That’s not exactly how mine worked before a bankruptcy robbed me of it.
Mine was 36 of highest Final Average Earnings in last 120 months, times longevity times a multiplier.
e.g. if I finished on an FAE of $100,000 after 30 years and the multiplier was 1.5%, then my pension annuity would be $45,000, or 45% of my FAE.
The actuarial exercise behind the pension was determined by (IIRC) 5% of my annual pay invested at 3.75% every year for the ongoing liability. In your example, that £600,000 liability is a snapshot that really has a long tail. In short, it is a long term liability, but it also has a long term ability to be covered by a favorable investment environment.
In the States, there are two things (three when things go bad) that greatly affect the DB Plans, and are the reason most companies now have a DC Plan (Direct Contribution, or 401K-type, Plan). One is a thing called 5 yr smoothing, the other is ERISA (a law designed to protect pensions, but which actually kills most of them) and the third is that when things go bad, the Pension Benefit Guaranty Corp (PBGC) assumes the assets at a “mark to market” valuation, which is entirely different than they had been valued inside the Plan. Depending upon timing, and most Plans go bump during negative economic cycles, it further exacerbated the shortfalls.
The 5 yr smoothing seeks to take out the peaks and troughs of the economic cycle, allowing companies to “smooth out” the valuation, and thus funding required, of the assets in the Plan. So, an asset is carried at a value that is not always reflective of it current value, and a company doesn’t have to fund a plan during a down economic cycle and can wait to do it until times improve. Post 9/11, and again Post-2008/09, valuations were devastated and quick acting corporations sought to use that to greatly overstate losses in their plans by showing their mark to market value, much as the PBGC would do if they took it over. This led to many union groups seeking to “freeze” their pensions and to move to a DC Plan. ERISA, in the other hand, does not allow a company to restate prior years liabilities by changing any parameters. However, it also does not allow a union to do it for their own members to help adjust their pension to a more favorable status, and thus make it possible to maintain. This happened to mine. Pilots sought to reduce the multiplier and cap longevity to reduce liabilities, thus, with the stroke of a pen, the pension was much healthier and liabilities reduced. From there, with a much healthier pension, we could either further adjust as necessary or freeze what we had and switch to a DC Plan, with the frozen DB Plan as a retirement backstop. ERISA doesn’t allow this, even when the people whose pension is in jeopardy agree to do it!! Therefore, the company was able to use the Internet bubble of 1999 and the 5 yr smoothing to make it seem like it was very well funded, but then after 9/11, when all hell was breaking loose, especially in the airline industry, the losses piled up, they asked for and received a funding holiday (meaning they didn’t have to fund the pension shortfall for two years) and then bled it to the point that the PBGC stepped in to stop the bleeding any further because it was going to be their liabilities that were increasing.
So, on Dec 30, 2004 (last business day of the year and the last date on which they could avoid rolling into the 2005 Payout limits) they took United Airlines Pensions out of the bankruptcy, assumed the liabilities, and charged United Airlines with a $1,500,000,000 payment against future profits to provide lost funding to the Plan. It had $7.1B in liabilities when they took it over and was about 50% funded when the underlying assets were marked to market.
Pensions in America were a corporate scam to not pay workers upfront and then play the timing of that float in the market for their own good. However, workers actually PAY IN TO THEIR OWN PENSIONS USING THIS DEFERRED COMPENSATION MODEL believing the company is actually investing that money wisely and judiciously and NOT overpromising what they can afford downline when that employee has put in their 30+ years of work. It is immoral that corporations are allowed to walk away from pensions in bankruptcy while executives reap bonuses and some executive reap even larger bonuses for “managing the company through bankruptcy.” My CEO got a $40M payoff for the bankruptcy, then had the balls to ask for it in stock, not cash, because the capital gains tax was lower than income tax!! And, Congress did not lift a finger to help the millions of workers who lost their pensions. Shocker!
Conversely, in Canada, they held a Special Session of Parliament over the rights of Canadian workers working for United Airlines. They demanded that if United wanted to continue to fly in Canada, they would pay employees EVERY PENNY OF THE PENSIONS THEY HAD ALREADY EARNED. To this day, Canadian employees of United are the only ones who kept their pension! THAT is what a moral and dignified country does for its hard working citizens when corporations try to leverage their hard earned and contractually promised money!!
So, at age 43 and a required retirement age of 65, I had to start my retirement planning all over again, almost from scratch, because the $170,000 of UAL stock I had in my retirement, that I could not sell because it was part of an ESOP(!!!) became worthless and my pension went from being planned at tens and tens of thousands at retirement to about ten from the PBGC....if they are still around when I retire, as they have no govt funding and the monies are not guaranteed!!
If you did some back of the envelope math in 2005, I think it was determined that for pilots at about 40 yrs of age at Plan termination, with a 10% Stock market return you could recoup your losses if you maximized every form of retirement savings available. However, for every year older, the picture got worse and worse, and that was at the max achievable...and 2008/09 took care of anything even approaching that for most people.
DC Plans are the way to go for new workers as they are portable, not kept inside company treasuries, and, although not a great thing for everyone, their investments are controllable by the employee not the employer. And, for those who bothered to read this far, a simple
Three Fund Portfolio provides simple and easy to understand diversification to weather almost any storm.