Personal Finance

Value of a defined benefit pension when negotiating salary?

  • Last Updated:
  • Aug 1st, 2019 10:14 pm
[OP]
Jr. Member
Oct 31, 2017
109 posts
68 upvotes
Toronto

Value of a defined benefit pension when negotiating salary?

Hi,

I'm not sure if this should be posted in careers, but currently I have a defined benefit pension at a bank and thinking about joining a different company who has defined contribution pension.

I'm just wondering how do I value the DB pension when negotiating salary? I've read 10-15% + current salary to even consider a switch on reddit, but I'm not sure how they calculated that.

Say if my current salary is 60K + DB pension where the other company is offering 65K + DC contribution.

When is it worth it to switch? Does my age matter (I'm in late 20s)?

Thanks for any inputs.
You miss shots you don't take.
49 replies
Member
Nov 28, 2017
426 posts
343 upvotes
So is this about decision or negotiation? Because you should be negotiating high even if the value in a change is already there.

In terms of a decision, that gets far more complicated. In general I would give more weight to opportunities for advancement and salary growth and a good work environment than the benefits. This young you can plan out a decent retirement either way.

Putting a dollar figure on it would require looking at how much you and your employer contribute to each plan, how reliably the DB plan is funded, investment options on the DC plan, how the DB plan vests and options when leaving early, and what the benefit formula is for the DB plan. And then of course other factors like when you want to retire and how, life expectancy, etc.

One demotivator for leaving is that many DB plans figure out your benefit level in retirement based on salary when you leave employment (plus any inflation adjustment). So if you got big pay jumps at the DC job, they would increase the value of contributions you had already made, not just future ones.
Deal Expert
Aug 22, 2011
28779 posts
14590 upvotes
Ottawa
I'm satisfied that my company matches 100% of my contribution a max of X% of my annual salary.
Sr. Member
Jan 1, 2017
627 posts
431 upvotes
Other things to consider are:
1. How long have you been with the DB employer?
2. Ignoring the DB portion what is the salary increase?

If it’s only $5k unless you get more opportunities or different experience it’s not worth it.
Sr. Member
Feb 2, 2007
621 posts
391 upvotes
GTA
You could consider the DB to RRSP room factor mandated by CRA in calculating the pension adjustment:
Say your DB provides a pension of 1% x length of service.
PA = 9 x 1% x annual salary - $600.

If your DB pension is 2% x length of service (the maximum allowed by law):
PA = 9 x 2% x annual salary - $600.
You may recognize above where the RRSP contribution room comes from.

For the DC pension, the PA is equal to the contribution.

Regarding your age, according to actuarial calculations, for a young person, the accumulated DB pension is worth less than the 9x factor, and for a person closer to retirement, the accumulated DB pension is worth more than 9x.
Deal Addict
Mar 3, 2018
1001 posts
766 upvotes
GTA
The added benefit of a DB is the potential to retire 10 years earlier if desired and still have a secure retirement. Especially if you start contributing in your 20’s. The value you place of early retirement should factor into your decision as well. I know many DB retirees who retired at 55, but never met anyone relying only on a DC who retired at that age.
Deal Addict
Jan 9, 2010
1274 posts
531 upvotes
As a rule of thumb the pension alone is probably worth at least 30-35% of your base depending on your plan and its details (level of contribution, vesting percentages, early retirement penalties etc.). In addition, many places that offer DB plans also offer post-retirement benefits, so that's another big chunk of compensation.

This is why they're often referred to as golden handcuffs.
Deal Fanatic
Feb 15, 2006
8283 posts
2560 upvotes
Toronto
DB is worth much more than DC.

But at your 20's, the work, advance opportunities, hours and flexibility (comes in to play when you have family) and the overall compensation package (vacation, medical for family, etc.) all need to be considered. DB or DC is just one part of the equation.
Deal Addict
Dec 12, 2009
3455 posts
1300 upvotes
Toronto
nevyn1234 wrote:
Jul 26th, 2019 3:47 pm
In terms of a decision, that gets far more complicated. In general I would give more weight to opportunities for advancement and salary growth and a good work environment than the benefits. This young you can plan out a decent retirement either way.
And salary growth is a tricky one. I thought it was generally accepted that the quickest way to bump up your salary was to switch employers.
If you are getting different credit scores from different sources please post them here:
Comparing the consumer accessible credit scores
Deal Addict
Dec 20, 2018
1615 posts
1229 upvotes
dimlight1 wrote:
Jul 26th, 2019 3:12 pm
Hi,

I'm not sure if this should be posted in careers, but currently I have a defined benefit pension at a bank and thinking about joining a different company who has defined contribution pension.

I'm just wondering how do I value the DB pension when negotiating salary? I've read 10-15% + current salary to even consider a switch on reddit, but I'm not sure how they calculated that.

Say if my current salary is 60K + DB pension where the other company is offering 65K + DC contribution.

When is it worth it to switch? Does my age matter (I'm in late 20s)?

Thanks for any inputs.
DB pensions are not all good, many DC pensions are better in terms of $$ you actually get. Eg I get 15% lump sum DC contribution regardless of how much I contribute. Many DB plans (if not all) are less
Deal Addict
Dec 20, 2018
1615 posts
1229 upvotes
Arrgh wrote:
Jul 26th, 2019 5:21 pm
DB is worth much more than DC.

But at your 20's, the work, advance opportunities, hours and flexibility (comes in to play when you have family) and the overall compensation package (vacation, medical for family, etc.) all need to be considered. DB or DC is just one part of the equation.
Why do you think DB is worth more than DC?my DC plan is a lot better than any DB plan that I've seen

There's good and bad DB plans out there just like DC plans
Deal Addict
Mar 3, 2018
1001 posts
766 upvotes
GTA
StatsGuy wrote:
Jul 27th, 2019 2:23 pm
Why do you think DB is worth more than DC?my DC plan is a lot better than any DB plan that I've seen

There's good and bad DB plans out there just like DC plans
A 15% DC would be the minimum you would need if you invested wisely to get close to a DB. A typical DB will pay up to 70% of your best income years indexed to inflation. You never have to worry about out living your money like a DC. Run the numbers and you will see for example a DC needs to have assets of up to $2M to offer similar income and inflation protection on a $100K final salary.
Penalty Box
Aug 11, 2005
4124 posts
1357 upvotes
DaveTheDude wrote:
Jul 27th, 2019 2:54 pm
A 15% DC would be the minimum you would need if you invested wisely to get close to a DB. A typical DB will pay up to 70% of your best income years indexed to inflation. You never have to worry about out living your money like a DC. Run the numbers and you will see for example a DC needs to have assets of up to $2M to offer similar income and inflation protection on a $100K final salary.
Lots of generalizations and assumptions here. What does 15% dc plan even mean?
Political avatars and signature are not permitted.
Deal Addict
User avatar
Jan 4, 2009
3733 posts
1493 upvotes
on the links
StatsGuy wrote:
Jul 27th, 2019 2:22 pm
DB pensions are not all good, many DC pensions are better in terms of $$ you actually get.
Shoo! Go away with your generalizations!

As someone who's retired, I actually have empirical insights on DB pensions. If you can get one, hang onto it and keep contributing. I was in the private sector with a 2% DB plan, and it had a full payout at 80 (age+ years of service).

Now I play golf in the summer, and travel in the winter. Life is good.
Deal Fanatic
Nov 24, 2013
5638 posts
2243 upvotes
Kingston, ON
Luckyinfil wrote:
Jul 27th, 2019 4:55 pm
Lots of generalizations and assumptions here. What does 15% dc plan even mean?
15% would refer to combined contribution rate (employee+employer) as a % of salary. Part of the reason DB plans are able to be so “generous” is the sheer amount employee+employer are putting in as contributions.

To match that kind of retirement income (70% DB of $100k salary) though it depends a lot on your safe rate of withdrawal assumptions and investment risk tolerance. I feel 4% withdrawal rate is sufficiently conservative, particularly if you have keep your DC or RRSP retirement funds invested in something that at least keeps up with inflation. If you factor out the bridge benefit in many DB plans that ends at 65, post-65 you’d only need ~$1.45M of capital at 4% withdrawal rate to hit the ~$58k of DB income target.

Top