What is the euro value today of my future public sector pension?

[noelÓm]

I am a post-2013 entrant to the public service and I would like to calculate the current value of my occupational pension (Single Public Sector Pension Scheme), given my average salary and contributions to date. I have so far built up a lump sum of approximately €15,000 and an annual pension of €2,500 per annum. Assuming I left the public sector tomorrow and retired later in life at age 65 to 68, what is the present value of my pension?

I have seen in other threads that Revenue will sometimes generate a notional pension pot value by multiplying the recurring annual pension payment by 20 and adding the lump sum. In my case, 15,000+(20*2,500)=€65,000. This looks like a reasonable starting point, but I would like to improve on this estimate if I can.

I am sure that there must be some way of calculating the pension’s value more formally. For instance, is there a database of annuity rates available that might help me? I found a UK-based article which cited an annuity rate of 3.9% for a 65 year old, with payments indexed to inflation (“CPI enhancement”). Does that sound like an accurate number? If so, a suitable multiple for my purposes might be closer to (1/0.039)=25.6 than 20.

The only other issue I can think of is that I might want to discount the future pension cashflows by a rate greater than expected CPI growth. This would mean that simply applying a multiple as above would be overstating the value of the pension in present value terms, as the CPI adjustment would not cancel out with the discount rate adjustment. I do not have very clear thoughts on this point, though I am sure that the risk of non-payment (perhaps observable in sovereign bond markets) or uncertainty about public sector pay policy in future should feed into this discount rate choice somehow.

I wonder have posters thought hard about this issue before or would they have a good sense of how to go about this estimation?

 

[NoRegretsCoyote]

. I have so far built up a lump sum of approximately €15,000 and an annual pension of €2,500 per annum. Assuming I left the public sector tomorrow and retired later in life at age 65 to 68, what is the present value of my pension?

It's a purely notional exercise with no practical benefit to you unless you're in the unlikely position of being near the SFT.

A notional value is not very meaningful as you can't draw down a PS pension more quickly or more slowly and (unlike an ARF) your children can't inherit it on your death.

A PS pension and an ARF are indeed both a form of wealth, but it is hazardous to try and make a monetary comparison of them.

Just think of it in terms of "on retirement I'll have x% of my final salary" and see how that is in relation to your likely needs and other means.

 

[noelÓm]

It's a purely notional exercise with no practical benefit to you unless you're in the unlikely position of being near the SFT.

A notional value is not very meaningful as you can't draw down a PS pension more quickly or more slowly and (unlike an ARF) your children can't inherit it on your death.

I want to estimate my net wealth, notional or otherwise. If I work in the public sector for any significant length of time, then the pension will be a significant component of my wealth. Even if it cannot be put up for sale and it's enjoyment is restricted in many ways.

A PS pension and an ARF are indeed both a form of wealth, but it is hazardous to try and make a monetary comparison of them.

I am essentially being given an annuity for every year I work in the public sector. They all start paying off at the same time and we call the payoffs a 'pension'. As we should know the prices of annuities, I think it can't be too hard to approximate the market value the of pension in today's money.

 

[NoRegretsCoyote]

I want to estimate my net wealth, notional or otherwise.

You can put a capital value on it by discounting using an annuity rate for an index-linked annuity (I don't know what these rates are).

You would uplift the value somewhat for the fact that your spouse could get a survivivor's pension. But that's offset to some extent by the fact if you die single before retirement age no one gets anything.

I have an old PS pension myself and I never bother trying to put a € value on it. I just try and think of it as meeting x% of my likely retirement needs.

 

[cremeegg]

I have seen in other threads that Revenue will sometimes generate a notional pension pot value by multiplying the recurring annual pension payment by 20 and adding the lump sum. In my case, 15,000+(20*2,500)=€65,000. This looks like a reasonable starting point, but I would like to improve on this estimate if I can.

Two points.

1 How accurate is the above.
2 What does it mean.

On 1 while the methodology above is 'wrong' from a theoretical perspective, i.e. the €2,500 should be discounted at the appropriate rate rather than multiplied by 20, the appropriate rate is opaque and the answer might not be too far off.

It is point 2 that is missing in the above calculation. That €65,000 is an estimate of the future value of the pension, i.e. when you are 65. To find the current value it should be discounted by the appropriate rate over the number of years until you are 65.

Using 2.5% as a discount rate and 30 years until you are 65 that gives

€65,000 x (1-0.025)^30 which is €30,412.

This is so full of assumptions as to be meaningless, but the method should be correct.

 

[noelÓm]

Thanks to both of you for engaging in with this abstract question.

You would uplift the value somewhat for the fact that your spouse could get a survivivor's pension. But that's offset to some extent by the fact if you die single before retirement age no one gets anything.

This is a good suggestion.

That €65,000 is an estimate of the future value of the pension, i.e. when you are 65. To find the current value it should be discounted by the appropriate rate over the number of years until you are 65.

Using 2.5% as a discount rate and 30 years until you are 65 that gives

€65,000 x (1-0.025)^30 which is €30,412.

This is so full of assumptions as to be meaningless, but the method should be correct.

I think this must not be not fully right because the lump sum and annual pension amount are CPI-linked for the full 30 years before I retire.

This means that the future value of the pension in 30 years time should be calculated on the basis of something like a (15000*(1.02^30))=€27,170 lump sum and (2500*(1.02^30))=€4,528 annual pension.

If the average CPI rate over the next 30 years is similar to the discount rate applied, then your present value correction will be unnecessary. If there is a difference between the two rates, then that will matter to a degree. But the pre-retirement CPI adjustment does a lot to support the present value today in my eyes.

 

[NoRegretsCoyote]

This means that the future value of the pension in 30 years time should be calculated on the basis of something like a (15000*(1.02^30))=€27,170 lump sum and (2500*(1.02^30))=€4,528 annual pension.

I don't know the rules around post-2013 entrants very well.

But if your lump sum is CPI-linked then its value is the same today as it is in 30 years time by definition. So your €15k lump sum on retirement is €15k of wealth (loosely defined) today.

 

[Páid]

Can you use the Pension Modeller here - http://www.cspensions.gov.ie/modellers.asp ?