Should You Include Your Pension in Your Net Worth?

Net worth and your pension

Your question is a good one, Ed, and the short answer is: there’s no single accepted method. A defined benefit (DB) pension is best thought of as a guaranteed income stream rather than a conventional asset you can spend today. Unlike a salary, which you must actively earn by working, a pension represents promised monthly income at a future date that will continue for life and, in many plans, can provide survivor benefits.

How to calculate your net worth in Canada

Net worth is a straightforward but vital financial metric: list all assets, subtract all liabilities, and the result is your net worth. As assets grow or debts are paid down, net worth increases. For many people, tracking net worth is a core part of financial planning because it provides a snapshot of financial strength and progress toward long-term goals.

What is the commuted value of a pension?

One common way to express a pension’s value is the commuted value. A commuted value is the present-day lump-sum equivalent of the future pension payments. It’s calculated from the expected monthly pension amount, the time until payments begin, and prevailing interest rates. Your annual pension statement may show this figure, or it may show alternate values such as contributions plus interest.

If you leave a workplace before pension benefits commence, some plans will allow you to take the commuted value as a lump sum. Depending on plan rules and jurisdiction, that lump sum might be transferred into a locked-in retirement account (LIRA) or be paid out as taxable income. Not all plans provide a commuted value on statements, and the way statements present contributions or account balances can understate the true value of a DB pension—especially where employer contributions are not reflected.

Should you include CPP and OAS?

The Canada Pension Plan (CPP) and Old Age Security (OAS) are government-provided defined-benefit programs and, in principle, are similar to workplace DB pensions. Nevertheless, most people do not list CPP or OAS as assets on a traditional net worth statement. That said, you should recognize them when planning retirement income because they represent reliable future cash flows that materially affect spending needs and investment decisions.

Including your workplace DB pension on a net worth statement is possible, but difficult. Valuation depends on whether you use commuted value, actuarial present value, or a simpler proxy such as contributions plus interest. Each method produces a different number, and some will understate the pension’s true value if employer contributions or inflation adjustments aren’t included.

How do interest rates affect pension payouts?

Interest rates are central to valuing a pension. Present values move inversely to rates: when interest rates fall, the commuted value of a pension rises; when rates rise, the commuted value falls. That’s because a higher assumed investment return means you need a smaller lump sum today to produce the same future income. Recent increases in interest rates have therefore reduced many pensions’ commuted values, even for members who continued to earn additional service.

Some investors treat a DB pension as if it were a bond or fixed-income holding—because it provides reliable, long-term cash flows. This framing can influence asset allocation: a pensioner might hold a higher proportion of equities in personal savings, reasoning that the pension reduces overall portfolio risk. That approach can be sensible, but it has limits. A pension’s promised future income is valuable only if you can tolerate the short-term volatility of a more equity-heavy portfolio. If market drops prompt panic selling, the theoretical stability of a future pension does not prevent real losses in liquid holdings.

So, should you include your pension in your net worth?

There’s no single right answer. You can include your pension as part of overall wealth if you choose a consistent valuation method—commuted value for comparability, for example—but be transparent about assumptions. Simply summing future payments overstates value because it ignores the time value of money. Conversely, listing only current account balances or contributions may understate the pension’s importance.

At minimum, treat your pension as an important footnote on your net worth statement and a key component of retirement planning. Understanding its value, how interest rates affect it, and how it interacts with CPP, OAS, and your other assets will help you set an appropriate investment strategy and retirement income plan.

Read more from Jason Heath:

• DC plans once you retire: What do you do with them?
• Understanding your company pension plan
• Planning for retirement with little or no savings to draw on
• Should you collect CPP and OAS while working in your 60s?