How valuable is a public sector pension?

S

Shawady

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In the light of pending increased pension contributions for public service workers, I was wondering is there anyone that can give an unbiased view on how valuable a ps pension is?

The majority of public sector employees contribute to their pension but are not entitled to a state old age pension so their contribution will only make up the difference between the two. However, they will be entitled to a lump sum of 1.5 times salary after 40 years service.

I do not want to turn this into a private versus public sector debate. I would just be interested in the view of someone with some expertise in pensions. Is it the case that for ps workers on low to middle income salaries, their pension is not as great as it made out in the media?
 
As far as I can see the problem is in generalizing in order to compare. Its doing to depend very much on the specifics of each person. The PS pension is based on years of service and final salary. But not everyone will have full service, or a full salary. Equally in the private sector few people will have 40 yrs service with the same company and many won't have maximized their contributions over the years. Also some companies also contribute to their employee pensions to. Also people will buy back years in public sector or increase their contributions in the private sector. Many that will combine public and private pensions.

So you'd have to come with a specific scenario and look at that.
 
Lets just clear up some issues:

It is muddying of waters when people say that it "generalises" if public servants don't have the full 40 years service- many opt out early voluntarily anyway, there is the option to "buy years" if service is not long enough- and from their perspective worst case scenario they have to use an AVC scheme like the rest of us.

To take the AVERAGE public sector worker whom amasses full service through all means available- it would require a private sector worker to commit to paying 22% of gross salary every year if this worker spent the same 40 years in employment.

The main advantages of the public sector pension are:

investment returns i.e. risk do not come into it (or at least only for their AVC-if they have one)- this is a massive advantage especially in the current investment climate
Contribution levels are at signifigant reductions to those required by private sector workers
In retirement if there is any further upward bench marking- these retirees see the benefit

To be honest the public sector pension is the rolls royce of pensions, while in general the private sector must "drive" whatever pension they can afford (usually somewhere between a Fiat 127 & a Nissan Micra!!)
 
Very rough estimate - it would cost 35% - 39% of pensionable salary each year to provide this pension. Thats including member contributions.

The most generous thing about this scheme is the salary linkage. Am only assuming salary increases of 2.0% above inflation - they have been much higher than this in recent times.

A very very generous DB scheme in the private sector would be similar to public sector but maximum pension increases of CPI to a max of 5% - which would cost 24% - 28%.

Majority of schemes in private sector would have increases at all , this would cost 16% - 20%.

Of course Private sector also have the problem of recent investment performance, so am ignoring that.

These all assume a retirment age of 65 - would be more expensive again for an earlier retirement age.

And of course for DC schemes, employers contribute an average of 6% of salary!
 
Yellow Belly said:
It is muddying of waters when people say that it "generalises" if public servants don't have the full 40 years service- many opt out early voluntarily anyway, there is the option to "buy years" if service is not long enough- and from their perspective worst case scenario they have to use an AVC scheme like the rest of us....
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Its very expensive to buy back years, they may not be able to afford it, or buy AVC's. That is the worse case scenario. To assume all Public sector workers have full 40yrs service is generalizing. Maybe 95% have 40yrs maybe its 50%. I have no idea.
 
Could someone clarify this for me?

1) If a private sector employee on a defined benefit scheme , say a bank official, retires with full service, does he/she get a pension equal to 2/3 of final salary plus a lump sum of 1.5 times final salary plus entitlement to Contributory Pension at 65?

2) If the salary of the bank official's post is increased, due to National Pay Agreement, say 3% - is that 3% passed on to the pensioner?

Thanks.
 
It probably depends on the specific details of that pension. I can't imagine many in the private sector do increase though.
 
Slim said:
Could someone clarify this for me?

1) If a private sector employee on a defined benefit scheme , say a bank official, retires with full service, does he/she get a pension equal to 2/3 of final salary plus a lump sum of 1.5 times final salary plus entitlement to Contributory Pension at 65?
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Some detail on bank pensions - which have been changing in recent years - in this Indo article:
http://www.independent.ie/business/...-ireland-pensions-row-looks-near-1203500.html

I'm not sure what the relevance is of the details you post, though - you're not under the impression that's what public servants get, are you?

Slim said:
2) If the salary of the bank official's post is increased, due to National Pay Agreement, say 3% - is that 3% passed on to the pensioner?

Thanks.
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Index linked, but not linked to salaries of serving staff, it looks like. Again, it probably depends on the specific bank and scheme.
 
Slim said:
Could someone clarify this for me?

1) If a private sector employee on a defined benefit scheme , say a bank official, retires with full service, does he/she get a pension equal to 2/3 of final salary plus a lump sum of 1.5 times final salary plus entitlement to Contributory Pension at 65?

2) If the salary of the bank official's post is increased, due to National Pay Agreement, say 3% - is that 3% passed on to the pensioner?

Thanks.
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The max pension woudl be 2/3rds pension - the pensioner woudl have the option to covert some of that pension to a lump sum - it woudl not be in addition. The Public Sector pension is 40/80ths plus a lump sum. Works out at about the same.

The 3% is not passed on to the pensioner - there is no salary linkage. The most generous scheme would be linked to CPI at a max of 5%.

By the way - very few banks offer these generous terms for new employees any more.
 
Thanks for the replies. My purpose is to inform myself on the actual situation, not simply accept IBEC's spin on public pay and pensions as so many commentators seem to have done. The scheme as described in the article, entailed a pension of 2/3, with a pension contribution of 2.5%!

The Local Government Superannuation Scheme, which applies to all local authority and HSE staff as well as others, provides for a maximum pension of 50%, based on a contribution of 6.5%. It is slighty complicated by the changes in 1995 but the end result is the same.

Now it seems public sector employees are going to get penalised for the "gold standard" pension which people think they enjoy. Clearly, the public sector pension scheme is inferior to the traditional DB scheme operated in the private sector. THe public sector is a soft target which has been undermined by clever spin by IBEC and many journalists and commentators, Pat Kenny and eddie Hobbs to name but two. Unfortunately the ICTU and the individual trade uniosn could not either get themselves together to refute these claims or else they were not afford the column inches given the IBEC stance. It's disgusting!

Why not increase the Income Levy, so all pay?
 
Private Sector Defined Benefit schemes (where they still exist) will typically have an accrual rate of 1/60th of Salary for each year of service. So after 40 years service you could get a total pension of 2/3rds. You will typically have the option to surrender part of this pension for a tax-free lump sum up to 150% of Salary. If you take the 150% tax free, then the residual pension will be approx 50% of Salary.
You cannot get a pension of 2/3rds + 150% tax free lump sum. This would exceed Revenue limits.

As regards increases in pension, these are generally not guaranteed but at best might be in line with CPI (but often capped at 3% or 4%). But many schemes will have no indexation of pensions in payment. It is this indexation of pension in line with salary for the grade that make the Civil Service pension such a valuable (and expensive) benefit, particularly in the light of recent Benchmarking awards.
 
Slim said:
Thanks for the replies. My purpose is to inform myself on the actual situation, not simply accept IBEC's spin on public pay and pensions as so many commentators seem to have done. The scheme as described in the article, entailed a pension of 2/3, with a pension contribution of 2.5%!


?
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The 50% pension plus lump sum works out the same as a 2/3rds pension. Only the very best DB scheme woudl give this. The "rolls royce" part of the pension is the salary linkage - no private sector schemes woudl give this. Most have no pension increases.

Yes the contribution rate is 6.5%. I assume the 2.5% figure came from the fact that 6.5% is based on "pensionable salary" for a post 95 ps employee. So for a salary of €40k you would pay 6.5% on €16,000 approx - so about 2.6% contribution rate. Would differ as to the salary of course. And that is the gross contribution - tax relief taken off that also.
 
Don_08 said:
The 50% pension plus lump sum works out the same as a 2/3rds pension.
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Actually, that's not [or no longer] quite true - and Revenue will allow relief on AVCs which bring you over the 50% in recognition of the 2/3 often being somewhat better.

Lots of private sector DB schemes have some indexation, but not the current salary linkages.
 
Dreamerb said:
Actually, that's not [or no longer] quite true - and Revenue will allow relief on AVCs which bring you over the 50% in recognition of the 2/3 often being somewhat better.

Lots of private sector DB schemes have some indexation, but not the current salary linkages.
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Very true - just trying to make a rough comparison. Can public sector employees also make AVCs?
 
OK, thanks to all who have answered. So, the 50% DB public sector pension equates approximately to the private sector DB pension of up to 66%, when you take the option to convert to lump sum into account.

Now, surely the private sector pensions will be increased in line with national pay awards? The era of re-evaluation upwards of public sector roles is long over.

Also, what is the situation regarding the Contributory Pension + the private sector pension?

Slim
 
Slim said:
OK, thanks to all who have answered. So, the 50% DB public sector pension equates approximately to the private sector DB pension of up to 66%, when you take the option to convert to lump sum into account.

Now, surely the private sector pensions will be increased in line with national pay awards? The era of re-evaluation upwards of public sector roles is long over.

Also, what is the situation regarding the Contributory Pension + the private sector pension?

Slim
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Private sector pensions will never have pension increases equal pay awards - who would pay for it? The employer and it is quite a substantial amount. So not going to happen.

Private Sector, just like Public Sector employees employed post 95 pay full rate PRSI, which entitles them to a Contributory Pension.
 
Don_08 said:
Private sector pensions will never have pension increases equal pay awards - who would pay for it? The employer and it is quite a substantial amount. So not going to happen.

Private Sector, just like Public Sector employees employed post 95 pay full rate PRSI, which entitles them to a Contributory Pension.
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But, (1) in the public sector employee's case, the Occupational Pension is reduced by the equivalent of the COAP assuming 40 years service. That is not, I believe, the case in the private sector. It is paid in ADDITION to the occupational pension, AFAIK.

(2) Are we to believe that a bank official who retired 20 years ago is receiving a pension of 2/3 of salary at 1989, without any increases since? If,as a previous poster has said, he/she receives an annual allowance equivalent to CPI, is that not index linked? CPI is nowadays ahead of any National deals, IMO.

Slim
 
Slim said:
But, (1) in the public sector employee's case, the Occupational Pension is reduced by the equivalent of the COAP assuming 40 years service. That is not, I believe, the case in the private sector. It is paid in ADDITION to the occupational pension, AFAIK.
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That's not a yes / no answer. It depends on the scheme. Obviously, in the case of a defined contribution scheme, whatever you get out is whatever you get out and you also get paid your COAP. However, the contributions may have been set up at a rate which reflects the expectation that the pensioner will also qualify for the COAP.

DB may or may not include COAP.

Slim said:
(2) Are we to believe that a bank official who retired 20 years ago is receiving a pension of 2/3 of salary at 1989, without any increases since? If,as a previous poster has said, he/she receives an annual allowance equivalent to CPI, is that not index linked? CPI is nowadays ahead of any National deals, IMO.

Slim
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It's likely that said bank official will have a pension which assumes annual inflation at some particular level - often 2 to 3 per cent, but not explicitly linked to the salaries of their current equivalents. Bear in mind though that bank officials had particularly good schemes; other workers even on DB may have flat nominal income for the duration of their retirement.

The overall Wage Price Index has increased faster on average than CPI for years.
 
In reply to Slim it is untrue to say that all private sector DB schemes will pay a 2/3rds pension in addition to the State Social Welfare Pension. Most DB schemes are "integrated" with the State Pension, so the total after 40 years in such cases will 2/3rds inclusive of the state Pension. Some private sector schemes are not integrated in this way, but a minority I think.
As regards the retired Bank official (or any private sector employee in a DB scheme), at best they might have gotten something close to CPI (often less), but never got any Benchmarking award. If memory serves me right, when the Benchmarking awards were made, the rationale in part was based on supposed productivity gains and changes in work practice. But retired public servants who produced no productivity gains nor changed their "work" practices, still got the Benchmarking increase reflected in their pension.
 
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