# Not so golden public sector pension?



## sector_001 (30 Jun 2015)

Hiya!

Mrs Sector started a public sector job that comes with a DB pension (they call it "superannuation").

I am wondering whether she should (if it is allowed) explore dropping out of this pension scheme and setting up a private PRSA DC-type plan.

Here's what puzzles me.

Salary €43K

Annual pension-related gross deductions = €4.3K
       - incl PRD pension levy & various Superannuation EE contributions.

10 years from now, if she leaves and freezes her entitlements, I reckon she'll have:
       - €43,407 Total Gross Pens contributions
       - (€26,044 Total Net Pens contributions.... net of 40% PAYE marginal tax rate)
and would then be entitled to (from age 65):
       - €16,032 Tax-free Lump Sum
       - €2,350 Gross Annual Pension
       - (€1,316 Net Annual Pension assuming we're in 40% tax band but ignoring PRSI, USC)     

I reckon that means she'll have to receive the pension for 11.6 years before she breaks even.
 .... (43,407-lumpsum) / gross annual

I have not built in any assumed salary increases into the calculations (she gets no increments), but let's say if there ever are any they will likely to first order equate to inflation. So it's safe enough to stick to present day value calculations.

If I was putting €43.4K into a DC pension over 10 years and had 5+ years further to retire, that's give me a min 15 year investment horizon.  Factoring in an ARF scenario, I'd cautiously call it a 20 year investment horizon (plus a further 10 year drawn down), I'd be disappointed with lower than a 5% APR on the 15 years.

That should certainly equate to a DC pension pot worth €70.7K at age 65.
Which even just drawing down 5% pa is €3.5K DC pension drawn down.

So why not exit the golden public sector pension??


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## Slim (30 Jun 2015)

sector_001 said:


> Hiya!
> 
> 
> I am wondering whether she should (if it is allowed) explore dropping out of this pension scheme and setting up a private PRSA DC-type plan.....
> ...


 
I am pretty sure it is compulsory. But, your wife could consider opening a private PRSA/AVC to enhance her pension. The Pension Levy is not counted towards her maximum pension contribution so she could have a ceiling of a further 23.5% of salary(assuming she is in her 50s).

Also, she could consider buying back Notional Service from employer though this can be expensive. Check it with employer.


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## Conan (30 Jun 2015)

Taking your pension figures as above, I think you are underestimating the value of the annuity and the impact of life expectancy.
If Mrs Sector was to receive a gross pension of say  €2,350 p.a. from age 65, the cost of buying such (currently) on the open market would be circa €70,000 (ignoring any spouses pension being paid on her death). Add in the lump sum, and you get a total "value) of circa €86,000.
It is worth bearing in mind that the "average" life expectancy for a female retiring at age 65 today is approaching 25 years.

In addition it is likely that the so called Public Sector pension levy will be reduced (or possibly eliminated) in the near future.


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## Slim (30 Jun 2015)

Conan said:


> In addition it is likely that the so called Public Sector pension levy will be reduced (or possibly eliminated) in the near future.


 
Indeed and bear in mind that the Pension Levy would continue to be deducted from Mrs. Sector's pay even if she could opt out!


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## sector_001 (30 Jun 2015)

Slim said:


> Indeed and bear in mind that the Pension Levy would continue to be deducted from Mrs. Sector's pay even if she could opt out!



I'm not so sure about that. Mrs Sector had a prior non-pensionable PS job.... with no pension levy deduction.


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## sector_001 (30 Jun 2015)

Slim said:


> ....
> Also, she could consider buying back Notional Service from employer though this can be expensive. Check it with employer.



While I struggle to see the value in the current pension offering, I have some limited insights into the cost of buying notional years and frankly that is even less attractive. Sticking fivers under the mattress has a higher ROI than notional years.

The real puzzlement behind my initial post is whether there is some other magical PS pension out there.... because if not, I am sooooo glad I socked € away into a DC scheme myself. Otherwise I'd predict lean & hungry times if we had to depend on the Mrs's miniscule DB PS "golden" pension.  

A further concern I have is that the State non-contributory pension (upon which the PS pension benefits seems to "rely") will be so means-tested that we won't get a bean from it.

Am I fundamentally missing something in my thinking/analysis... or are we just debating around the finer points?


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## venice (30 Jun 2015)

Question: If the PS pension is so great then why is it compulsory?


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## Conan (30 Jun 2015)

Obviously (?) if Mrs Sector is only going to have 10 years service then her pension benefits will be small.
In general, a Public Servant retiring after 40 years will receive:
- a lump sum of 150% of Salary, plus
- a pension (indexed in line with any future salary increases for the grade) of 50% of Salary

The accrual rate under the PS scheme is:
Lump Sum - 3/80ths of Salary for each year of service (so 120/80ths after 40 years)
Pension - 1/80th of Salary for each year of service (so 40/80ths after 40 years)  

It gets a bit more complicated depending on when they joined the PS. Older Public Servants pay a reduced rate of PRSI and therefore do not get the State Social Welfare Pension. Public Servants who joined after 1995 pay the full rate PRSI and therefore get the State Pension at age 66 (and also pay a lower rate Pension Contribution since their "occupational pension" takes into account the State Pension). 

I fail to see what point you are making.


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## sector_001 (30 Jun 2015)

Conan said:


> Obviously (?) if Mrs Sector is only going to have 10 years service then her pension benefits will be small.
> In general, a Public Servant retiring after 40 years will receive:
> - a lump sum of 150% of Salary, plus
> - a pension (indexed in line with any future salary increases for the grade) of 50% of Salary
> ...



Lump sum - correct.
Pension - *incorrect*. It is 1/80th of *Net Pensionable* Salary for each yr of service. 
    where NPS = Salary minus 2x single person state contributory pension (i.e. salary - €23.9K). Big difference there!

So my wife's PS job pension would (if she could do 40 yrs) max out at €9.4K (plus the state OAP pension unless it's defunct by then).
I am ignoring the state OAP pension as all _normal_ PAYE workers build up entitlements to that.



Conan said:


> It gets a bit more complicated depending on when they joined the PS. Older Public Servants pay a reduced rate of PRSI and therefore do not get the State Social Welfare Pension. Public Servants who joined after 1995 pay the full rate PRSI and therefore get the State Pension at age 66 (and also pay a lower rate Pension Contribution since their "occupational pension" takes into account the State Pension).
> 
> I fail to see what point you are making.



While I understand your general comment about PRSI rates for historic public servants, it doesn't apply in her case.  I have no data to comment on whether historic public servants in her org do indeed pay a lower pension contribution. The KGB would be more transparent.

As for the point, my original question still stands! If she has a choice, would she be better of exiting the DB PS scheme and setting up a DIY PRSA DC.
I believe I understand the maths behind this PS scheme, but I do not have insight into typical fee structures & returns for Irish run PRSAs.... hence my appeal for learned opinions to this forum.  And while I believe I understand the maths of investments well, I am willing to entertain the chance that I have missed some hidden factor that could explain why everyone & their granny is jealous of PS DB pensions. I however am sooooooooooo glad of my private sector DC pension fund... it is clear and transparent (and together with ARFs are becoming more like US 401K and IRA plans as the years go by).

In a nutshell, I contend her PS DB pension is rubbish. Prove otherwise and substantiate your argument (please!).


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## sector_001 (30 Jun 2015)

venice said:


> Question: If the PS pension is so great then why is it compulsory?



Sorry, I don't understand the linkage you appear to imply.


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## Steven Barrett (30 Jun 2015)

Didn't read through all the previous threads...

You never took the tax free lump sum off the pension pot of €70,700 (which would be about right). Reducing that by 25%, gives you €53,025, 5% of that is €2,651.

Then you have to add in the cost of the guarantee. You will be paid €16,000 tax free lump sum and €2,300 annuity from the civil servant. if you go yourself, you are dependent on the markets. You may get more, you may get less, you may get it spot on. You just don't know. Then to take 5% out each year for the rest of your life will mean investing 50% - 60% of the ARF in equities and all the ups and downs that go with that. some years you'll get more than €2,651, other years less. With the civil service pension, you are guaranteed to receive that income. 


Steven
www.bluewaterfp.ie


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## Slim (1 Jul 2015)

OP, I think we need to simplify the case and look at that:

1. Your wife can only 'opt out' if she leaves within 2 years of joining the employer. Superannuation contributions will be returned less 25% tax. PRD will not be returned.
2. If she remains in and works for 10 years, I assume she is Class A prsi, her pension contributions will be:
€43k x 3% plus (43k-24k) x 3.5% (assuming 2xOAP rate = €24k), i.e total pa = €1,955. After 10 yrs, she resigns and preserves her entitlements. At 65 she would be entitled to a lump sum of (€43k/80)x3x10 yrs = €16,125. Her PRD (pension levy)  of €1,652 currently(although this is reducing next year by c. €1k,) is not counted for refund and is only relevant if she leaves and doesn't have to pay it anymore.
Total pension contribution = €11,730 net of 40% tax relief plus PRD of €11k (est. after Landsdowne Road reductions).
3. Pension payable at 65 = 1/200 of Pensionable remuneration less/= to COAP x 3.333333 x service, i.e €40,056/200x10 = €2,002.80pa plus 1/80 of excess over €40,056 x service, ie. €2,944/80x10 = €368 pa. Total occupational pension pa = €2,370pa plus OAP of(12 x €230.30) €12,017, ignoring any Christmas bonus.
4. After receiving lump sum of €16,125, she needs to live for less than 1 year to get her contributions back taking OAP into account.
5. I would stick with Public Sector pension and take out PRSA/AVC to maximise tax relief and have a little more comfort at 65.


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## Slim (1 Jul 2015)

venice said:


> Question: If the PS pension is so great then why is it compulsory?


 One in, all in. It's so everyone pays for the rest.


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## Meath Lady (1 Jul 2015)

Slim said:


> OP, I think we need to simplify the case and look at that:
> 
> 1. Your wife can only 'opt out' if she leaves within 2 years of joining the employer. Superannuation contributions will be returned less 25% tax. PRD will not be returned.
> 2. If she remains in and works for 10 years, I assume she is Class A prsi, her pension contributions will be:
> ...




ANY idea what happens to  your superannuation pension  if you don't have enough contributions to be eligible for a full OAP or 2  x OAP


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## Slim (2 Jul 2015)

Meath Lady said:


> ANY idea what happens to  your superannuation pension  if you don't have enough contributions to be eligible for a full OAP or 2  x OAP


 Hi, You will get a superannuation allowance(occupational pension) regardless of how few years you work, albeit it may be really small. The calculation of your entitlement to OAP rate of pension is based on years also but I am less sure about that. BTW, there is no getting 2 x OAP, just a max of 1 x OAP plus superannuation allowance.


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## The Ghoul (2 Jul 2015)

If a class A public servant doesn't have enough contributions for a full OAP, is this where the "supplementary pension" comes in?

Let's say John is a pre 1995 public servant who doesn't pay PRSI and has a final salary of 50,000
Let's say Mary is a post 1995 public servant with an integrated pension and a final salary of 50,000 and let's say the OAP is 12,000

After 40 years, John gets an occupational pension of 40/80ths of 50,000 = 25,000
After 40 years, Mary gets an occupational pension of  40/80ths of (50,000-24,000) = 13,000 plus the OAP of 12,000. If Mary is too young to get the OAP when she retires, my understanding is that she gets a supplementary pension of 12,000 to make up for it?

Now if Mary doesn't have enough PRSI contributions for a full OAP does the supplementary pension also make up for that?

Let's say both John and Mary work for 20 years in the public service.
John gets pension of 20/80ths of 50,000 = 12,500.

Does Mary gets 20/80ths of (50,000-24,000) = 6500 and then a supplementary pension of 6000 to bring her up to the same overall pension as John.

This is important to me as like Mary I am a class A public servant and I have some plans in my head to retire very early from paid employment (so no more PRSI contributions) and get my preserved benefit pension at age 60.


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## Meath Lady (2 Jul 2015)

Slim said:


> Hi, You will get a superannuation allowance(occupational pension) regardless of how few years you work, albeit it may be really small. The calculation of your entitlement to OAP rate of pension is based on years also but I am less sure about that. BTW, there is no getting 2 x OAP, just a max of 1 x OAP plus superannuation allowance.



Thanks Slim. However when they are calculating your superannuation pension i understand they work it out based on your salary minus 2xOAP. However if you are not entitled to the full contributory OAP as you have not enough contributions do they have a different method of working it out. For instance I am almost 58 and


The Ghoul said:


> If a class A public servant doesn't have enough contributions for a full OAP, is this where the "supplementary pension" comes in?
> 
> Let's say John is a pre 1995 public servant who doesn't pay PRSI and has a final salary of 50,000
> Let's say Mary is a post 1995 public servant with an integrated pension and a final salary of 50,000 and let's say the OAP is 12,000
> ...





Very well explained and exactly what i am trying to figure out. Any info appreciated


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## Slim (14 Jul 2015)

Meath Lady said:


> Thanks Slim. However when they are calculating your superannuation pension i understand they work it out based on your salary minus 2xOAP. However if you are not entitled to the full contributory OAP as you have not enough contributions do they have a different method of working it out. For instance I am almost 58 and


 
Sorry, was away and didn't pick this up. The calculation above is the standard contribution to pension as a post 95 public servant. It does not take into account that you may not qualify for full OAP at retirement age. What you get at retirement is pro-rata, based on contributions. I don't think the Supplementary Pension is aimed at making up the shortfall in your entitlement to contributory OAP. There is some info on this here, although it it refers to the education sector, I think the underlying principles are the same. https://www.education.ie/en/Educati...ns/Supplementary-Pension-Explanatory-Note.pdf


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## Gerry Canning (14 Jul 2015)

Sector001.
From checking Pension sites .{I am not au-fait with pensions}
26 years old putting 9% of salary of 25,000 into Pension for 40 years , will get 4,500(in todays values) of a pension on reaching 66.That appears to be a far cry from the 12,500 that a public servant has earned for 40 years service.

Under Public service will get circa 50% of average salary ,index linked for life.
Under private pension , need to opt for indexation , need to opt for partner protection , both these have effect of reducing the 4,500. Also fund not forever guaranteed.
Under standard contributory old age pension pension circa k12.

It (appears) to me that Public Servant pensions are quite good, at least when compared to normal paye workers.
The issue of whether the State can afford in future years is a bit unfair, remember if States go belly up it is likely that all our Pensions are banjaxed !


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## goingforgold (16 Jul 2015)

Hi Gerry, the above is a little misleading as any public sector employee employed after 1995 is going to have the state contributory old age pension included in their total pension allowance.

So an employee on 25k per annum will receive 12.5k per annum on retirement which will mostly be made up of state pension (12k). 

A private sector employee, in your example above, will receive 12k per annum from state and 4.5k from private pension, so somewhat better off.


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## Gerry Canning (16 Jul 2015)

goingforgold said:


> Hi Gerry, the above is a little misleading as any public sector employee employed after 1995 is going to have the state contributory old age pension included in their total pension allowance.
> 
> So an employee on 25k per annum will receive 12.5k on retirement which will mostly be made up of state pension (12k).
> 
> A private sector employee in your example above will receive 12k from state and 4.5k from private pension, so somewhat better off.


.............
Point taken.

But for the next couple of decades will the average Public Servant not be better off than the average paye person, rtic.

(I am not getting at public servants , just asking,since there is a notion that public servants have the gold !)


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## Deiseblue (16 Jul 2015)

Hi Gerry , whether Public Sector workers were employed post or pre 1995 they will not receive either the non contributory or contributory State pension in addition to their occupational pension.

Takes rather the glitter off that gold , doesn't it ?


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## suzie (16 Jul 2015)

Deiseblue said:


> Hi Gerry , whether Public Sector workers were employed post or pre 1995 they will not receive either the non contributory or contributory State pension in addition to their occupational pension.
> 
> Takes rather the glitter off that gold , doesn't it ?




Interesting, Does this also apply when one's PRSI A class contributions were generate from private sector employment?

S


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## Protocol (17 Jul 2015)

Deiseblue said:


> Hi Gerry , whether Public Sector workers were employed post or pre 1995 they will not receive either the non contributory or contributory State pension in addition to their occupational pension.
> 
> Takes rather the glitter off that gold , doesn't it ?



Note that public servants hired since April 1995 do pay full-rate PRSI, and so will receive the State Pension.


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## Deiseblue (17 Jul 2015)

True , but in the case of post '95 workers that pension is integrated with their occupational pension to ensure that post & pre 95 workers are treated equally.
A pre 95 worker on €50,000 can expect a maximum pension of €25,000 per annum & a post 95 worker on the same salary can expect the same made up of a contributory pension of €11976 & an occupational pension of €13,024 .
As a retired Bank of Ireland pensioner not only do I receive an occupational pension but if I hopefully live long enough I will receive the State OAP - no integration there !


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## Gerry Canning (17 Jul 2015)

Public servants now pay full-rate prsi and are entitled to State Contributory Pension, that is fair.
............................................................................................................................

The question then is this.
Do Public Servants now pay enough  in their contributions to cover their pensions from work?

eg @ 66 it takes circa a pot of 100,000 to get a pension of 4,000.
So if anyone ,be they public/or private to get an annual  pension of 12,000 the pot needs to be north of 300,000. 

If it is a case that the pot is less than 300,000 ,yet anyone gets an annual pension of 12,000 ,it means someone else is paying for it.
........................................................................
Maybe as this pension time-bomb develops we will reduce State pension for those with high private pensions !


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## gianni (17 Jul 2015)

Gerry Canning said:


> Public servants now pay full-rate prsi and are entitled to State Contributory Pension, that is fair.
> ............................................................................................................................



This has been the case for more than 20 years. This statement makes it sound like it happened recently!


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## Gerry Canning (17 Jul 2015)

Gianni, 

 I don,t care if they started 40 years ago .They pay = they are entitled.


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## orka (17 Jul 2015)

Deiseblue said:


> As a retired Bank of Ireland pensioner not only do I receive an occupational pension but if I hopefully live long enough I will receive the State OAP - no integration there !


What was the last year that new entrants to BoI joined a defined benefit non-integrated scheme?  Most large companies have had integrated schemes for decades.  

And BoI is hardly a poster child for comparing to the public sector - their defined benefit scheme closed to new entrants in 2006 and the overall deficit is over €1B.  With a lot more employees and no funding, that gives an indication of the massive problems that will face the public sector in the continued provision of a defined benefit scheme (and indeed the state generally in providing a high contributory/non-contributory pension for not much in the way of contributions).


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## Gerry Canning (20 Jul 2015)

From the postings;
As things stand , could it be said.
1. Retired now = Golden Pension.
2. Retiring in 10 years = Silver Pension.
3. Retiring in 30 years = Bronze Pension.
4. Retiring in 40 years = No Pension.


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