Net Replacement Ratio (NRR)

A Net Replacement Ratio (“NRR”) is the ratio of a member’s projected pension in the year after retirement to their projected salary in the year before retirement. For example, if a member’s annual pension in the year after retirement is R80,000 and their salary in the year before retirement was R100,000, then this gives a NRR of 80% (80,000/100,000).
Usually a pensioner does not require the same level of income (i.e. pension) as an active employee (i.e. salary) and a NRR of 70% or more is considered sufficient. This is the case due to lower work related expenses like travelling etc, lower payments on debt and having fewer dependents. If your pensionable salary percentage is less than 80% of your Total Cost to Company salary, a NRR of 70% based on pensionable salary may not be sufficient for a comfortable retirement.
The NRR calculation does not take into account any other investments or savings for retirement.
The NRR calculation is based on a number of assumptions and so may differ from projections from other sources due to differences in the
underlying assumptions.

NOTE:

Net Replacement Ratio will be reflected if the “Annual Salary” and “Annual Pensionable Salary” have been populated, refer to Additional Information Person
Net Replacement Ratio will be reflected on the Cash Flow Calculations, refer to Needs Analysis Cash Flows

Refer to the 1st month GROSS PENSION; Post Retirement Cash Flows Card -> View Details -> GROSS PENSION
Calculation: Annual pension in first year of retirement = GROSS PENSION x 12
Example: {408,947.49 x 12 = 4,907,369.88}

Future Value of Annual Pensionable Salary using a rate equal to the salary increase annually
Rate: (3) Increase of monthly cashflows (including annual salary increase)
Number of Periods: Age until retirement
Present Value: (2)Annual Pensionable Salary
Calculation: FV(Rate, Number of Periods,,Present Value)
Example: {FV(6%,44.75,,480,000.00) = 6,511,464.96}

Net Replacement Ratio (NRR)

Calculation: Current pensionable salary percentage = Annual Pensionable Salary / Annual Salary
Example: {600,000.00 / 480,000.00 = 80.00%}

Future Value of Annual Pensionable Salary using a rate equal to the salary increase annually
Rate: (3) Increase of monthly cashflows (including annual salary increase)
Number of Periods: Age until retirement
Present Value: (1) Annual Salary
Calculation: FV(Rate, Number of Periods,,Present Value)
Example: {FV(6%,44.75,,600,000.00) = 8,139,331.20}

Calculation: Net replacement ratio (Pensionable salary) = Annual pension in first year of retirement / Pensionable salary in year before retirement
Example: {4,907,369.88 / 6,511,464.96 = 75.37%}

Calculation: Net replacement ratio (Total cost to company salary) = Annual pension in first year of retirement / Total cost to company salary in year before retirement
Example: {4,907,369.88 / 8,139,331.20 = 60.29%}

Net Replacement Ratio (NRR)

Last Updated on 6 years ago by Tinus Burger