Should public sector workers pay more for their pensions?

[csirl]

Strictly speaking we are talking about public service employees here as many of the benefits (indexation etc) do not neccessarily extend to the commercial semistate bodies. In addition public service superannuation is unfunded with pension benefits being paid out of governmnent current expenditure while the comercial semistate bodies have an approved pension fund which backs the DB scheme. This is an important detail as the employees of NET and Irish Shipping discovered.

As detailed in my earlier posts, the pension funds for lower and middle ranking civil servants (vast majority - more than 90% of civil servants) currently employed in the public service are OVER FUNDED by the members contributions of the current members of the scheme (who now pay Class A etc.)

Whereas State pensions in general may by under funded i.e. paid out of current expenditure, there is a lot more than just civil service pensions in the exchequers pension outgoings. Things like Oireachtas members pensions, politically appointed government employees pensions, judicial pensions, high ranking state positions with limited terms e.g. CEO of State body, Secretary Generals who retire on more favourable terms etc. - these are almost certainly under funded.

The pensions of some retired civil servants and other state employees from previous eras who may not have contributed to their pensions may also be under funded.

But your bog standard civil servant who currently works in an admin role in a government department is more than paying for his/her own pension and is effectively subsidising the exchequer.

 

[Protocol]

First of all, class A public service workers in integrated pension do not pay 6.5% of salary. They pay less, approx. 5% of salary.

I'll reply later to the other issues.

 

[aircobra19]

...People who joined the public sectore pre-1995 pay 6.5% of salary for a generous index-linked DB scheme....

...only if they are also given full Class A PRSI benefits, which that category of public servants doesn't generally have. There are trade-offs!

First of all, class A public service workers in integrated pension do not pay 6.5% of salary. They pay less, approx. 5% of salary....

Is that not because they don't get class A PRSI benefits?

 

[ajapale]

.....



Superannuation is a rather old fashioned word used to describe pension schemes.

In Ireland it is used (in the main) to describe defined benefit (DB) schemes which were set up under by leglislation.

Schemes typically described as superannuation are:
The Civil Service
Local Authorities
Health Boards
The Guards, the Army etc.

These schemes are quite complex as they have varying degrees of deduction and benefits. They are unfunded schemes. This means that the government take your deductions but do not put the money into a fund to back the pension scheme. When the time comes to pay your pension the Government pays this out of current expenditure.

Some commercial semistate organisations such as the ESB have funded superannuation schemes. These schemes operate in much the same way as private DB schemes as described in the key post above.

In general the benefits provided in these public sector supeannuation schemes are second to none. Indeed the Civil Service Scheme is very generous offering pensions linked to the salary of the present incumbent of the job you retired from.

Hi csirl,

The extract above is taken from a key post in the pensions forum.

The words funded and unfunded have a very specific meaning when talking about Defined Benefit Pension schemes.

Public and Civil Service superannuation schemes in Irelard are unfunded.

By definition only funded schemes DB schemes can be underfunded or overfunded.

aj

 

[Azriel]

The contributions made by public sector employees are based on the same salary definition as the benefits provided. So where there is an entitlement to the State Retirement Pension, the benefit and the contribution payable are both reduced.

In private sector defined benefit schemes, pension benefits are calculated similarly to public sector schemes - that is, the entitlement to the State Retirement Pension is reflected in the benefit payable on retirement (and in the contribution payable). The case of the lower paid individual getting a very low pension benefit due to the allowance for the State Retirement Pension applies equally.

The issue is that public sector workers get a high end version of Defined Benefit (versus private sector Defined Benefit). In the last 10 years, the private sector has moved significantly away from the DB model, or has reduced the benefits payable, or has increased the contributions payable, or has wound-up the schemes in force. The public sector has acheived very little in this regard.

Also, from yesterdays news wires "Wages in the public sector in Ireland rocketed by a massive 67pc between 1999 and 2006, ... Private sector pay in Ireland was up by 42.2pc, the central bank's survey found....The Irish figure for public sector wage growth was the highest of the 12 countries" - the costs of pension provision are increased where salary levels are not controlled (as pensions are payable based on final salary in the public sector). So the high end pension terms have been preserved, which when combined with high level salary growth leads to a very high cost of pension provision.

 

[Ron_H]

All private sector workers pay PRSI and in addition all private sector employers pay employer PRSI at 10.75% on every euro paid to the employee. What does the private sector worker get from this? - Some dental benefits and an entitlement to the contributory pension which is around €210 per week.

Public sector worker on the other hand get a generous lump sum and a pension linked to final salary (way more than €210 per week)

How is this fair? How long can this go on until people realise that the national pension fund is really being set-up to fund public sector pensions. Brian Cowan talks about Ireland been debt but is ignoring the massive under funding of public sector pensions even taking into account the current national pension fund.

Of course its hardly in the interest of the politician or civil servants to change this since there are the primary benefactors.

 

[DrMoriarty]

I won't argue against the general consensus being advanced above, viz that pre-1995 entrants to the public sector enjoy an attractive pension provision compared to others — but, as Dreamerb has said, there are trade-offs. For example, the fact that neither I, my wife nor my children are entitled to dental benefits costs me a great deal more in real terms annually than the 1.5% of salary that I 'save' by paying class D instead of class A PRSI. I would swap that particular 'perk' tomorrow if I had the option.

More generally, while DB pensions are undeniably a considerable 'added attraction' of public sector employment, they need to be considered in context. Personally I'm rather wary/weary of the tendency among the media and elsewhere to seize on catchy soundbites about the 'bloated'/'cushy' public sector, with the implication that to a man/woman they are idle, unaccountable incompetents living off the sweat of 'ordinary (i.e. private sector) taxpayers' — as though they didn't pay the same taxes or something? It's as soft a target as the prevailing 'bad apple' myth/stereotype — everyone seems to know a lazy or incompetent civil servant, nurse, teacher etc. who should be fired but can't be. How many good ones do they know? Ask them when they last got a performance-related bonus, company car, expense-account trip abroad...

Sure, the public sector offers security of employment and a good pension, but there are plenty of drawbacks that I won't bother ranting on about here — glass ceilings, bureaucracy, poor leadership, 'political' rather than merit-based appointments/promotions, and all sorts of other frustrations. If it wasn't for the pension and the job security, I think it would be very hard to attract/retain good people whose talents would almost certainly be better rewarded in the private sector.

Why is that when you read a Sunday papers profile of some-or-other successful entrepreneur, you so often come across things like 'Greatest regret: Not getting out of the public sector sooner'...?

 

[aircobra19]

Not all pay class D do they? Some are Class A.

 

[DrMoriarty]

Anyone recruited (or made permanent from a temporary position) after 1995, AFAIK. And some categories even prior to 1995, but don't ask me which.

 

[Dreamerb]

I think there's also some confusion, in that some posters appear to believe that civil servants get the DB scheme exclusively on the basis of their PRSI contributions (which, as previously referred to, may be at class D or at class A rates, depending on date of entry). As a post-95 entrant, I can't comment on the details of pension arrangements for earlier entrants, but I also pay specific pension deductions, and am buying back notional service as well. The pension deductions, actuarially speaking, are lower than would be expected for the scale of the benefits even factoring in that it's an integrated pension; the notional service buy-back terms however are now based on the full actuarial value of the notional service.

I'm not saying the pension terms aren't good - they most certainly are, and are a major attraction in the civil service - but I concur with DrMoriarty: you have to consider in context. I (mostly) like my job and find it rewarding - but it's not money for old rope, as some seem to imagine, and yes it does have drawbacks. Happily, though, merit-based promotion is much more the norm now, bar at the very highest level where it's on merit plus who government thinks they can work with (TLAC promotions - Assistant Secrretary and Secretary General level).

 

[csirl]

Hi csirl,

The extract above is taken from a key post in the pensions forum.

The words funded and unfunded have a very specific meaning when talking about Defined Benefit Pension schemes.

Public and Civil Service superannuation schemes in Irelard are unfunded.

By definition only funded schemes DB schemes can be underfunded or overfunded.

aj

aj,

The current exchequer pension cost is for people who are currently retired. These are mainly people from by-gone era on historic employment terms who did not contribute to their pensions. It also includes a lot of non-admin civil service people e.g. policitial appointees who get "enhanced" pension terms due to their political status.

There are very few people on today's civil service employment conditions who are retired. My post is about TODAYs civil servants - those currently working - and I stand by my point that many will not receive the benefit of their pension contributions.

The world changed for civil servants in 1995. Due to a combination of political pressure and because they were easy targets for budget cuts, they got hit badly with a reform of their pension conditions. Remember that this decision was made pre-celtic tiger when we had just come throught he worst era of our economies history (and also remember decision to do this was made a couple of years earlier that '95 when we were firmly in life support Tallaght strategy mode)

From April 1995 onwards, civil servants paid Class A PRSI - the maximum amount paid by any sector of employment. They also lost the non-contributory pension scheme that applied to previous generations of civil servants (the one in deficit that is referred to in your post). From that date onwards, civil servants were in a contributory pension scheme that they paid for themselves. The right to get the social welfare contributory pension was also denied to them even though they were paying Class A PRSI. From 1995 onwards, civil servants pay their own way with regard to pensions.

It must also be remembered, that at the time the decision was made, the contributory old age pension (COAP) had been eroded significantly during the late 80s/early 90s due to the country being nearly bankrupt. An artificially low rate of COAP was used in the calculations for deciding the new civil service pension conditions - remember the calculations whereby the COAP rate is deducted from 1/2 salary. Therefore the deductions taking into account COAP were artificially low. Now that COAP is at a more normal level, the deduction from 1/2 salary is very high, thus eroding the contributory pension.

In summary, whereas historically civil servants may have got a good deal out of pensions, those employed in the civil service today under the post-95 employment conditions are getting a raw deal and their pensions are significantly lower than the norm in the private sector. Also, many will make a loss in NPV terms on their contributions and will be far worse off than if they had paid these contributions into a private pension scheme.

 

[cerberos]

Maybe some can correct me but I believe that a private worker would need to contribute 40% of salary for 40 years to meet the indexed pension of a similiar public service worker.

Also, did the civil servants ever have wage cuts, wage freezes or have a year when the got no increase at all?

Indexed pension + security of tenure + rises and/or salaries in excess of private industry + everyone eligible to apply gets the 100% bonus == pretty good deal

 

[csirl]

Maybe some can correct me but I believe that a private worker would need to contribute 40% of salary for 40 years to meet the indexed pension of a similiar public service worker.

Urban myth - look at the maths for a typical civil servant in one of my previous posts on this thread. 40% of salary? When social welfare is taken into account, an average civil servant only gets. c.25% of salary from their pension contributions. Contribute 40% of salary for 40 years is equal to someone getting 25% of salary for 10-15 years? Do the maths.

Having worked in both sectors in recent years, I can assure you that the private sector pension schemes I have been a member of had benefits far in excess of the public sector schemes I have been a member off. Here's comparison of my 2 most recent in each sector:

Private Sector (well known large multinational with 1000s employees in Ireland):

Contributions - 6% (plus any additional voluntary contributions matched by employer euro for euro).
PRSI - Class A
Health Insurance - VHI B+ for entire family.
Stock Options - Yes
Bonus - 1 months salary per annum - always paid.
Christmas Bonus - 2 weeks salary.
Promotion opportunity - abundant as large organisation.

Receive Social Welfare Contrib Pension - Yes.
Work Pension - 60% of wage after 30 years linked to inflation (CPI)

Public Sector (standard civil service contract):

Contributions - 6.5%
PRSI - Class A
Health Insurance - None.
Stock Options - Dont exist.
Bonus - Doesnt exist.
Christmas bonus - Doesnt exist.
Promotions - only if willing to decentralise.

Dont get Social Welfare Contrib Pension even though paying Class A.
Work Pension - only 50% of wage after 40 years service - increases linked to payscale.

The private sector terms were typical for multinational in Ireland, and indeed I know a lot of people in other multinationals who have even better pensions schemes.

Looking at both of these terms, its clear to see which is better.

Multinationals are generally American in origin & the Americans are big into their pensions, health insurance and stock options. These multinationals tend to give all employees worldwide similar pay & conditions. They have a long history of funding pension schemes often matching or exceeding employee contibrutions (it is a myth that a private sector workers pension depends on his own contributions - private pension funds in large companies are funded by the companies profits). The influx of multinationals into Ireland in recent years has totally upset the status quo. Public sector pensions, which were better than traditional Irish private sector pensions have been over taken by multinational pensions.

 

[csirl]

To add to the above.

The days of someone spending their entire careers with one employer are over. People nowdays change jobs quite often and frequently will work in both the private and public sector at different points in their careers.

I've worked a number of jobs in both sectors, as have many people I know. In recent years, it has been noticeable that many of these people are drifting away from public sector employment as pay, pensions and promotions are falling behind the private sector. This may change in future years if we get a recession, but right now, the balance is tipped in favour of working in the private sector. Other reasons for the drift away from the public sector include:

1. Decentralisation - no hope of promotion over next 10 years unless move down the country.

2. Pay - the paltry 2-3% per annum social partnership increases are less than inflation. In multinationals, you negotiate your own salary with boss & so always ask for increases above inflation. I accept that they may not always be granted, particularly if company is in bad patch, but in the long term, they are better than social partnership.

3. Erosion of tenure. Recent law changes mean that civil servants can be sacked for poor performance, just like everyone else. There is a fear among some civil servants that they are at risk of being sacked as scapegoats for poor decisions by their political masters. It is increasingly common nowdays for underperforming admin civil servants to be let go after poor reviews. Not all Government Depts are doing this with gusto right now, but the numbers are increasing each year and I'd guess that within the next 5-10 years will be on a par with any multinational (it is also a myth that a poor employee in a multinational is automatically going to be fired. Most are anonymous to senior management and can hide behind a good overall performance by their office/team.

 

[Purple]

To add to the above.

The days of someone spending their entire careers with one employer are over. People nowdays change jobs quite often and frequently will work in both the private and public sector at different points in their careers.

I've worked a number of jobs in both sectors, as have many people I know. In recent years, it has been noticeable that many of these people are drifting away from public sector employment as pay, pensions and promotions are falling behind the private sector. This may change in future years if we get a recession, but right now, the balance is tipped in favour of working in the private sector.

Public sector pay increases have been far ahead of the private sector for years. You could not be more wrong. With pensions and generally better terms and conditions the overall package becomes even more attractive.

1. Decentralisation - no hope of promotion over next 10 years unless move down the country.

Decentralisation is a stupid idea. I agre that this is a major deawback.

2. Pay - the paltry 2-3% per annum social partnership increases are less than inflation. In multinationals, you negotiate your own salary with boss & so always ask for increases above inflation. I accept that they may not always be granted, particularly if company is in bad patch, but in the long term, they are better than social partnership.

What about the multinationals who have pay freezes for two ro three years at a time, or the ones that have cut wages? What about the people who were let go from all the ones that have closed down? The increases from Benchmarking and social partnership have been way more than 2-3%

3. Erosion of tenure. Recent law changes mean that civil servants can be sacked for poor performance, just like everyone else. There is a fear among some civil servants that they are at risk of being sacked as scapegoats for poor decisions by their political masters. It is increasingly common nowdays for underperforming admin civil servants to be let go after poor reviews. Not all Government Depts are doing this with gusto right now, but the numbers are increasing each year and I'd guess that within the next 5-10 years will be on a par with any multinational (it is also a myth that a poor employee in a multinational is automatically going to be fired. Most are anonymous to senior management and can hide behind a good overall performance by their office/team.

How many civil servants have been sacked for bad performance in the last 5 years?

As for it being an urban myth that a public sector pension is worth 28% of salary over 40 years the [broken link removed] disagrees.

 

[csirl]

As for it being an urban myth that a public sector pension is worth 28% of salary over 40 years the [broken link removed] disagrees.

SBP made a fundamental error in their calculations. They say that the Public Servant gets 50% of salary on retirement. This is wrong. Public Servants get 50% of salary MINUS the current rate of state contributory old age pension (currently c.€10k per annum).

The private sector employee gets his pension PLUS also receives the state contribitory old age pension.

Both pay same PRSI - Class A.

Its this type of poorly researched and misleading journalism that has created the myth. This guy wrote an article about public service pensions and got the basic assumptions and calculations wrong.

How wrong was he? Well he forgot to add the Social Welfare pension to the private sector worker and forgot to take it away from the Public Servant, so he was wrong to the tune of c.€20,000 per annum in his calculations.

How many civil servants have been sacked for bad performance in the last 5 years?

Typical Government Department is getting rid of c.10-15 long term fully permanent employees per annum for poor performance. Most "resign" instead of taking the sack. This number is slowly increasing each year as work practices change throughout the service.

Newly recruited civil servants now must complete a mandatory 12 months temporary contract followed by another 12 months probabtion before being eligible for a permanent position. Quite a high proportion of are let go after the initial 12 month temporary contract, though these are not recorded as "being sacked" - people are just told their services are no longer required at the end of the 12 month temporary contract. This method is very effective for screening out dud employees - have to perform well before hired permanently. It is not unknown in recent years for a Government Department to let go off in excess of 100 temporary contract employees in a year (sometimes for budgetary reasons as well as performance).

For information, size of Gov Depts/Offices varies from c.150 to c.5000. Average size is c.600.

The above figures do not include people fired for other reasons e.g. criminal activities, internal disciplinary hearings etc.

All of this is quite new to the civil service. It wouldnt have happened even 5 years ago. Is a condition of the partnership agreements, so unions, who are quite tame in civil service, dont complain. In any event, most of the civil servants I know are quite happy to see poorly performing civil servants got rid off. Many managers in the civil servant now take the view that unless they are 100% happy with a newly hired employee, they wont take them back at the end of the contract year.

 

[Purple]

Does that mean that it's only 14-16% over 40 years that would be needed?

How much does the indexation to grade cost?

 

[DrMoriarty]

The increases from Benchmarking and social partnership have been way more than 2-3%.

My particular grade got 2.5%, phased in over 27 months...

IIRC, the average increase was around the 7% mark, the median probably rather lower. The media, by and large, preferred to run with headlines about nurses getting 17% (which btw I think they fully deserved). But I won't start you off on that one again!

 

[SadBob]

I'm a Civil Servant earning 45k. Max of my scale is 50k. Post 1995 Recruit and paying Class A PRSI.

Using a relatively simple calculation based on current day figures and taking my current salary as an average over my 40 years service (to get a full pension) the following is how much I will have paid in to my pension and in PRSI contributions.

Current fortnightly pension contributions €81 Gross (Cost to me €43) as it’s a pre-tax deduction. Total PRSI per fortnight is €84. So presuming I only get the benefit of my Old Age Pension from my full 40 years paying PRSI contributions the cost to me over my 40 years working life is as follows,

Pension Cost €43 x 26.09 (fortnights per year) + PRSI of €84 x 26.09 = €3,313 x 40 years = €132,537

Suppose I retire on 50k which is the max of my scale at the moment, I will receive €75k tax free lump sum and an annual pension of €25 (which includes the OAP). You will see that after I receive my lump sum I will have paid in €57,537 more (€132,537 - €75,000) in pension and PRSI contributions than I got back. With an annual pension of €25k to follow it will take me roughly 2 years 4 months to get back the balance of my 40 years contributions!

Yes, pre 95 Civil Servants get a better deal but these were the conditions of service for me at the time of recruitment and I accepted them. Also any one who feels hard done by in relation to their Civil/Public Service pension entitlements should contact a private pension provider and see how much a DB pension would cost them privately which equates to their current one.

I will not answer the OPs question as to whether or not we should pay more for our pensions as who likes parting with money ! but the Civil/Public Service pensions are by far the best out there in my opinion!

 

[Sunny]

Interesting arguments on this thread and can't say I follow it all but why don't we pay civil servants the old age pension that they have contributed to through their PRSI. We then declare an end to defined benefit pensions for the public sector like most private sector companies are doing and let public sector workers have the same risks with regard to pensions as their private sector counterparts.