this year after interview because they couldn't match my current package).

Will they be paying you a US salary in USD?

It's highly unlikely any DC scheme will match USS, unless you double your salary.

The amount you and your uni pay in is irrelevant in a DB scheme like USS - how come you're not aware of this?

Eh? Why would a university in the Uk pay in dollars?

No, I doubt it. I'd be based in London.

It's highly unlikely any DC scheme will match USS, unless you double your salary.

@titchy Why double (i.e. 100% increase) as opposed to, say, 50% or 25% increase? Has anyone done those calculations to prove it, or is it different for every individual depending on their contribution history?

The defined benefit portion of the USS only applies to the first £40k, with the remainder being defined contribution.

Also, the DC portion is based on career average salary, rather than final salary, which doesn't bode well for me because I was 0.5FTE for several years.

The 21.6% doesn't really help you work out anything. As others have said, DB pension don't work that way, so ignore that number completely.

You need to calculate the annual increase in your pension (which with USS is not easy). Simplest way would be to look back over the annual statements for the past few years and work out what each year's increase was as a percentage of your annual salary. It won't be exact, but should give you a reasonable idea.

Re the part time working - check the details of that. It may not be as bad as you think. The USS scheme is weird, so this many not apply, but most DB pensions work in 1 of 2 ways.

Option 1: final salary. If you work part time your pension calculated based on the WTE salary, but if you work part time you earn part years.

Option 2: career average. Your pension is calculated separately each year, then all those mini-pensions are added together when you retire.

Either way working part time should only reduce your pension for the years you did those hours - it doesn't actually drag your whole average salary down.

But that part doesn't really affect your current decision. Just useful to understand it for future planning.

You might want to look into turning down your employer scheme and starting your own Stakeholder Pension. Banks can be a bit cagey about those which suggests that they might be quite good - for the purchaser. But I don't know.

My bad.
I thought she was considering working for a US company.

Well it'll depend on how many more years till you retire. If you've still got 30 years to go, then you'd need to work out the £ required to get you those 30 years of service (assume you've worked FT that would give you a pension of 57,000 x 30/80). If you've only got 5 years left till retirement then the loss in pension is much less and you'd only nees 57k x 5/80.

How big an annuity pot would you need to purchase an index linked pension of the amount of pension you'd lose by moving out of USS? Then google annuity costs. That gives you a ballpark.

Also, the DC portion is based on career average salary, rather than final salary, which doesn't bode well for me because I was 0.5FTE for several years.

No USS accrues at your full time equivalent salary, not your pro-rated salary. But the years you were PT contribute part years to your total service which your pension is based in.

Final word from me - you should be final salary up to about three years ago, career average from then till retirement. And the DC bit kicks in at a higher salary I think, again only for contributions since the scheme was amended a few years ago.

And miss out on the free money from the employer contribution? (And some employers also have a deal with the pension company that gives reduced fees.)

And that doesn't address the problem of whatv salary increase would offset the loss of the current pension.

F