Author Topic: Accounting question - Pension as an asset  (Read 4038 times)

warfreak2

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Accounting question - Pension as an asset
« on: February 22, 2014, 06:33:08 AM »
As a public sector teacher in a UK university, I have what appears to be a very nice pension scheme - I pay in about 7% of my salary (percentage is determined by salary), and my employer makes a contribution of 14.1% (fixed percentage) of my salary. However, the eventual payout is determined by an average over the final few years' salary, and the length of service, rather than total contributions.

I'm trying to record my income and expenses in gnucash, and I set up an account for my pension under "Assets". My income gets split into different accounts, including my current account, tax expenses, and the pension account. My question is, does it make sense that the "total assets" figure includes the actual total amount paid into the pension account, when that isn't used to calculate its true value? Otherwise, how should it be recorded as an asset?

arebelspy

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Re: Accounting question - Pension as an asset
« Reply #1 on: February 22, 2014, 08:36:45 AM »
There are a number of ways to account for it, and, just like many things in the personal finance arena, up to you.  Since it's a number that doesn't matter (net worth) but is just for your own pleasure, pick whatever makes you feel warm and fuzzy.

I personally don't even count my pension (but it'll be pretty small when I finally take it 20-30 years from now, maybe 5-9k annual or so in real dollars).

My favorite two methods though for those that do count it is to either:
1) Take the NPV of the income stream, or
2) Price our a comparable annuity (in this case a deferred annuity) from an insurance company and value it at that (market) price.

I don't favor the "count up the contributions" method, because I don't think it gives you an accurate value.  But if you want to do it, it has some advantages (simplicity, for example). Like I said, choose whatever you like.  :)
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Nords

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Re: Accounting question - Pension as an asset
« Reply #2 on: February 22, 2014, 07:40:42 PM »
Otherwise, how should it be recorded as an asset?
What Arebelspy said, because once you've vested in that pension (a very bond-like asset) then you should adjust the rest of your assets to balance out your overall asset allocation.

Milevsky's "Are You A Stock Or A Bond?" book uses vested university professors as a prime example of people who should invest the rest of their assets heavily into stocks or real estate.  He stops just short of saying that "Asset allocation is irrelevant for professors since they have little reason to stop working in the first place".  I guess he'd know.

Your question is exactly why my spouse and I invest in anything but bonds.  When we use the NPV of our military pensions, they're already >90% of our AA.

warfreak2

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Re: Accounting question - Pension as an asset
« Reply #3 on: February 23, 2014, 04:19:26 AM »
That's a good insight, thanks!

Since the pension income will be index-linked, is the NPV just (life expectancy - retirement age)*(annual payout)? Since each payout should be worth the same in today's money? Or should I assume a better rate of return than inflation?

The annuity market searches I found require me to be 55+. It's almost as if the assumption is that nobody bothers about their pension until they are too old to do anything about it.

Nords

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Re: Accounting question - Pension as an asset
« Reply #4 on: February 23, 2014, 06:09:20 PM »
That's a good insight, thanks!

Since the pension income will be index-linked, is the NPV just (life expectancy - retirement age)*(annual payout)? Since each payout should be worth the same in today's money? Or should I assume a better rate of return than inflation?

The annuity market searches I found require me to be 55+. It's almost as if the assumption is that nobody bothers about their pension until they are too old to do anything about it.
Yep.  Or you could use the interest rates on TIPS or I bonds. 

I'd be conservative and assume a rate of return equivalent to inflation.  Over the last 12 years, the reality is that my pension has been adjusted to inflation while my retirement spending has declined.

http://the-military-guide.com/2011/03/17/present-value-estimate-of-a-military-pension/