# The truly shocking cost of State pensions



## Sarenco

Some pretty frightening figures in today's IT -

http://www.irishtimes.com/news/politics/pensions-could-make-millionaires-of-civil-servants-1.2814021


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## noproblem

Alarmist scribes at work again, makes for great headlines.


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## Sarenco

noproblem said:


> Alarmist scribes at work again, makes for great headlines.



There's nothing alarmist about the article - it simply gives current actuarial valuations for various State pensions.


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## jim

Its a pretty factual non emotional non alarmist artical that sheds light on the cost of public service pensions to the state, which in anyones language is absolutely astronomical.


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## KOW

Sarenco said:


> Some pretty frightening figures in today's IT -
> 
> http://www.irishtimes.com/news/politics/pensions-could-make-millionaires-of-civil-servants-1.2814021



I agree totally that many Public servant pensions are crazy.  Ex  Ministers on 120k +

That said the most popular grade in the Public Service is a Clerical Officer. A Clerical officer after 40yrs service will have a weekly  pension of approx. 350 euro before tax. No old age pension is payed. Not a huge pension by any means after 40yrs on the job.


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## Sarenco

According to the article, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace.  The lump sum is extra.


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## Páid

Sarenco said:


> According to the article, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace.  The lump sum is extra.



That is one hell of a stretch. The average civil servant doesn't get a pension worth €1.5 million. His intention in the article is to skew the figures so that the seemingly excessive pensions of top civil servants are used to tar the whole civil service.

I'm surprised you fell for that one, Sarenco.


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## Sarenco

Páid said:


> I'm surprised you fell for that one, Sarenco.



I just quoted the article!  The assumptions re age, marital status, etc. are all detailed in the article.

I very much take the point that larger pensions paid to more senior civil servants will push up the average figure but I've no reason to believe that the €1.5 million figure does not represent the average.

Speaking of larger pensions -

http://www.kenfoxe.com/2016/08/nine...while-16-get-annual-pensions-of-over-e125000/


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## odyssey06

If any public sector or semi-state are looking for wage increases, fine, but balance that with a switch to defined contribution plans within 12 months.


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## willyfones

Good at showing in simple terms how alarming (and incredibly valuable) the public sector pension is.   However, you will find this benefit is not appreciated or understood across the Civil Service.

The whole pyramid scheme is of course unsustainable but that is over the medium/long term,, and our politicians only look 4 years ahead at best...    its bury your head in the sand time again,,,


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## Gerry Canning

Pension time is far -far -away , stop worrying , the world is due to end on 5th May 2052 , I think its called the Rapture Concert.So those of you who have provided for Earthly Old Age , will lose out , and horror,,  the rest go to Hell!

On a serious note though , when the sums on payout don,t add up to the States income in the future years  , terms will be changed and pensions will be reduced , but I would suggest not by calamitous amounts..


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## ashambles

Páid said:


> That is one hell of a stretch. The average civil servant doesn't get a pension worth €1.5 million. His intention in the article is to skew the figures so that the seemingly excessive pensions of top civil servants are used to tar the whole civil service.
> 
> I'm surprised you fell for that one, Sarenco.


It seems harder than it should be find out what annuity rates are in Ireland, but from what I remember  something as close as you can get to a public sector pension would cost around 36000 euro for each 1000 in pension received. That would be from 65.

However an inflation linked annuity from 60 for a healthy person would be more expensive, think we've a few posters who work in the area so might be able to tell us.

1.5m might buy in terms of annuities for a 60 year old - maybe 30-35k euro? For a 65 year old it should be around 42k (2.8% annuity)

So it wouldn't be a surprise if a package equivalent to a 60 year old retiring civil servant would cost 1.5m.


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## Sarenco

ashambles said:


> 1.5m might buy in terms of annuities for a 60 year old - maybe 30-35k euro?



That's probably about right but the example also assumes that the retiree is male and has a spouse that gets half the pension if the retiree dies, that the spouse is three years younger than the retiree, and that the pension increases with inflation, though with a cap of 5 per cent in any one year.


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## Páid

Sarenco said:


> That's probably about right but the example also assumes that the retiree is male and has a spouse that gets half the pension if the retiree dies, that the spouse is three years younger than the retiree, and that the pension increases with inflation, though with a cap of 5 per cent in any one year.





> If a young person aspired towards a pension of €24,000 per year, which is just below the average for retired civil servants last year, and wanted to retire aged 65, they would have to start investing €15,750 annually from age 25. That is the equivalent of one third of gross income. If they wanted to retire at 60 and started investing at age 20, the starting contribution would be €17,850.



He states in the article that the average civil servant retires at just above €24,000 per year and that an equivalent fund in the private sector would be worth €1.5m. Both Sarenco and Ashambles seem to agree that a €1.5m fund would result in a pension of €30-35k (up to 40% more than the author states) and using Ashambles figure of €36,000 per €1,000 received would result in a fund worth €860,000 (any of the calculators I used resulted in a similar figure). It's no wonder the actuary wanted to remain anonymous as his/her figures don't stand up. Why are they ignoring the lump sum? It is because it would skew the figures in favour of civil servants?

All of this, by the way, is ignoring the fact that there are more/less lucrative pensions payable depending on whether you started pre or post 1995 or indeed the embargo on recruitment. Both of these will have a considerable impact on the cost of future pensions.


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## Sarenco

Hi Paid

The article doesn't actually say that the average civil servant retires at just above €24,000 and that pension would have a market value of €1.5m.  You have combined two discrete and unconnected sentences in the article to arrive at that distorted conclusion.

The article actually says the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace and the assumptions underlying that calculation are explicitly set out in the article.

Quite separately, the article says that a pension of €24,000 is just above the average paid to retired civil servants last year.  We have no idea what level of service the average pensioner had (some pensioners may only have worked for a few years in the civil service), their gender, age, etc.

I would imagine that the average civil servant with 40 years service would retire today on a pension materially in excess of €24,000 (and, yes, larger pensions paid to more senior civil servants feed into the average figure).

Also, bear in mind that the article explicitly assumes that (a) the pensioner is male with a wife, three years his junior, that will receive 50% of the pension if he dies first; and (b) the pension is index linked (i.e. payments escalate in line with inflation).  Both these factors would add very significantly to the cost of purchasing an equivalent annuity on the open market.

So, putting it all together, I agree with ashambles that it is entirely plausible that the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace.

And that's just the pension - the tax free lump sum is an additional benefit.


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## Sarenco

Páid said:


> All of this, by the way, is ignoring the fact that there are more/less lucrative pensions payable depending on whether you started pre or post 1995 or indeed the embargo on recruitment. Both of these will have a considerable impact on the cost of future pensions.



The article focuses on the actuarial value of public sector pensions today - it says nothing about the cost of public sector pensions to the exchequer into the future.

That's a whole other discussion but I'm certainly happy to acknowledge that some steps have been taken to contain the pensions bill into the future. The problem is that these measures won't be nearly enough.


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## Páid

There are more holes in the article than an African American man after a routine police stop.

All aboard the gravy train!


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## ppmeath

The economist didn't want to be named? I wonder why. The article is woefully lacking in facts, the PS pension scheme in this country is in a shambles.


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## Sarenco

Páid said:


> There are more holes in the article than an African American man after a routine police stop.



Could you point them out?  You haven't so far.


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## Sarenco

ppmeath said:


> The article is woefully lacking in facts, the PS pension scheme in this country is in a shambles.



All assumptions used in the calculations are explicitly set out in the article.  What do you think is missing exactly?


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## ppmeath

Sarenco said:


> All assumptions used in the calculations are explicitly set out in the article.  What do you think is missing exactly?




Any and all mention of the different PS pension strands, there are 4. 

He seems oblivious to the fact that the people retiring now on full service are those who were hired before 1995. 

He hasn't, not once, mentioned the significant changes in the pensions (hence the 4 strands above) scheme that have been introduced.

As I said, it's no wonder he didn't put his name to it.


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## ppmeath

Just to give you an example. A PS hired since 2014 and who is on a much lower starting salary then his predecessor and who is, for example, 25, will have to work until he he 68 - before being entitled to any pension.

He will be paying a full Class A stamp - for a State Contributory pension - which will be integrated into his final pension entitlement of 50% final salary. 

That salary will be the average salary of his 43 year service, not his final one.

If he retires on a salary of 60k, then his entitlement will be a pension of 30k, this will be made up of the rate of the SCP - today it is 12,131.60 and the balance is his "occupational" pension.

He will be making his contributions to the occupational part, he will be making PRSI contributions for the SCP.

He will also be retiring at the same age as a private citizen with no pension provision.


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## Sarenco

ppmeath said:


> Any and all mention of the different PS pension strands, there are 4.



What difference does that make?

The article simply calculates the actuarial value a pension paid today to the average civil servant who retires at 60 with 40 years of service.  

The fact that future pensioners may not get such fantastic pensions has no impact of the accrued value of pensions payable today.


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## ppmeath

It makes plenty of difference.

Pre 1995 made no personal pension contributions and no Class A contributions.

Post 1995 do make a personal pension contribution (PPC) 5% and they make a Class A PRSI contribution and the employer also makes a contribution.

That is not factored in.

Post 2014 now contribute are are known are "referable" amounts every year towards their pensions and they make the Class A contribution as does the employer.

I have no issue with him calculating the value, but he says:

"would have to put €65,400"

Without mentioning that the PS employee is making contributions and he gives the retirement age as 65, when new PS workers can't retire until they are 68.


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## Sarenco

http://www.irishtimes.com/news/poli...ants-paid-lump-sums-of-over-100-000-1.2814075

This is a companion piece on the value of the lump sums received by civil servants on retirement that are in addition to their pension entitlements.

It is interesting to note that in 2008 the public sector pension bill was €1.6 billion. Last year it was €2.8 billion.


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## Sarenco

ppmeath said:


> new PS workers can't retire until they are 68.



New PS workers are not retiring today.  The article relates to the cost of pensions that are payable today.

The effectiveness, or otherwise, of recent efforts to contain the future cost of PS pensions is a completely different discussion.

The comparison with the amount that a private sector worker would have to contribute to a fund to achieve a similar pension also relates to the accrued value of a PS pension that is payable today.


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## ppmeath

Which they also contribute to.


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## ppmeath

Sarenco said:


> New PS workers are not retiring today.  The article relates to the cost of pensions that are payable today.
> 
> The effectiveness, or otherwise, of recent efforts to contain the future cost of PS pensions is a completely different discussion.
> 
> The comparison with the amount that a private sector worker would have to contribute to a fund to achieve a similar pension also relates to the accrued value of a PS pension that is payable today.



Yes, because those retiring today on a full pension are those who joined pre 1995. The article says "Start providing" and then:

"A person who aspired towards an annual pension of €100,000 when they reached 65, and started providing for it at 25, would have to put €65,400 into their pension fund every year"

Those in the PS from 2014 at age 25 will have to work 43 years - until they are 68, not 65.

They will make 43 years of contributions to both their pension, the State Contributory (which is part of their final pension) and the lump sum.

They are not getting it for nothing.

Then the article says:

"If a young person aspired towards a pension of €24,000 per year, which is just below the average for retired civil servants last year, "

If the average pension was 24k, then the average retirement salary was 50k, not 100k. Because the entitlement is 50% final salary.


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## Protocol

ppmeath said:


> It makes plenty of difference.
> 
> Pre 1995 made no personal pension contributions and no Class A contributions.



Just to correct a myth - *most PS always, always paid 6.5% pension contributions.*

Pre 1995 they didn't pay full-rate PRSI.

Post 1995 all PS pay full-rate PRSI.

[Yes, some PS, not many, did not and do not make a pension cont]

*A typical teacher has always, always, paid 6.5% pension cont - let me be absolutely clear on that. *


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## orka

ppmeath said:


> If the average pension was 24k, then the average retirement salary was 50k, not 100k. Because the entitlement is 50% final salary.


Massive assumption there that every retiree had full service - which is very unlikely.  Entitlement to 50% is after full service.


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## ppmeath

Protocol said:


> Just to correct a myth - *most PS always, always paid 6.5% pension contributions.*
> 
> Pre 1995 they didn't pay full-rate PRSI.
> 
> Post 1995 all PS pay full-rate PRSI.
> 
> [Yes, some PS, not many, did not and do not make a pension cont]
> 
> *A typical teacher has always, always, paid 6.5% pension cont - let me be absolutely clear on that. *



Pre 1995 Civil Servants, never made Personal Pension Contributions. 
http://www.cspensions.gov.ie/faq1.asp#4


_*"4. Do I pay contributions for these benefits?*

*There is no personal contribution towards their own personal pension for officers who pay modified PRSI.*

Officers pay contributions of 1½% of pay for spouses’ and children’s pension benefits.  For job-sharers and work-sharers, contributions are calculated on a pro rata basis."_


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## ppmeath

orka said:


> Massive assumption there that every retiree had full service - which is very unlikely.  Entitlement to 50% is after full service.



That is what the assumption is in the article:


"The pension paid to the average civil servant who retires at 60 with 40 years "


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## orka

ppmeath said:


> That is what the assumption is in the article:
> 
> 
> "The pension paid to the average civil servant who retires at 60 with 40 years "


Yes - that's for the 'assumptions' part of the article - how much would it cost for a 25 yr old aspiring to a 24K pension etc.  The 'actual of 24K' is for retirees last year - you can't draw any conclusions about service (and therefore final salary) of actual retirees from that single piece of data.


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## ppmeath

True enough. But if we are to compare like with like, then there has to be a reference to the 25 year old who joined the PS today - comparing it with people retiring now is pointless. Horse, bolted and all that.


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## Protocol

ppmeath

Civil service is 10% of PS, so most PS always made 6.55 pension conts.

I did point out that some PS, e.g. the civil service, did not pay the 6.5%.


30,000 approx civil service

300,000 approx wider PS.


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## Páid

Sarenco said:


> All assumptions used in the calculations are explicitly set out in the article.  What do you think is missing exactly?


It's not sufficient to supply assumptions before writing an article like this. The assumptions must be reasonable and the calculations accurate. The assumptions are not reasonable in my opinion and the calculations are on data the anonymous actuary gleaned from the pensions website but not made public. The more I look at the article the more farcical I think it is.

*Pensions could make millionaires of civil servants (but won't in most cases)*


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## Sarenco

Páid said:


> The assumptions must be reasonable and the calculations accurate.



You haven't told us what you think is unreasonable about the assumptions.  Civil service pensions are index linked and a surviving spouse in general receives a half pension.
You haven't told us what calculations you think are inaccurate.  So far you have just distorted what is actually said in the article.
What non-public data are you referencing?  Current annuity rates?
You haven't explained why you think the article is farcical or why you think the value of an average civil servant pension is not worth €1 million+.


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## Sarenco

ppmeath said:


> Which they also contribute to.



The "contributions" are entirely notional - they don't get paid into a fund.  In any event, the "contribution" level is immaterial in the context of the benefits accrued.


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## Sarenco

ppmeath said:


> But if we are to compare like with like, then there has to be a reference to the 25 year old who joined the PS today - comparing it with people retiring now is pointless.



Why?  The article is talking about the value of pensions payable today - and will remain payable for a very long time to come.

It is certainly not pointless to highlight the huge cost of these pensions in the context of budgetary projections, on-going negotiations with public sector unions, etc.


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## Páid

1. This assumption is unreasonable - "The calculation, as with all calculations in this report, presumes the retiree is male, married, that the spouse gets half the pension if the retiree dies, that the spouse is three years younger than the retiree, and that the pension increases with inflation, though with a cap of 5 per cent in any one year." What about all the females? What about the single people? What about those that contribute for more than 40 years?

2. The only thing distorted are what the author purports to be "projections" without taking into account pre & post 95 pensions, the embargo, etc.

3. "Working with the calculator on the website of the Pensions Authority, the actuary got figures for how much people would have to put aside each year if they aspired to have pensions such as the ones mentioned above, when they reached ages 60 and 65. Again the lump sums would be additional." - This data has not been made public and therefore cannot be scrutinised.

4. See 1, 2 and 3.

The real reason* for the article is to have the private sector up in arms against the civil service in advance of any pay restoration claims






* - Assumption - may or may not be true.


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## Sarenco

Páid said:


> What about all the females?


The cost of their pensions are even higher!  You know, because they live longer.



Páid said:


> What about those that contribute for more than 40 years?


That has zero impact on their pensions - the maximum pension accrues on 40 years service.



Páid said:


> ... without taking into account pre & post 95 pensions, the embargo, etc.


All of which are completely and utterly irrelevant to calculating the actuarial value of a pension payable today.



Páid said:


> the calculator on the website of the Pensions Authority...data has not been made public and therefore cannot be scrutinised.


I still don't know what data you are talking about.  I assume you are not suggesting that the Pensions Authority (a statutory authority) would install a corrupted calculator on its website.



Páid said:


> * - Assumption - may or may not be true.


Regardless, it's irrelevant.

I'm regularly surprised at the degree to which public servants underestimate the true value of their pension entitlements.

To paraphrase Upton Sinclair:

_"It is difficult to get a man to __understand__ something, when his pension depends upon his not understanding it!"_


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## noproblem

"I'm regularly surprised at the degree to which public servants underestimate the true value of their pension entitlements."

Any chance you could give us a link or two to the above statement?


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## Sarenco

noproblem said:


> "I'm regularly surprised at the degree to which public servants underestimate the true value of their pension entitlements."
> 
> Any chance you could give us a link or two to the above statement?



I don't understand - I can hardly provide a link to my own comment!


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## ppmeath

Protocol said:


> ppmeath
> 
> Civil service is 10% of PS, so most PS always made 6.55 pension conts.
> 
> I did point out that some PS, e.g. the civil service, did not pay the 6.5%.
> 
> 
> 30,000 approx civil service
> 
> 300,000 approx wider PS.



The Public Sector incorporates the Civil Service, that pension scheme is more or less the same pension scheme that a Garda, Nurse etc has. 

Pre 1995 didn't make a personal pension contribution, they contributed towards the spouses and dependent's pension only, that is not a criticism, it is the way the system was.


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## ppmeath

Sarenco said:


> The "contributions" are entirely notional - they don't get paid into a fund.  In any event, the "contribution" level is immaterial in the context of the benefits accrued.



No, they're not "notional", from an employee point of view, they are very real, they pay real money.


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## ppmeath

Sarenco said:


> Why?  The article is talking about the value of pensions payable today - and will remain payable for a very long time to come.
> 
> It is certainly not pointless to highlight the huge cost of these pensions in the context of budgetary projections, on-going negotiations with public sector unions, etc.



Payable to those who are retiring on very good terms, terms that have been altered considerably and there is no mention of it.


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## ppmeath

Carry on ignoring this part Sarenco:

*"Start providing*
A person who aspired towards an annual pension of €100,000 when they reached 65, and started providing for it at 25, would have to put €65,400 into their pension fund every year, with the contribution assumed to increase by 2.5 per cent per year. If they wanted to retire at 60 and started making contributions aged 20, the equivalent figure would be €74,250.
If a young person aspired towards a pension of €24,000 per year, which is just below the average for retired civil servants last year, and wanted to retire aged 65, they would have to start investing €15,750 annually from age 25. That is the equivalent of one third of gross income. If they wanted to retire at 60 and started investing at age 20, the starting contribution would be €17,850."

That's fine.


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## Sarenco

ppmeath said:


> The Public Sector incorporates the Civil Service, that pension scheme is more or less the same pension scheme that a Garda, Nurse etc .



Well, the average Garda retires on a pension with a value of ~€1.2m, plus a generous lump sum, after only 30 years' service.  

I'm amazed the civil servants aren't up in arms!


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## KOW

So again the biggest grade in the Public service by far are Clerical Officers. After 40yrs service 350 euro pension per week. Dont get the old age pension. So someone can sit on their backside for 40yrs and receive a pension of approx 220 per week. A difference of 130 per week before tax after 40 yrs work.


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## Sarenco

ppmeath said:


> Carry on ignoring this part Sarenco:.



I'm not ignoring anything!

The quoted section looks perfectly accurate to me.  Are you suggesting it isn't?

There is no comparison drawn with the pension that a civil servant (that isn't retired) might enjoy in the future but that isn't the point of the article.  You keep reading that into the article - but it isn't there.


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## noproblem

Sarenco said:


> I don't understand - I can hardly provide a link to my own comment!


You've made a sweeping statement with no back up. Similar to ould chat in a pub, but hurtful and spoken like a know-all, yet no known substance to it. Oh, apart from your own opinion.


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## Sarenco

noproblem said:


> You've made a sweeping statement with no back up. Similar to ould chat in a pub, but hurtful and spoken like a know-all, yet no known substance to it. Oh, apart from your own opinion.



Huh? 

It's simply been my experience that public servants regularly underestimate the true value of their pension entitlements.  That's not an opinion - that has genuinely been my experience.

Why would you find that hurtful?


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## Sarenco

DCD said:


> A difference of 130 per week before tax after 40 yrs work.



Genuine question - could you estimate how much it would cost a 60-year old man to buy an annuity that pays €130 per week?  

Assume for this purpose that a surviving spouse will receive half that amount and that the €130 figure will escalate over time in line with inflation.

[incidentally, the non-contributory pension is means tested and is currently only payable at 66 but ignore that detail for the time being.]


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## Sarenco

ppmeath said:


> No, they're not "notional", from an employee point of view, they are very real, they pay real money.



Ok so, tell us where that real money goes?  

The truth is that all State pensions are funded on a "pay as you go" basis - there is no separate fund into which contributions are deposited.  It's purely notional - an accounting exercise if you prefer.


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## Sarenco

ppmeath said:


> Payable to those who are retiring on very good terms, terms that have been altered considerably and there is no mention of it.



Why would there be?  The article isn't about the terms upon which civil servants may retire in the future.


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## KOW

Sarenco said:


> Genuine question - could you estimate how much it would cost a 60-year old man to buy an annuity that pays €130 per week?
> 
> Assume for this purpose that a surviving spouse will receive half that amount and that the €130 figure will escalate over time in line with inflation.
> 
> [incidentally, the non-contributory pension is means tested and is currently only payable at 66 but ignore that detail for the time being.]



Do you suggest that after 40yrs of work my wife does not deserve a pension pre tax of 130 euro extra compared to somebody who may have never worked? I dont think so


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## Sarenco

DCD said:


> Do you suggest that after 40yrs of work my wife does not deserve a pension pre tax of 130 euro extra compared to somebody who may have never worked? I dont think so



It's really not about what anybody deserves - I'm simply asking if you could estimate what that extra €130 per week would cost if bought in the open market?


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## Gordon Gekko

Doesn't a pension of €30,000 cost around €1,000,000 in the open market?

That's the pension for a public servant on €60,000.

No way €60,000 is the average salary in the public sector.


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## Protocol

ppmeath said:


> The Public Sector incorporates the Civil Service, that pension scheme is more or less the same pension scheme that a Garda, Nurse etc has.
> 
> Pre 1995 didn't make a personal pension contribution, they contributed towards the spouses and dependent's pension only, that is not a criticism, it is the way the system was.



*Again, let me be clear.*

Many, but not all, PS have always made 6.5% pension conts, back before 1995.

Teachers, etc. have always, always, let me repeat, always paid 6.5%.

Yes, a minority of PS, e.g. civil service and uni lecturers, did not make the 6.5% pension cont.


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## Sarenco

Gordon Gekko said:


> Doesn't a pension of €30,000 cost around €1,000,000 in the open market?



An annuity that pays a 60 old man €30k pa, indexed for life with a surviving spouse benefit of 50%, would cost a heck of a lot more than €1m, at current annuity rates.

Also, the article only refers to civil servants - not public servants more generally.


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## Gordon Gekko

Sarenco said:


> An annuity that pays a 60 old man €30k pa, indexed for life with a surviving spouse benefit of 50%, would cost a heck of a lot more than €1m, at current annuity rates.
> 
> Also, the article only refers to civil servants - not public servants more generally.



How much is "a heck of a lot"?


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## Páid

Gordon Gekko said:


> Doesn't a pension of €30,000 cost around €1,000,000 in the open market?
> 
> That's the pension for a public servant on €60,000.
> 
> No way €60,000 is the average salary in the public sector.



The average pension according to the article is just above €24,000 which would put the average salary on retirement at ~€48,000.

You could blindly accept what the author is saying or you could critically assess it. The burden of proof is on the author making the claims yet he doesn't;

Provide the name of the actuary or the name of the company where they work.
Provide the figures gleaned from the pensions authority calculator he mentions
Provide any details of the "annuity calculator supplied by a major financial services firm" or name that firm
Provide verifiable figures to back up this statement "Demographic trends indicate that the system is unsustainable."
In a nutshell he is comparing the pension a civil servant receives (having accrued it over 40 years with all his presumptions) to what it would cost is purchased today. Why is that even a valid comparison? It would be if you were selling a house.

Sarenco (or anyone else), is there a calculator available online that can verify the authors claim that a €24,000 pension is valued at €1.5m? With or without the lump sum of €72,000.

For a lie to be believeable there must be a grain of truth in it. This article is nonsense.


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## Sarenco

Gordon Gekko said:


> How much is "a heck of a lot"?



~€500k.


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## Firefly

This is the mother of all ponzi schemes! Bernie Madoff would be proud. If the government had any sense they would immediately convert all defined benefit pensions to defined contributions from this point on (I would be ok with the benefits up until now). This would draw a clear line in the liability for future taxpayers. I'm actually a little surprised the workers and unions are not pushing this - they must all know deep down that at some point in the future the cash just won't be there. Wouldn't a defined contribution be a better bet - afterall the money would be privately owned by the worker. For the record, Mrs. Firefly is back working at the HSE.


----------



## Gerry Canning

Paid,

On k100 accumulated on a  pension fund, will make a pension  @3% on an annuity pension for 20 years starting @65 = circa 6500 a year of a pension without indexation etc.
Means that to get pension of k24 the value of pension in todays buying terms = @ a minimum k370.
Indexation and spouses/survivors add ons will increase that to well above k 370.
As a stab @ it , average k24 pension in public service = k500 in todays terms.
But spreading that state cost over 20 years makes the k500 just a figure.

The crunch will come when State can,t afford the annual known pension bill,
If that happens , State pensions will be cut !

Apart from people living longer and demographics , no-one can predict the future, we are maybe viewing things a bit too pessimistically.


----------



## cremeegg

Gerry Canning said:


> Paid,
> 
> On k100 accumulated on a  pension fund, will make a pension  @3% on an annuity pension for 20 years starting @65 = circa 6500 a year of a pension without indexation etc.



Where do you get these figures from.

I would have expected a €100k pension pot to produce a much smaller pension than the €6,500 pa you suggest.

I must admit I am finding it hard to find a published annuity rate.


----------



## cremeegg

This link suggests, about €4,200

[broken link removed]


----------



## North Star

just to add hopefully some clarity to the discussion ( argument?) . 
I have sourced an indicative annuity quote for the following;

Male age 65 female age 62
Fund to buy annuity is €1mio
The annuity inflates at 3% per annum
The annuity provides for a 50% spouses pension
The guaranteed term is 5 years
nil commission
The annuity income is €19,542.20 
and I now tiptoe quitly away....


----------



## Gerry Canning

creemegg .

It seems that pension annuities pay about 3% per annum .
So k100 by 3% over 240 months = 554 per month = 6648 per annum . (not very scientific)
North Stars is much better,and more a worry !


----------



## Sarenco

And here's an indicative quote based on the criteria described in the article, ie:

Male age 60; female age 57
Fund to buy annuity is €1,500,000
The annuity increases in line with inflation, subject to a cap of 5% per annum
The annuity provides for a 50% spouses pension
The guaranteed term is 5 years
nil commission
The annuity income is €23,542.20
That's an annuity rate of 1.572%.


----------



## Sarenco

And another indicative quote for a €1,000,000 fund:-

Female age 60; Male age 62
Fund to purchase annuity is €1,000,000
The annuity increases in line with inflation, subject to a cap of 5% per annum
The annuity provides for a 50% spouses pension
The guaranteed term is 5 years
Nil commission
The annuity income is €16,772.20 (€322.54 per week)


----------



## Páid

Sarenco said:


> And here's an indicative quote based on the criteria described in the article, ie:
> 
> Male age 60; female age 57
> Fund to buy annuity is €1,500,000
> The annuity increases in line with inflation, subject to a cap of 5% per annum
> The annuity provides for a 50% spouses pension
> The guaranteed term is 5 years
> nil commission
> The annuity income is €23,542.20
> That's an annuity rate of 1.572%.



From who ? Or are you going to make us guess?


----------



## Sarenco

My indicative quotes were sourced from Irish Life.  

I would encourage you to obtain alternative quotes for comparison/verification purposes.


----------



## japester

Sarenco said:


> And here's an indicative quote based on the criteria described in the article, ie:
> 
> Male age 60; female age 57
> Fund to buy annuity is €1,500,000
> The annuity increases in line with inflation, subject to a cap of 5% per annum
> The annuity provides for a 50% spouses pension
> The guaranteed term is 5 years
> nil commission
> The annuity income is €23,542.20
> That's an annuity rate of 1.572%.


That is absolutely amazing stuff! Who in there right mind would purchase an annuity at these kinds of rates. I mean, if you had savings of €1.5M at 60 and (say) expected to live to the ripe old age of 90, you could cream off 50k per year for 30 years rather than purchase an annuity, and surely you'd have gained a little interest over those 30 years also  Sounds like those guys that supply annuities are on a very good thing!!!


----------



## Páid

Sarenco said:


> My indicative quotes were sourced from Irish Life.
> 
> I would encourage you to obtain alternative quotes for comparison/verification purposes.


I would like to verify the quote you posted. Is this the calculator you used - [broken link removed]


----------



## Sarenco

I actually got the quotes through my broker.  10 minute 'phone call and he emailed me the figures.


----------



## Cervelo

Here's what i got from from Irish Life

*Annuity Details*
Quote Basis: Standard
Quote Date: 06/10/2016
Interest Rate: 0.31%
Payment Frequency: Monthly
Currency: Euro
Pension Type: Compulsory Purchase
*Pension Details*
Available fund: €1,000,000.00
First Life Pension Amount: €20,922.20
Second Life Pension Amount: €10,461.10
Escalation Type: None
Escalation Rate: 0%
Investment Protection: No
Guarantee Period: 5 years
Commencement Date: 06/10/2016
Commission: 2%
Reversion %: 50.0
Overlap Indicator: No
*Beneficiary Details*
First Life: Ringo Star
DOB: 07/04/1967
Gender: Male
Second Life: Mrs Star
DOB: 07/04/1967
Gender: Female


----------



## Firefly

Hi Sarenco,

Thanks for those numbers - they really made me sit up!

If you wouldn't mind could you provide the numbers for someone retiring at 65 with an annuity of 1m?

Thanks,
Firefly.


----------



## Sarenco

Cervelo said:


> Escalation Rate: 0%



PS pensions are index linked - you really need to assume that the annuity will increase in line with inflation.


----------



## Firefly

Cervelo said:


> Here's what i got from from Irish Life
> 
> *Commission: 2%*



I presume that's 2% of the payout each year / month rather than on the amount of the annuity fund? Otherwise someone with a fund of 500k would be losing 10k a year in commission!



Cervelo said:


> ap Indicator: No
> First Life: Ringo Star


A bit late for him I'm afraid!


----------



## Sarenco

Firefly said:


> If you wouldn't mind could you provide the numbers for someone retiring at 65 with an annuity of 1m?



I think I've taken up enough of my broker's time for one day!  Perhaps NorthStar or SBarrett could be prevailed upon to source a quote for you.


----------



## Firefly

Sarenco said:


> I think I've taken up enough of my broker's time for one day!  Perhaps NorthStar or SBarrett could be prevailed upon to source a quote for you.



No probs - tks!


----------



## Cervelo

Sarenco said:


> PS pensions are index linked - you really need to assume that the annuity will increase in line with inflation.



If i put in an Escalation rate it will half the starting pension payout
but I was surprised with that quote for me a 50 year old, i was expecting a lot lower


----------



## North Star

Hi Firefly, the figues I provided were for a man age 65 with a €1mio fund. What of the remaining variables do you want chnaged i.e. age of spouse, compounding at fixed rate ( if so what rate?) or inflating in line with inflation with an inflation cap ? etc


----------



## cremeegg

Thanks Cervelo for that excellent post.



Cervelo said:


> Here's what i got from from Irish Life
> 
> 
> *Pension Details*
> 
> Investment Protection: No




Can somebody please explain this element of the Pension details


----------



## Sarenco

cremeegg said:


> Can somebody please explain this element of the Pension details



My understanding is that investment protection is an additional benefit whereby an annuitant's estate will receive a payment if the annuitant dies within a specified period.  Obviously that additional benefit comes at an additional cost.


----------



## Sarenco

Cervelo said:


> If i put in an Escalation rate it will half the starting pension payout



The flip side is that the purchasing power of your annuity payment could be very significantly reduced in the future if your annuity payment doesn't increase in line with inflation.  40 years ago, you could buy a house for €20k in Dublin!


----------



## cremeegg

Sarenco said:


> My understanding is that investment protection is an additional benefit whereby an annuitant's estate will receive a payment if the annuitant dies within a specified period.  Obviously that additional benefit comes at an additional cost.



I think the phrase "Guaranteed Term" covers that. Which still leaves me wondering what "investment protection" refers to


----------



## Sarenco

cremeegg said:


> I think the phrase "Guaranteed Term" covers that. Which still leaves me wondering what "investment protection" refers to



A "guaranteed term" refers to the minimum period during which annuity payments will be made even if the annuitant dies during that initial payout period.

"Investment protection" essentially returns the purchase price of the annuity, less whatever annuity payments have already been made, to the annuitant's estate if the annuitant dies within a specified period.  In a sense, the product creates a hybrid between an annuity and an ARF.

Does that help?


----------



## cremeegg

Yes, thank you.


----------



## Sarenco

Páid said:


> I would like to verify the quote you posted.



Hi Paid

Just wondering if you managed to verify to your satisfaction that the quotes that I posted are reflective of the current cost of purchasing an annuity in the open market that is comparable to a PS pension?

This thread contains some links that may be of assistance to you in this regard:-

http://www.askaboutmoney.com/threads/buying-a-pension-annuity-whos-got-best-rates.122095/


----------



## Páid

Haven't had time in the last 2 days to delve any deeper.

The only calculator I could find online that gave the value of the fund was from New Ireland and I suspect that it isn't indexed because it's significantly cheaper than what you were quoted.

[broken link removed]





> Assumptions
> 
> Unless otherwise indicated you are entitled to the maximum State Pension (Contributory) of currently €998 per month provided your retirement age matches the age at which the State Pension becomes payable. The State Pension becomes payable at age 66 if born on or before 31st December 1954, age 67 if born between 1st January 1955 and 1st January 1961, and age 68 if born on or after 1st January 1961 provided that you have made sufficient qualifying contributions.
> Your monthly pension contribution increases by 3% each year up until your retirement age and is invested in a pension plan with an annual management charge of 1% and a 5% charge on each contribution. These charges are in line with the maximum Standard PRSA fees and charges.
> The investment return before retirement is 6% per annum before charges. This rate is for illustration purposes only and is not guaranteed. Actual investment returns will vary.
> All monetary amounts are expressed in future terms.
> The calculations do not allow for the Government Pension Levy or any other levy or tax.
> The annuity rate used to calculate the estimated pension is based on a post-retirement interest rate of 3% per annum and is in line with the guidelines issued by the Society of Actuaries in Ireland. In practice, the amount of pension purchased will depend on the annuity rates prevailing at the time of retirement.
> The calculations assume that annuity payments will remain level over the term and are payable for the life of the individual subject to a minimum period of 5 years.
> The calculations assume that no pension will be paid to your spouse/dependants in the event of your death in retirement.
> Please note that pensions in payment are subject to tax and other duties.
> The rate of tax relief available in practice depends on the rate of tax you actually pay. Tax relief is subject to upper limits which are based on age. There are also other Revenue conditions which apply. These have not been taken into account in the Retirement Income Calculator which is intended purely for illustration purposes only.
> Please note that pensions and contributions to pensions are subject to approval by the Revenue Commissioners. Terms and conditions and Revenue limits apply.


----------



## cremeegg

That is not a quote for an annuity.


----------



## Páid

Well that explains it.


----------



## Cervelo

If you go to Pensionplanetinteractive.ie, you can get a annuity quote, it's where i got my Irish Life quote yesterday.


----------



## Páid

https://www.pensionplanetinteractive.ie/ppi/public/pensionChoicePersonalDetails.action


----------



## Sarenco

Páid said:


> https://www.pensionplanetinteractive.ie/ppi/public/pensionChoicePersonalDetails.action



Here's the indicative quote that I got from Irish Life when I plugged the details into that online calculator:
*
Annuity Details*
Quote Basis: Standard
Quote Date: 07/10/2016
Interest Rate: 0.06%
Payment Frequency: Monthly
Currency: Euro
Pension Type: Compulsory Purchase

*Pension Details*
Available fund: €1,500,000.00
First Life Pension
Amount: €23,542.20
Second Life Pension
Amount: €11,771.10
Escalation Type: Inflation - Annual Cap
Inflation Cap: 5%
Investment Protection: No

*Beneficiary Details*
First Life: Joe Bloggs
DOB: 07/10/1956
Gender: Male
Second Life: Jane Bloggs
DOB: 07/10/1959
Gender: Female

*Indicative Quote*
Per Year:
*€23,542.20 pa*


Annuity Rate:
*1.572%*


Guarantee Period: 5 years
Commencement Date: 07/10/2016
Commission: 0%
Reversion %: 50.0
Overlap Indicator: No


----------



## Páid

Takes the fun out of playing lotto.


----------



## Gerry Canning

Sarenco.

1,500,000 by 25 years left in life = 60,000 a year .

Any point in turning fund into pension?
Am I missing something ?


----------



## Sarenco

Gerry Canning said:


> Am I missing something ?



A couple of things:-

At 60 you don't know that you (or your 57 year old wife) only have 25 years of life left.  It's certainly not inconceivable (particularly given advances in medical science) that the annuitant's widow could be still receiving payments in 50 years' time.
You don't know what purchasing power your money will have in the future (bear in mind that the annuity payments in the above examples are index linked).  As I mentioned earlier in this thread, 40 years ago you could buy a fine house in Dublin for €20k - that would barely buy a shed now!
Really my point is that State pensions (and not just public sector pensions) are far more valuable (and costly) than most people realise.


----------



## elacsaplau

Sarenco said:


> Really my point is that State pensions (and not just public sector pensions) are far more valuable (and costly) than most people realise.



Well, it only took 100 posts for your point to gain broad-scale acceptance!! Fair play for your calm persistence!!


----------



## Gerry Canning

Sarenco, Thanks for that .

Still think I,d take my chances on having me 1.5 mill in my own paws !

(you are 100% correct , State type pensions are presently very valuable but if state runs out of funds ?)


----------



## Jon Stark

Firefly said:


> This is the mother of all ponzi schemes! Bernie Madoff would be proud. If the government had any sense they would immediately convert all defined benefit pensions to defined contributions from this point on (I would be ok with the benefits up until now). This would draw a clear line in the liability for future taxpayers. I'm actually a little surprised the workers and unions are not pushing this - they must all know deep down that at some point in the future the cash just won't be there. Wouldn't a defined contribution be a better bet - afterall the money would be privately owned by the worker. For the record, Mrs. Firefly is back working at the HSE.



As a civil servant I'd have no problem with what you suggest, as long as my employer also increases my salary by the additional ~20% that I could earn in the private sector in an equivalent role...! I'd be delighted to have been earning 20% more gross, and not paying the PRD or PPC, for the last couple of years while starting a family and saving the deposit for a house...


----------



## cremeegg

Jon Stark said:


> As a civil servant I'd have no problem with what you suggest, as long as my employer also increases my salary by the additional ~20% that I could earn in the private sector in an equivalent role...!



This is me not rising to the bait.


----------



## Jon Stark

cremeegg said:


> This is me not rising to the bait.



Huh?


----------



## Cervelo

cremeegg said:


> This is me not rising to the bait.


----------



## elacsaplau

cremeegg said:


> This is me not rising to the bait.



Good man cremeegg,

It's interesting how when the essential point of the article (that pensions of civil servants are highly valuable) has been broadly vindicated - we get virtual silence, in terms of acknowledgement, from the "this is all crap" brigade - just the introduction of a new twist in the road.


----------



## PMU

ppmeath said:


> *"Start providing*
> A person who aspired towards an annual pension of €100,000 when they reached 65, and started providing for it at 25, would have to put €65,400 into their pension fund every year, with the contribution assumed to increase by 2.5 per cent per year. If they wanted to retire at 60 and started making contributions aged 20, the equivalent figure would be €74,250.
> If a young person aspired towards a pension of €24,000 per year, which is just below the average for retired civil servants last year, and wanted to retire aged 65, they would have to start investing €15,750 annually from age 25. That is the equivalent of one third of gross income. If they wanted to retire at 60 and started investing at age 20, the starting contribution would be €17,850.


_I _haven't read the original IT article, as they want to charge me for access, but from what I can make out from the previous posts they calculate what it would cost to buy the equivalent of a civil service pension on the open market. This shows a stunning lack of knowledge of how public sector pensions work. The government does not go out and buy an annuity to pay civil service pensions. You don't need a capital sum to generate the pension. They are paid on a PAYG system.   The pensions themselves are not particularly overgenerous and a  comparison with an annuity is just bogus.

It does not cost 1.5 million to provide a pension of 24,000. If you assume the retiree will live for 25 years he / she needs 25 euro capital for each euro of pension. (Assuming the capital sum is depleted by 1 euro for each year of retirement).

If the envisaged pension is 24,000 euro, this equates to a capital sum of 600,000 euro. Add in 72,000 for the lump sum and the capital value of this retiree's pension is 672,000 euro – it's not over 1 million. For post 1995 employees you can deduct the accumulated value of contributions made.


----------



## elacsaplau

Hey Sarenco.........you're back in play??!!


----------



## Cervelo

I think the point that is been made is not the cost to the govement for providing a pension of €24k but the cost to a employee in the private sector to have a pension of the same amount


----------



## PMU

Cervelo said:


> I think the point that is been made is not the cost to the govement for providing a pension of €24k but the cost to a employee in the private sector to have a pension of the same amount


It's not a monetary amount.  The employee in the private sector is not in the public sector; either because he / she made an informed choice not to join the public service, or did not have the smarts to pass the entrance exam.
If he / she wants a public sector pension the cost is more than the relative costs in the two pensions. It's the (difference in salary between public and private sectors)+(difference in career outcomes for the individual between working in public and private sectors) + (difference between the public and the private sectors ability to meet the individual's Maslow needs).  It's not just money.


----------



## Sarenco

elacsaplau said:


> Hey Sarenco.........you're back in play??!!



Apparently so.


----------



## Sarenco

PMU said:


> _I _haven't read the original IT article....


That's quite obvious!



PMU said:


> The government does not go out and buy an annuity to pay civil service pensions. You don't need a capital sum to generate the pension. They are paid on a PAYG system.


The article does not suggest or imply that the State purchases annuities to discharge its pension obligations.  As you rightly say, the State's pensions are not pre-funded and are discharged out of current revenue.  I don't believe anybody suggested otherwise.



PMU said:


> The pensions themselves are not particularly overgenerous ...


Relative to what exactly?



PMU said:


> It does not cost 1.5 million to provide a pension of 24,000. If you assume the retiree will live for 25 years he / she needs 25 euro capital for each euro of pension. (Assuming the capital sum is depleted by 1 euro for each year of retirement).



I'm afraid that analysis ignores the pension entitlement of any surviving spouse and, more importantly, it completely ignores the compounding effect of inflation over time.  The PS pensioner will almost certainly receive payments that are dramatically higher than €24k pa in 25 years time.

If anything, the analysis as to what lump sum would be required to purchase an annuity to provide an income in retirement comparable to a PS pension actually underplays the true cost of PS pensions to the taxpayer.  The annuity quotes detailed above all assume that the annuity payment will escalate in line with inflation, subject to an annual cap.  However, PS pensions do not escalate in line with inflation - they increase in line with salary increases of serving PS employees.

The Department of Public Expenditure estimated a couple of years ago that the State would reduce its pension liabilities by around €16 billion if it linked future PS pension increases to the cost of living rather than increases in the salaries of serving PS employees.  A saving of €16 billion would go a long way to securing the sustainability of the State's pension liabilities.


----------



## noproblem

elacsaplau said:


> Good man cremeegg,
> 
> It's interesting how when the essential point of the article (that pensions of civil servants are highly valuable) has been broadly vindicated - we get virtual silence, in terms of acknowledgement, from the "this is all crap" brigade - just the introduction of a new twist in the road.




It's a bit like arguing with the SSM crowd, only one opinion seems to matter and they have this stupid mindset that feels they're always right. Must have very long hands as well because they're always clapping themselves on the back. Ah well?


----------



## Sarenco

PMU said:


> It's not just money.



That may well be true but, for good or ill, money is what we tend to discuss on this forum!


----------



## Gordon Gekko

PMU said:


> or did not have the smarts to pass the entrance exam



I laughed at this.


----------



## Jon Stark

elacsaplau said:


> Good man cremeegg,
> 
> It's interesting how when the essential point of the article (that pensions of civil servants are highly valuable) has been broadly vindicated - we get virtual silence, in terms of acknowledgement, from the "this is all crap" brigade - just the introduction of a new twist in the road.



Of course it's very valuable, that was exactly my point?! I could certainly earn a higher gross in the private sector with my qualifications and experience, but I very much value the DB pension I'm getting from relatively small deductions at my end, hence I'm happy to stay. 

I thought Cremeegg was suggesting that I'm full of it about the pay gap, buying into the myth that all public sector employees are overpaid...


----------



## Sarenco

Jon Stark said:


> I thought Cremeegg was suggesting that I'm full of it about the pay gap, buying into the myth that all public sector employees are overpaid...



Hi Jon

Would you mind starting a new thread if you would like to debate whether or not public sector workers are more poorly paid than their private sector equivalents?  This thread has already got quite long and I am anxious to keep it on topic.

Many thanks.


----------



## Sarenco

noproblem said:


> the SSM crowd



Same Sex Marriage?

Can we stick with the topic at hand?

Thanks.


----------



## Jon Stark

Sarenco said:


> Hi Jon
> 
> Would you mind starting a new thread if you would like to debate whether or not public sector workers are more poorly paid than their private sector equivalents?  This thread has already got quite long and I am anxious to keep it on topic.
> 
> Many thanks.



I never suggested I want to debate it - if you read my original post on this thread you'll see it was specifically in response to a suggestion about what should be done to reduce the cost of PS pensions.

Maybe the thread should be closed, since all you seem to have wanted is to say "Look at this article about how much PS pensions cost", and you've now said it. You've shouted down any and all attempts at discussing the changes to mitigate the cost of pensions for future retirees. You've also managed to land a dig with your assertion that public servants don't appreciate the value of their pensions, but I'm off topic when I assert that I do and that's why I'm happy enough to earn a lower salary than I could in the private sector without a DB occupational pension... so there doesn't seem to be much scope for discussion...??


----------



## Sarenco

Jon Stark said:


> I never suggested I want to debate it



Well then why did you introduce the point in the context of this discussion?  Again, I'm more than happy to debate the point in a separate thread but I'm trying to keep this thread on topic.



Jon Stark said:


> You've shouted down any and all attempts at discussing the changes to mitigate the cost of pensions for future retirees.



Again, I'm more than happy to debate the sufficiency or otherwise of the steps that have been taken to date to address the State's pension liabilities elsewhere.

However, a number of posters suggested that the calculations in the article were bogus because they failed to take account of these changes.  I simply pointed out that these changes had zero impact on calculating the present value of current PS pensions.  I had to repeat this point of a few occasions because it was raised on a number of occasions but I hope I was courteous to other posters at all times.



Jon Stark said:


> You've also managed to land a dig with your assertion that public servants don't appreciate the value of their pensions, but I'm off topic when



I actually said that I am regularly surprised at the extent to which public servants underestimate the true value of their pension entitlements.  That's hardly a dig - it's simply been my experience.  Many of the contributions to thread are a good example of this phenomenon.



Jon Stark said:


> ... so there doesn't seem to be much scope for discussion...??



I'm inclined to agree but some posters are still arguing that the article is bogus and hence the ongoing discussion.


----------



## noproblem

Sarenco said:


> Same Sex Marriage?
> 
> Can we stick with the topic at hand?
> 
> Thanks.





Sarenco said:


> Well then why did you introduce the point in the context of this discussion?  Again, I'm more than happy to debate the point in a separate thread but I'm trying to keep this thread on topic.
> 
> 
> 
> Again, I'm more than happy to debate the sufficiency or otherwise of the steps that have been taken to date to address the State's pension liabilities elsewhere.
> 
> However, a number of posters suggested that the calculations in the article were bogus because they failed to take account of these changes.  I simply pointed out that these changes had zero impact on calculating the present value of current PS pensions.  I had to repeat this point of a few occasions because it was raised on a number of occasions but I hope I was courteous to other posters at all times.
> 
> 
> 
> I actually said that I am regularly surprised at the extent to which public servants underestimate the true value of their pension entitlements.  That's hardly a dig - it's simply been my experience.  Many of the contributions to thread are a good example of this phenomenon.
> 
> 
> 
> I'm inclined to agree but some posters are still arguing that the article is bogus and hence the ongoing discussion.






No, the article is not bogus, don't believe anyone said it was, but it's your article and some human beings on here disagree with it and quite rightly too. However, you're not listening and by simply refuting everything being said and believing only your own rhetoric your argument is going nowhere. Give it a rest like a good lad, you're a very unique person, just like everyone else.


----------



## Sarenco

noproblem said:


> No, the article is not bogus, don't believe anyone said it was


At least three other posters said the article was bogus (or used words to that effect).



noproblem said:


> it's your article


It's not actually.



noproblem said:


> you're not listening


More than happy to give full consideration to all substantive points.  Did you intend to make one?



noproblem said:


> Give it a rest like a good lad, you're a very unique person, just like everyone else.


Any chance you could ease up on the condescending tone?  

Many thanks.


----------



## Jon Stark

Sarenco said:


> At least three other posters said the article was bogus (or used words to that effect).
> 
> 
> It's not actually.
> 
> 
> More than happy to give full consideration to all substantive points.  Did you intend to make one?
> 
> 
> Any chance you could ease up on the condescending tone?
> 
> Many thanks.



The irony of your second last sentence above, coming straight after the previous couple...!


----------



## noproblem

Sarenco said:


> At least three other posters said the article was bogus (or used words to that effect).
> 
> 
> It's not actually.
> 
> 
> More than happy to give full consideration to all substantive points.  Did you intend to make one?
> 
> 
> Any chance you could ease up on the condescending tone?
> 
> Many thanks.


By synopsising my replies to suit yourself you are proving yourself to be the master of the condescending tone. Thankfully, others opinions have more than proved themselves correct, without trying to be superior in any way. I'm guessing that's what's called intelligence.


----------



## Cervelo

Jon Stark said:


> As a civil servant I'd have no problem with what you suggest, as long as my employer also increases my salary by the additional ~20% that I could earn in the private sector in an equivalent role...! I'd be delighted to have been earning 20% more gross, and not paying the PRD or PPC, for the last couple of years while starting a family and saving the deposit for a house...



I find it hard the believe that a civil servant would give up a DB pension and opt for a DC pension for a 20% salary increase givin' the cost of the DC fund needed to provide the same as the DB pension,
or am I missing your point ??


----------



## elacsaplau

noproblem said:


> No, the article is not bogus....QUOTE]
> 
> Hi noproblem,
> 
> Just one question - do you accept the accuracy of the annuity rates emanating from the Irish Life quotation system?


----------



## cormacol

I'm not getting all the ire being directed at the OP.

The simple fact is that the pension benefits offered to the current generation of public sector retirees are extremely valuable and most have no understanding of it or at least give that impression.

A combination of low interest rates to keep the existing system going combined with a period of unsustainable pay increases has resulted in a typical retiree becoming a millionaire and using up our scarce resources.

In one sense it is just another example of the older generation screwing the younger generation.

The big problem is the insistence of the state of taking on these risky liabilities


----------



## noproblem

It depends, doesn't it elacsaplau? Are you really asking me to accept what is fact or figures based on past performance? If it's past performance it means nothing because it has happened and may not happen again, if it's based on the future i'd imagine they call that "projection" or some other similar gobble de gook financial jargon. If not, they're geniuses and must have the market totally wrapped up. Don't you think?.


----------



## elacsaplau

Hi noproblem,

My question is not about what has happened in the past or what will happen in the future.

I am just trying to understand whether you accept that someone, with €1.5m in his pension fund, *now* will get an annuity of only €24k per year (on the contractual terms as described in previous posts)?


----------



## noproblem

Some get it for a very short while, some get it for years and some who have paid in will never get it at all. Allowing for what i've just given you, would you not think the figures you've given me as verbatim are indeed no such thing?


----------



## elacsaplau

Hi noproblem,

I think we are a little at cross purposes. I think what you are saying is that post retirement some folk will die shortly thereafter and some will live for ages. And also that some people will never make it to retirement age. All of this I accept fully.

My question is if you have someone who is not a member of a defined benefit plan but is a member of a DC plan - and this person arrives at retirement age and has a DC fund equal to €1.5m and wishes to buy an annuity with this fund, do you accept that the annual amount of the annuity (pension) that he will receive is c. €24k (based on the nature of the annuity as described)?


----------



## Gordon Gekko

The point that many seem to be missing is that the cost of an annuity where an insurance company must make a profit is very different to the cost of providing an annuity.


----------



## Slim

Could l respectfully suggest that using the cost of annuities offered by 'for profit' insurance companies presents an overly gloomy prospect for the retiree. In the US, an invested pension fund of €1.5m would be estimated to facilitate a safe withdrawal rate of 4% giving approx €60k pension per annum, based on the Trinity study. We should broaden this discussion to include non annuity mechanisms.


----------



## Sarenco

Gordon Gekko said:


> The point that many seem to be missing is that the cost of an annuity where an insurance company must make a profit is very different to the cost of providing an annuity.



It's certainly true that life companies have to make a profit on the annuity contracts that they write. 

But...


Sarenco said:


> If anything, the analysis as to what lump sum would be required to purchase an annuity to provide an income in retirement comparable to a PS pension actually underplays the true cost of PS pensions to the taxpayer.  The annuity quotes detailed above all assume that the annuity payment will escalate in line with inflation, subject to an annual cap.  However, PS pensions do not escalate in line with inflation - they increase in line with salary increases of serving PS employees.
> 
> The Department of Public Expenditure estimated a couple of years ago that the State would reduce its pension liabilities by around €16 billion if it linked future PS pension increases to the cost of living rather than increases in the salaries of serving PS employees.  A saving of €16 billion would go a long way to securing the sustainability of the State's pension liabilities.


----------



## cormacol

Fair point Gordan re the profit.

Also the annuity investment strategy should be based on Irish bond yields rather than core euro yields although the difference isn't much at the moment.

Going against this - the public sector pension increase is salary linked which would be considerably more valuable than the max annuity increase available


----------



## cormacol

Slim said:


> Could l respectfully suggest that using the cost of annuities offered by 'for profit' insurance companies presents an overly gloomy prospect for the retiree. In the US, an invested pension fund of €1.5m would be estimated to facilitate a safe withdrawal rate of 4% giving approx €60k pension per annum, based on the Trinity study. We should broaden this discussion to include non annuity mechanisms.



We really shouldn't unless your proposing that the investment strategies underpinning both approaches are the same - that you could generate the same drawdown by investing in Irish bonds and not run out of money if you live to normal life expectancy


----------



## noproblem

elacsaplau said:


> Hi noproblem,
> 
> I think we are a little at cross purposes. I think what you are saying is that post retirement some folk will die shortly thereafter and some will live for ages. And also that some people will never make it to retirement age. All of this I accept fully.
> 
> My question is if you have someone who is not a member of a defined benefit plan but is a member of a DC plan - and this person arrives at retirement age and has a DC fund equal to €1.5m and wishes to buy an annuity with this fund, do you accept that the annual amount of the annuity (pension) that he will receive is c. €24k (based on the nature of the annuity as described)?



Your question is not broad enough and is trying to get me to agree with an assertion based on a confined spread. Neither do I think public servants should have to apologise to anyone for what they get. There's a very good job done over the past few years by FG in particular in the divide and conquer department between private and public sector workers. A very nasty development and copied with great skill by FG from our conquerors in the past. 
 Look,  everyone has an opinion on pensions, some seem to believe their opinion is exact, others like to debate that fact and, there's no proper answer really. One thing I do agree with though, the person/company selling the pension will do well out of it. Any other discussion from me on this is pointless, but let others carry on trying to impose so called calculations and so called facts on us mere mortals. Sure we're only first generation graduates and what would we know compared to you clever boys and girls. You've really proved yourselves in the pension field, haven't you?


----------



## cormacol

noproblem said:


> Your question is not broad enough and is trying to get me to agree with an assertion based on a confined spread. Neither do I think public servants should have to apologise to anyone for what they get. There's a very good job done over the past few years by FG in particular in the divide and conquer department between private and public sector workers. A very nasty development and copied with great skill by FG from our conquerors in the past.
> Look,  everyone has an opinion on pensions, some seem to believe their opinion is exact, others like to debate that fact and, there's no proper answer really. One thing I do agree with though, the person/company selling the pension will do well out of it. Any other discussion from me on this is pointless, but



But it is fact.....within the construct of the current iteration of the financial system. 

I'd be interested in your view as to how you value a defined benefit pension (not just public sector)


----------



## Sarenco

Slim said:


> Could l respectfully suggest that using the cost of annuities offered by 'for profit' insurance companies presents an overly gloomy prospect for the retiree. In the US, an invested pension fund of €1.5m would be estimated to facilitate a safe withdrawal rate of 4% giving approx €60k pension per annum, based on the Trinity study. We should broaden this discussion to include non annuity mechanisms.



Hi Slim

I think a discussion on the pros and cons of an ARF/withdrawal strategy versus purchasing an annuity would be an excellent topic for discussion on another thread.

For present purposes, I would just note that the Trinity study analysis applied in an Irish context gives a "safemax" withdrawal rate of only 2.6% over a 30 year period, using a portfolio comprised of 50/50 domestic bonds and equities.

Could this 2.6% "safe" withdrawal rate (adjusted for inflation) be relied upon in the future?  Perhaps but bear in mind that interest rates are currently at their lowest levels in recorded financial history so even this low withdrawal rate is far from guaranteed to ensure that you won't run out of money before you run out of life.  Annuities obviously take this risk off the table.


----------



## elacsaplau

Hi noproblem,

First of all, I am a public servant so I'm not intending to self-flagellate here - well, not overly so, anyways!

Secondly, I did not understand the general points you were making so I resorted to a single specific question which required repeated posing - and even then you have refused to answer.

I just happen to believe that the annuity quotes from Irish Life are accurate (albeit very unenticing) and consequently that public/civil servants pensions are highly valuable. As others have pointed out, there are reasons why annuity rates are so low (long-term high-grade EU bonds at incredibly low yields, actual and anticipated longevity improvements, etc.) and why, as a consequence, pensions have such massive equivalent capital values these days.

All the IT journalist was saying is that if you were to buy a typical civil servant's pension in the marketplace (i.e. an annuity), it would cost a fortune. I tend to agree with him because, getting all technical, _dems da facts. _Your decision not to acknowledge this is your prerogative.


----------



## Jon Stark

Cervelo said:


> I find it hard the believe that a civil servant would give up a DB pension and opt for a DC pension for a 20% salary increase givin' the cost of the DC fund needed to provide the same as the DB pension,
> or am I missing your point ??



Maybe I'm young and foolish, but right now I'd be happy to have the bird in the hand, financially speaking. An implicit assumption for me would be that any DC  scheme would involve employer and employee contributions, so the funding cost would still be shared to some extent.

I'm guessing the vast majority of posters here are a lot closer to retirement than I am, with houses / mortgages and family already sorted... given my grade I shouldn't need to make any other provision apart from appropriate life cover, but I worry about what might happen to the DB scheme, and my ultimate benefits, over the substantial remainder of my career - at least if the scheme was DC I'd know exactly where I stand all the way along.


----------



## Sarenco

Jon Stark said:


> Maybe I'm young and foolish, but right now I'd be happy to have the bird in the hand, financially speaking.



Well, maybe you should take the comparable private sector job in that case.



Jon Stark said:


> ...given my grade I shouldn't need to make any other provision apart from appropriate life cover, but I worry about what might happen to the DB scheme, and my ultimate benefits, over the substantial remainder of my career - at least if the scheme was DC I'd know exactly where I stand all the way along.



I share your concerns regarding the sustainability of the State's pension liabilities, which is why I posted a link to the IT article in the first place.


----------



## Sarenco

It may be worth noting that the article does not deal exclusively with PS pensions.

It also notes that the State pension has a present value of approximately €500,000.  Minister Varadkar has recently acknowledged that this is unsustainable but it looks as though the State pension is actually going to be increased.  Making it, eh, more unsustainable.


----------



## Gordon Gekko

How can the State Pension have a present value of €500k?

It'll be payable from age 68 and average life expectancy is 79 for a man and 83 for a woman. So 13 years of paying something worth €12k a year with no automatic increases or indexation.

€156k gets paid out on average.

How can the present value be €500k?


----------



## Jon Stark

Sarenco said:


> Well, maybe you should take the comparable private sector job in that case.


Oh so now you're happy to keep going with what you previously viewed as my off topic ramblings... 

You're choosing to take my post out of context - for someone who wants to come across as being very polite and all P's and Q's you actually seem to thrive on selective quoting and taking a post in isolation rather than in context...  I said IF a suggestion made by an earlier poster to IMMEDIATELY change the terms of PS pensions from DB to DC was to be implemented then HYPOTHETICALLY I wouldn't be too miffed AS LONG AS the gap in gross pay between my job in the civil service and an equivalent private sector role (which I can currently rationalise away as being accounted for by my very valuable pension and the few extra days of annual leave that I don't get to take anyway) is bridged as part of the same exercise.

And absolutely, if there ever is a major move like that and after all industrial action ends, if there's a major cut to the value of the overall (pay & pension) package available to the PS workers then you will indeed see the best and brightest cross back into the private sector.



Sarenco said:


> I share your concerns regarding the sustainability of the State's pension liabilities, which is why I posted a link to the IT article in the first place.



Well you see, this is just it, you didn't really say a whole lot in your OP, you just linked to an article - in other fora I frequent your thread would've been closed and deleted or at a minimum you'd have been asked to actually start the discussion.


----------



## Jon Stark

Gordon Gekko said:


> How can the State Pension have a present value of €500k?
> 
> It'll be payable from age 68 and average life expectancy is 79 for a man and 83 for a woman. So 13 years of paying something worth €12k a year with no automatic increases or indexation.
> 
> €156k gets paid out on average.
> 
> How can the present value be €500k?



To be fair the life expectancy figures you quote are at birth - the life expectancy of a person who actually reaches 68 is probably a bit higher...


----------



## Sarenco

Gordon Gekko said:


> How can the present value be €500k?



That's what it would cost to purchase an annuity that would provide a comparable income.

Male aged 66 (the State pension is currently payable at 66).
Fund of €500,000 available to purchase annuity.
Pension escalates line with inflation, subject to cap of 5% per annum.
No guaranteed term.
Nil commission.
Annuity income - *€12,507.20*
Increases in the State pension have actually outpaced inflation to a very material extent over the last 20 years and there is no indication that this trend is going to be reversed in the short term.


----------



## Sarenco

@John Stark - if you have a problem with any of my posts then please feel free to use the "report" button.

I don't propose to debate the issue of public sector v private sector pay on this thread as, in my opinion, it would only serve to distract from the topic under discussion - namely, the truly shocking cost of State pensions.

Thank you.


----------



## Cervelo

Jon Stark said:


> Maybe I'm young and foolish, but right now I'd be happy to have the bird in the hand, financially speaking. An implicit assumption for me would be that any DC  scheme would involve employer and employee contributions, so the funding cost would still be shared to some extent.
> 
> I'm guessing the vast majority of posters here are a lot closer to retirement than I am, with houses / mortgages and family already sorted... given my grade I shouldn't need to make any other provision apart from appropriate life cover, but I worry about what might happen to the DB scheme, and my ultimate benefits, over the substantial remainder of my career - at least if the scheme was DC I'd know exactly where I stand all the way along.



So after you have got your 20% salary increase your still looking for your employer to fund part of your pension, how much would you consider is a reasonable contribution by your employer ??


----------



## Sarenco

Sarenco said:


> Increases in the State pension have actually outpaced inflation to a very material extent over the last 20 years and there is no indication that this trend is going to be reversed in the short term.



Just to flesh out that comment -

In 1996 the full State pension (contributory) was IR£78 per week.  That's the equivalent of about €145 per week in 2016 money, compared to the current payment of €233 per week.


----------



## Jon Stark

Cervelo said:


> So after you have got your 20% salary increase your still looking for your employer to fund part of your pension, how much would you consider is a reasonable contribution by your employer ??



Do most occupational schemes in large organisations not have some element of matching by the employer?


----------



## Gordon Gekko

Sarenco said:


> That's what it would cost to purchase an annuity that would provide a comparable income.
> 
> Male aged 66 (the State pension is currently payable at 66).
> Fund of €500,000 available to purchase annuity.
> Pension escalates line with inflation, subject to cap of 5% per annum.
> No guaranteed term.
> Nil commission.
> Annuity income - *€12,507.20*
> Increases in the State pension have actually outpaced inflation to a very material extent over the last 20 years and there is no indication that this trend is going to be reversed in the short term.



But the present value isn't the number that an insurance company demand to pay such an annuity.

€500k is a sensationalist figure.


----------



## Sarenco

Hi Gordon

This entire thread is about what it would cost to purchase an income equivalent to a State pension on the open market.  I would strongly encourage you to seek alternative annuity quotes if you consider what I have  posted to be unrepresentative of the current market.

Yes, a life assurance company will seek to generate a profit from its annuity book - no question.

However, this profit margin would be swamped by the actual increases that can be anticipated in State pension payments over and above cost of living increases based on our recent history.  Look at the gap between increases that you would anticipate based on increases in the cost of living over the last 20 years and the actual increases in the State pension over that period - it's massive!

Is there any evidence that this trend is likely to change in the future?  Not that I can see.

Also, bear in mind that life companies have a natural hedge to the longevity risk that they bear on their annuity books - the mortality risk that they bear on life contracts.  Obviously, an individual (or State) doesn't have that advantage.


----------



## Cervelo

Jon Stark said:


> Do most occupational schemes in large organisations not have some element of matching by the employer?



I'm sure some if not most do, but not everybody works for a large corporation in the private sector, a lot of people work for smaller companies who dont have a pension scheme or have their employers pay part of their pension.


----------



## elacsaplau

Gordon Gekko said:


> But the present value isn't the number that an insurance company demand to pay such an annuity.
> 
> €500k is a sensationalist figure.





Sarenco said:


> Hi Gordon
> 
> This entire thread is about what it would cost to purchase an income equivalent to a State pension on the open market.





Can someone tell me how many more times Sarenco needs to say the same thing?


----------



## Jon Stark

Cervelo said:


> I'm sure some if not most do, but not everybody works for a large corporation in the private sector, a lot of people work for smaller companies who dont have a pension scheme or have their employers pay part of their pension.



Well which private sector group do you think public sector workers are more comparable to?!


----------



## Sarenco

elacsaplau said:


> Can someone tell me how many more times Sarenco needs to say the same thing?



Thanks elacsaplau but I do understand the ongoing scepticism - the numbers are truly shocking, almost unbelievable.

Pensions are expensive - _really, really _expensive.  

I don't think we can have a proper discussion on how best to secure the sustainability of the State's pension liabilities until people fully absorb just how expensive they really are.


----------



## Jon Stark

elacsaplau said:


> Can someone tell me how many more times Sarenco needs to say the same thing?



But really, what is its relevance? Does the state buy an annuity for every PS pensioner / OAP?? If not, what is the relevance of the cost of a notional annuity to fund something that IN FACT is never going to be funded by an annuity?!


----------



## Sarenco

It's absolutely true that the State will never purchase annuities to discharge its pension obligations.  

The State will, however, provide a stream of pension income from current revenue that is comparable to the income stream provided by an annuity.  Therefore, it is entirely appropriate to compare the income stream from a pension with the income stream from an annuity.

Annuities are priced in the open market and are a very good proxy for estimating the market value of a State pension.

Hope that helps.


----------



## Gordon Gekko

elacsaplau said:


> Can someone tell me how many more times Sarenco needs to say the same thing?



It a completely irrelevant point...the State doesn't have to buy annuities from for-profit corporations in order to fund pensions. It's just sensationalism.


----------



## PMU

What is the 'truly shocking cost' of state (i.e.  public sector) pensions?  Well, it's EUR 2.5 bn (2013), about 15% of the total public sector pay and pensions bill and about 4% of total government expenditure (2013 figures; source IPA). Is this 'truly shocking'?

The public service pay and pension bill peaked at 18.7bn in 2008. Since then it has decreased to €16.2bn in 2014, of which pensions accounting for approximately 15 per cent.  In 2009, the public service pay and pensions bill accounted for 11 per cent of GDP and 13.3 per cent of GNP. By 2014 public service pay and pensions were reduced to 8.6 per cent of GDP and 10 per cent of GNP.

As for the IT article, it's bogus. The cost of providing a civil service pension is its assessed capital cost and not the amount of money a civil servant would have to put away each year to fund it.    This is the methodology used in previous benchmarking studies.  The 1.5 ml 'market – cost' of an average civil servant's pension is specious. Public sector pensions are not funded this way. And it's nonsense to classify the average civil servant as a millionaire on this basis .

The article goes on to say that pensions are extraordinarily expensive, which is correct in both the public and private sectors, but in the public sector, in terms of government expenditure, public  sector pensions are, at present, not excessively onerous, whether as a percentage of total government expenditure or of GNP, and, most importantly, have decreased in recent years.   Someone who retires on a civil service pension of 24,000, had a final salary of 48,000, which is about the max. of the executive officer scale for pre-1995 entrants. To suggest that this person could be classified as a millionaire shows a distinct lack of seriousness in assessing financial outcomes.


----------



## Sarenco

Gordon Gekko said:


> It a completely irrelevant point...the State doesn't have to buy annuities from for-profit corporations in order to fund pensions. It's just sensationalism.



Yes, the State doesn't buy annuities - I have already acknowledged that fact repeatedly.

However, the cost of a purchasing an annuity is a very good proxy for the cost of providing a State pension.

Admittedly it's an imperfect proxy - primarily because the benefits provided by State pensions can be expected to outstrip annuity payments that escalate in line with inflation.  In other words, the cost to the taxpayer in providing a pension will almost certainly be higher than the cost of an annuity that simply escalates in line with inflation.


----------



## Cervelo

PMU said:


> Someone who retires on a civil service pension of 24,000, had a final salary of 48,000, which is about the max. of the executive officer scale for pre-1995 entrants. To suggest that this person could be classified as a millionaire shows a distinct lack of seriousness in assessing financial outcomes.



But to someone in the private sector earning the same amount, they can only wish for that sort of pension
Could they have even saved enough for half of that ??


----------



## theo67

Cervelo said:


> But to someone in the private sector earning the same amount, they can only wish for that sort of pension
> Could they have even saved enough for half of that ??



Point has probably already been made, but the person in the private sector who works 40 years will get State Contributory Pension, circa 12k for single person, up to  23k for person with adult dependent.


----------



## Sarenco

Cervelo said:


> But to someone in the private sector earning the same amount, they can only wish for that sort of pension
> Could they have even saved enough for half of that ??



Perhaps I should have titled this thread:-

"The truly shocking cost for somebody in the private sector to buy an annuity that provides an income comparable to the pension currently payable to an average civil service pensioner".


----------



## Jon Stark

Sarenco said:


> Perhaps I should have titled this thread:-
> 
> "The truly shocking cost for somebody in the private sector to buy a pension that provides an income equivalent to the pension currently payable to an average civil service pensioner".



It certainly could've saved us several pages of posts...


----------



## elacsaplau

Sarenco said:


> "The truly shocking cost for somebody in the private sector to buy a pension that provides an income equivalent to the pension currently payable to an average civil service pensioner".



Sarenco,

Are you crazy - that would cause riots man? Seriously, I don't know what more you could have done......

How many more times will you have to say that annuity costs are fierce dear altogether?


----------



## Jon Stark

Cervelo said:


> But to someone in the private sector earning the same amount, they can only wish for that sort of pension
> Could they have even saved enough for half of that ??



They can do more than just wish for it - the public sector hires from, guess where, the general public... 

There are plenty of areas where public sector employees get recruited back out into the private sector, so either those people fail to understand the value of the pension benefits they're foregoing (I know Sarenco's view on that!) or the entire deal of pay, (limited) opportunities for advancement, and pension isn't always that great...

I suppose the point I'm getting at is that you can look at the pensions and say, "Holy Crap, look how much they're costing!" (15% of the PS pay bill presently I think was indicated earlier) but the alternative is that (if people do have any appreciation of the value of the pension) to recruit/retain staff, the overall package can't easily be substantially reduced in value.


----------



## Jon Stark

elacsaplau said:


> Sarenco,
> 
> Are you crazy - that would cause riots man? Seriously, I don't know what more you could have done......
> 
> How many more times will you have to say that annuity costs are fierce dear altogether?



Lol at that - it would indeed be the mother of all backtracks to turn around at this point and assert that his concern is about how expensive annuities are!


----------



## elacsaplau

Jon Stark said:


> Lol at that - it would indeed be the mother of all backtracks to turn around at this point and assert that his concern is about how expensive annuities are!



In what way?


----------



## Sarenco

Jon Stark said:


> Lol at that - it would indeed be the mother of all backtracks to turn around at this point and assert that his concern is about how expensive annuities are!



I'm more than happy to acknowledge just how expensive annuities are at the present time.

Purchasing an income in the marketplace that is comparable to a State pension is expensive - very expensive.  That's really the whole point of the thread.


----------



## cormacol

I know this is a bit off topic at this stage but....

While the full annuity cost is not totally representative of the cost to our society for public sector pensions it is pretty close. 

In our current financial system, our limited resources have to be divided and in my opinion too much of our limited resources have historically been allocated to public sector pensions..while steps have been taken it will take a very long time for this to wash through the system. 

The argument that private sector employees should stop giving out and join the public sector misses the point unfortunately- it's the totality which is unsustainable


----------



## Jon Stark

Sarenco said:


> I'm more than happy to acknowledge just how expensive annuities are at the present time.
> 
> Purchasing an income in the marketplace that is comparable to a State pension is expensive - very expensive.  That's really the whole point of the thread.



The whole point of the thread is in your title surely? But since state pensions are, by definition, not purchased in the marketplace the exercise is fundamentally flawed.

You are not expressing concern in your OP (and again see my earlier comments re standards, discussion etc) or anywhere that I've noticed since, about the cost of annuities.


----------



## Jon Stark

elacsaplau said:


> In what way?



Because quite clearly and repeatedly his concern has been expressed as relating to the cost to the exchequer of funding its pension commitments - at risk of going into fully broken record mode, the cost of annuities in the marketplace has no bearing on this cost.


----------



## cormacol

Jon Stark said:


> Because quite clearly and repeatedly his concern has been expressed as relating to the cost to the exchequer of funding its pension commitments - at risk of going into fully broken record mode, the cost of annuities in the marketplace has no bearing on this cost.



Just because your not buying annuities does not mean their costs aren't relevant. How do you place a value on it?


----------



## Jon Stark

cormacol said:


> Just because your not buying annuities does not mean their costs aren't relevant. How do you place a value on it?



Mother of.....

If you are worried about the COST of it, or the sustainability of that cost, then you can work out actuarially what that cost is.


----------



## cormacol

Jon Stark said:


> Mother of.....
> 
> If you are worried about the COST of it, or the sustainability of that cost, then you can work out actuarially what that cost is.



Exactly - how do you think the cost of an annuity is derived? 

I'd be interested in why there is no relation between the two - I think everyone has acknowledged that there are differences in the two but I would have thought the main drivers of the cost are the same.


----------



## Gordon Gekko

Jon Stark said:


> Mother of.....
> 
> If you are worried about the COST of it, or the sustainability of that cost, then you can work out actuarially what that cost is.



No you don't!

A quote from an insurance company includes their profit margin.

The State is a "not for profit" entity, so the real cost of providing a public sector pension is the annuity quote less the insurance company's profit margin.

So quoting the annuity quote is utterly misleading.


----------



## cormacol

It might be your turn of phrase but it's not utterly misleading - it gives a fairly good indication of the cost but does needs to be adjusted for the profit as we all agree. 

That is still an actuarial calculation though


----------



## Jon Stark

Gordon Gekko said:


> No you don't!
> 
> A quote from an insurance company includes their profit margin.
> 
> The State is a "not for profit" entity, so the real cost of providing a public sector pension is the annuity quote less the insurance company's profit margin.
> 
> So quoting the annuity quote is utterly misleading.



Not sure why you're quoting me and disagreeing with me, as we seem to be in agreement!


----------



## Jon Stark

cormacol said:


> It might be your turn of phrase but it's not utterly misleading - it gives a fairly good indication of the cost but does needs to be adjusted for the profit as we all agree.
> 
> That is still an actuarial calculation though



Any idea what kind of margin they operate at?? I'd be very surprised if they don't err very much on the side of caution (i.e. Profit)...

If the fund requirement per the IT article is 1.5m and the annuity provider have as little as a 30% margin, then the actual cost is 1.15m...


----------



## cormacol

Jon Stark said:


> Any idea what kind of margin they operate at?? I'd be very surprised if they don't err very much on the side of caution (i.e. Profit)...
> 
> If the fund requirement per the IT article is 1.5m and the annuity provider have as little as a 30% margin, then the actual cost is 1.15m...



It wouldn't be any where near that but I couldn't give you a current figure  for profit margin.


----------



## Sarenco

Jon Stark said:


> You are not expressing concern in your OP (and again see my earlier comments re standards, discussion etc) or anywhere that I've noticed since, about the cost of annuities.



For the avoidance of any doubt, I am very concerned about current annuity rates. I'm sure that anybody that is currently saving to provide for their retirement is (or at least should be) similarly concerned.

I am also very concerned about the sustainability of the State's unfunded pension liabilities.

The two issues are not unrelated.

Hope that clears things up.


----------



## Gordon Gekko

The margin is circa 20%.


----------



## Gordon Gekko

Sarenco said:


> For the avoidance of any doubt, I am very concerned about current annuity rates. I'm sure that anybody that is currently saving to provide for their retirement is (or at least should be) similarly concerned



Why are you concerned if you're (presumably) going down the ARF route?


----------



## Sarenco

Gordon Gekko said:


> The margin is circa 20%.



I think you will have to give us a link for that and explain what you mean by "profit margin" in this context.  

Life assurance companies normally express their profitability in terms of embedded value - is that what you're talking about?


----------



## Gordon Gekko

http://www.telegraph.co.uk/finance/...w-annuity-firms-clean-up-at-your-expense.html

"Only one company, Standard Life, actually discloses its profit margins on annuities. We asked other insurers to follow suit but none would do so. Standard Life made a margin of 18.6pc on annuities in 2011."


----------



## Sarenco

Ok, so you're talking about targeted underwriting margin in the UK annuity market from a time when purchasing an annuity was compulsory in that market.  It hardly follows that that is reflective of the Irish annuity market.

In any event, even a 20% underwriting margin wouldn't bridge the gap between the escalation rate of PS pensions and cost of living increases of an annuity.


----------



## Gordon Gekko

Sarenco said:


> Ok, so you're talking about targeted underwriting margin in the UK annuity market from a time when purchasing an annuity was compulsory in that market.  It hardly follows that that is reflective of the Irish annuity market.
> 
> In any event, even a 20% underwriting margin wouldn't bridge the gap between the escalation rate of PS pensions and cost of living increases of an annuity.



Are you ever wrong, Sarenco?

Standard Life confirmed that their margin on annuities was 19%.

But that's not enough for you...


----------



## Sarenco

Gordon Gekko said:


> Are you ever wrong, Sarenco?



Yes, all the time!

Regardless, you can't take a margin rate from what was effectively a captive market before the recent UK pension reforms and assume that margin is representative of the Irish market.

But even if you do assume that it is representative it still doesn't demonstrate that an annuity is not a close, if imperfect, proxy for the cost of a public sector pension for the reasons already stated.


----------



## elacsaplau

Sarenco said:


> In any event, even a 20% underwriting margin wouldn't bridge the gap between the escalation rate of PS pensions and cost of living increases of an annuity.



Presumably this will cause certain posters to at least reflect a little - but, honestly, who knows?

Regarding Gordon's link to the Telegraph, I think we should never again refer to newspaper articles that mention annuities. This was attempted, in good faith, 191 posts ago. And it's a very dangerous thing to do.

In any event, the annuity profit margin was just another silly tangent in this thread (read: would you want to buy an annuity from a company that was not making a profit?). The gist of the now infamous original article is that if an individual was to try replicate the income stream in the market (via an annuity), it would cost a fortune. Any profit margin within the annuity is simple part of the cost to the individual.


----------



## Jon Stark

Sarenco said:


> In any event, even a 20% underwriting margin wouldn't bridge the gap between the escalation rate of PS pensions and cost of living increases of an annuity.



Sorry if this is a stupid question but could you explain the above in plain English for me? What is the escalation rate of PS pensions mean?

Edit: I think I should understand what it means, but in circumstances where there has been no escalation in nearly a decade in individual PS pensions, I'm wondering if I'm missing something...


----------



## Sarenco

elacsaplau said:


> Any profit margin within the annuity is simple part of the cost to the individual.



Of course that's quite true.  I suppose you could get really silly and start factoring in the cost of framing, administering and enforcing our tax code into the cost of providing State pensions.  But that would clearly be ridiculous - wouldn't it?


----------



## Jon Stark

Sarenco said:


> Of course that's quite true.  I suppose you could get really silly and start factoring in the cost of framing, administering and enforcing our tax code into the cost of providing State pensions.  But that would clearly be ridiculous - wouldn't it?



Not ridiculous at all, IF you can establish that there is a marginal cost in that area due to State pensions, and IF you can reliably quantify that additional cost... does your gut suggest it exists and/or it's material...?


----------



## Sarenco

Jon Stark said:


> Sorry if this is a stupid question but could you explain the above in plain English for me? What is the escalation rate of PS pensions mean?


 
Apologies for the jargon.  It simply means that PS pensions rise in line with the salaries of serving PS staff members as opposed to increases in the cost of living.

The Department of Public Expenditure estimated a couple of years ago that it would shave €16 billion off  the PS pension bill by limiting future increases to increases in the cost of living.


----------



## Sarenco

Jon Stark said:


> Not ridiculous at all, IF you can establish that there is a marginal cost in that area due to State pensions, and IF you can reliably quantify that additional cost... does your gut suggest it exists and/or it's material...?



Well the costs clearly exist.  The good folk in the Oireachtas, Department of Finance, Revenue Commissioners and Courts all draw salaries (and pensions!), occupy office space, etc. 

Can I reliably quantify the cost?  No more than I can reliably quantify the future profits of life assurance companies.

Either way, I don't believe it's in any way material to what we're discussing.  To be honest, I was being facetious in making the point.


----------



## Jon Stark

Sarenco said:


> Well the costs clearly exist.  The good folk in the Oireachtas, Department of Finance, Revenue Commissioners and Courts all draw salaries (and pensions!), occupy office space, etc..



They sure do, and they still would even if the scheme didn't exist or was different, hence my reference to the MARGINAL cost - but since you've admitted you were only being a smart This post will be deleted if not edited to remove bad language referring to it we may travel no further down this particular cul de sac...


----------



## Jon Stark

Sarenco said:


> Apologies for the jargon.  It simply means that PS pensions rise in line with the salaries of serving PS staff members as opposed to increases in the cost of living.
> 
> The Department of Public Expenditure estimated a couple of years ago that it would shave €16 billion off  the PS pension bill by limiting future increases to increases in the cost of living.



I had a raised that point with colleagues one day last week actually, where I said I couldn't understand why PS pensioners get to benefit from pay agreements entered into by current staff in return for increased productivity / efficiency etc... when they weren't required to deliver said productivity / efficiency. Pensions absolutely should only rise in line with inflation. 

Needless to say the 63 year old at the table shifted around uncomfortably in his chair without saying anything...!


----------



## Cervelo

Can somebody clarify for me how much PRSI a pre 95er pays on €48k, would i be right in thinking its .9% ??


----------



## Sarenco

Jon Stark said:


> They sure do, and they still would even if the scheme didn't exist or was different, hence my reference to the MARGINAL cost - but since you've admitted you were only being a smart This post will be deleted if not edited to remove bad language referring to it we may travel no further down this particular cul de sac...



Yes, the cost of framing, administering and enforcing our tax code is marginal.  As is the profit margin of a life company in writing an annuity.  I certainly agree that there is no need to travel any further down this particular cul de sac.


----------



## Jon Stark

Sarenco said:


> Yes, the cost of framing, administering and enforcing our tax code is marginal.  As is the profit margin of a life company in writing an annuity.  I certainly agree that there is no need to travel any further down this particular cul de sac.



So if there was no DB PS pension scheme, there would be no cost of framing, administering and enforcing our tax code - I'm intrigued to hear how you stand that up...??


----------



## Slim

Cervelo said:


> Can somebody clarify for me how much PRSI a pre 95er pays on €48k, would i be right in thinking its .9% ??


Yes, from €352 - €500, it's .9%. Over €500, it's .9% of first €1,443, 4% on balance.


----------



## Sarenco

Jon Stark said:


> So if there was no DB PS pension scheme, there would be no cost of framing, administering and enforcing our tax code - I'm intrigued to hear how you stand that up...??



I'm not trying to stand anything up!  I'm simply making the (somewhat tongue in cheek) point that there is a cost associated with framing, administering and collecting the taxes required to make State pension payments.  I wouldn't attempt to quantify that cost but it's not zero.


----------



## Cervelo

Slim said:


> Yes, from €352 - €500, it's .9%. Over €500, it's .9% of first €1,443, 4% on balance.



So a person earning €48k only pays .9% in total or is it .9 on the first €500 and 4% on the next €432 ??
Is the first €1,443 per week or year ?


----------



## PMU

Sarenco said:


> Yes, the State doesn't buy annuities - I have already acknowledged that fact repeatedly.
> 
> However, the cost of a purchasing an annuity is a very good proxy for the cost of providing a State pension.
> 
> Admittedly it's an imperfect proxy - primarily because the benefits provided by State pensions can be expected to outstrip annuity payments that escalate in line with inflation.  In other words, the cost to the taxpayer in providing a pension will almost certainly be higher than the cost of an annuity that simply escalates in line with inflation.


No it's not.  The cost of providing a  pension is comparable to establishing a sinking fund, not to purchasing an annuity.

Also, on what planet are you living? Public service salaries shave not increased; they have been decreased. Pensions have been reduced in line with salary reductions and a pensions-related deduction (average 7%) was introduced in 2009. Future pensions will be based on career averaging and not on final salary. The 'link' between pension increases and salary always was discretionary, and can be reviewed under the recent public service agreements 2010 – 2018.

The important point, which you haven't responded to in my post no 162 above, is that public sector pensions are decreasing both in terms of annual cost (i.e. as a % of total expenditure) and in terms of affordability (i.e. as a % of GNP). They are not increasing. Is 4% of total government expenditure really 'shocking'?


----------



## Slim

Cervelo said:


> So a person earning €48k only pays .9% in total or is it .9 on the first €500 and 4% on the next €432 ??
> Is the first €1,443 per week or year ?


From €352  - €1443 per week, it's .9%. Over €1443 pw it's 4%.


----------



## Sarenco

Gordon Gekko said:


> http://www.telegraph.co.uk/finance/...w-annuity-firms-clean-up-at-your-expense.html
> 
> "Only one company, Standard Life, actually discloses its profit margins on annuities. We asked other insurers to follow suit but none would do so. Standard Life made a margin of 18.6pc on annuities in 2011."



Just to develop the point that it is unsafe to rely on data relating to annuity margins prior to the UK pension reforms that were introduced in 2014, the margins that Standard Life generated on its new annuity business last year fell by a whopping 66% -

http://www.rte.ie/news/business/2015/0220/681588-standard-life-profit/


----------



## Sarenco

PMU said:


> No it's not.  The cost of providing a  pension is comparable to establishing a sinking fund, not to purchasing an annuity.



I respectfully disagree.

The cost of purchasing an annuity that provides a comparable benefit to an individual State pension is a perfectly valid, if imperfect, way of estimating the actuarial value of that pension.  I believe I have already explained why I consider your "sinking fund" approach to be inappropriate.



PMU said:


> Also, on what planet are you living?



I'm afraid I don't have an answer to that knockout argument!

As you know, the Department of Public Expenditure and Reform carried out an actuarial valuation of the State's public service pension liabilities as at December 2012.

The key result was that the total accrued liability in respect of public service pensions was estimated at €98bn. This compares with the previous estimate of €116bn for 2009. Therefore, over the three years from 2009 to 2012 the liability had fallen by €18bn or by 16% and the main reasons for the reduction were the pay and pension cuts since 2009 and the freeze in pay and pension rates that are currently under negotiation.

The Department itself has estimated that the accrued liability would fall by a further €16bn if future pension increases were linked to inflation, rather than the salary increases of serving staff members.

Whatever way you look at it, the accrued (and obviously unfunded) public sector pension liability is a big number and the question remains as to how it will be discharged when the ratio of retirees to workers is projected to deteriorate from 1:5 to 1:2 by 2050.

Put bluntly, where's the money going to come from in the future?


----------



## Merowig

http://www.independent.ie/business/...nds-of-public-sector-pensioners-35116538.html


> Triple boost for thousands of public sector pensioners
> (...)
> The increases will see some retired public sector workers getting an annual increase in their income of €1,000.
> 
> The big gains for retired nurses, civil servants and teachers will come from a further unwinding of cuts to their pensions in the austerity budgets. They are set to get around €500 restored to their pension payments from the start of next year.
> (...)


----------



## Sarenco

Last June the Minister Donohue announced the restoration of pension income that was subjected to the Public Service Pension Reduction (PSPR) in the wake of the financial crisis.

The changes provide for the restoration of pension income on a phased basis over three years as follows:

1 January 2016 – return of €400 to most PSPR-impacted pensioners.
1 January 2017 – return of €500 to most PSPR-impacted pensioners.
1 January 2018 – return of €780 to most PSPR-impacted pensioners.
and/or removing pensioners from the PSPR “net” entirely.

This will obviously have a material impact on the State's accrued public service pension liabilities, the reporting of which is now mandatory (commencing with the end-2015 position) as part of our national accounts under EU Regulations.


----------



## Páid

What is the actual cost to the state for the average €24,000 pension? Is it anywhere near €1.5m ?


----------



## Cervelo

Páid said:


> What is the actual cost to the state for the average €24,000 pension? Is it anywhere near €1.5m ?



Is it not €24K, or is it a trick question ??


----------



## Sarenco

Meanwhile, in other news, the IT are reporting that the forthcoming Commission on Public Sector Pay will consider the value of public servants’ pensions as part of their remuneration, compared to those available in the private sector.

Needless to say, the Beards are not too thrilled and are lobbying hard to ensure that the Commission contains "an adequate number" of members with trade union backgrounds.  They're not too keen on having any pesky "academics" about the place.

http://www.irishtimes.com/news/poli...der-value-of-public-sector-pensions-1.2815424


----------



## Páid

Cervelo said:


> Is it not €24K, or is it a trick question ??


It's €24,000 *per year*. I'm wondering what the total cost of the average Civil Service pension is to the State i.e. the total paid to the person receiving the pension.


----------



## Sarenco

Páid said:


> It's €24,000 *per year*. I'm wondering what the total cost of the average Civil Service pension is to the State i.e. the total paid to the person receiving the pension.



Do you mean historically?  When the cost of living and life expectancy was much lower.

Or are you looking for an actuarial projection as to what the pension will cost the State, making certain reasonable assumptions?


----------



## Páid

Sarenco said:


> Or are you looking for an actuarial projection as to what the pension will cost the State, making certain reasonable assumptions?



That sounds good. It just seems reasonable to me that if you are going to compare pensions you would compare what the pension costs the State to what it would cost to purchase in the private sector. We have the figure for the second part of the comparison (€1.5m), but not the first.


----------



## Sarenco

Paid

The annuity cost is based on an actuarial projection!  That's really the whole point.

You can deduct ~5% to allow for the life companies anticipated profit margin but then you have to add back ~10% to allow for the fact that PS pensions increase in line with salary increases rather than increases in the cost of living. 

Or you could just take the annuity cost as a reasonable, if imperfect, way of estimating the actuarial value of that pension and call it a day.


----------



## Cervelo

This is what i think it would cost both public and private workers for a pension of €24k
For ease of caculation starting and ending pay is €48k and 40 years service

Public sector worker pays prsi at .9% total €17280 and recieves lump sum €72k and a pension of €24k

Private worker pays prsi @ 4% total €76800, then pays into a private pension a further €176,400 (€315k gross) to hopefully get the same pension


----------



## Sarenco

Cervelo said:


> For ease of caculation starting and ending pay is €48k and 40 years service



It may ease the calculation but that's not a very realistic assumption.

In any event, Paid was asking about the cost to the State rather than the individual.


----------



## Conan

The capital cost of an annuity of €24,000 indexed at 2% p.a. and reducing to 50% on the death of the pensioner (assuming a surviving spouse) is circa €1m. The retirement lump sum would be additional.
But of course State pensions are not funded and are paid out of ongoing taxation.
However for someone retiring from the private sector (DC) they would need a pot of c€1m to fund above pension (plus an amount for the retirement lump sum).

Another point worth bearing in mind. We have seen numerous cases over the years where senior(?) civil and public servants are granted "added years" of service on retirement (often early retirement) and because there is no concept or recognition of the "capital costs" involved in such cases it can be easy to increase Joe Bloggs pension by an extra couple of years service. After all what is (say) €5,000 p.a. extra pension (in reality the capital cost is circa €210,000).


----------



## Páid

Sarenco, are you're getting the €98bn figure from here? http://www.per.gov.ie/en/monitoring...the-accrued-public-service-pension-liability/



> Following an actuarial assessment carried out by Departmental staff, this accrued liability figure – of all expected future superannuation [or pension] payments to current public servants and their spouses in respect of service to the end of 2012, plus the full liability for all future payments to current and preserved pensioners and to their spouses, based on current pension rules – has been estimated as amounting to €98 billion as of the end of 2012.





> When a single figure saying we owe a large debt is published, it can be very disconcerting, so it is important to clarify what this figure is – and more importantly what it is not.
> 
> It is equal to the sum of all the *future *payments that public service occupational pension schemes had committed to make as at 2012, based on the current pension rules.  It will not fall due to be paid on a single day; in fact, we estimate that it is payable over the next 70 years or more because pension payments can continue for a very long time.



At the end of 2012 there were about 300,000 serving public servants? How many public servants were in receipt of a pension?


----------



## Sarenco

Yes, the results of the 2012 actuarial valuation, with all relevant assumptions, are available on the Department's website.

I'm afraid I have no idea how many individuals were in receipt of a public sector pension at the end of 2012.  Why do you ask?


----------



## Páid

Ignoring the people (public and civil servants) already in receipt of a pension.

There are about 30,000 serving civil servants each having a pension with an actuarial value of €1.5m. That alone makes up €45bn yet they only represent 10% of the serving public servants. 

Why the huge disparity?


----------



## stuffit

Here's an article from today's Irish Examiner  http://www.irishexaminer.com/ireland/overpaid-former-tds-owe-42k-to-pension-scheme-425058.html

Contributions from serving politicians (TD + Senators) to their pension in 2015 : €900,927

Amount paid out to retired politicians or their surviving spouses in 2015: €11.5m


----------



## Sarenco

Páid said:


> Why the huge disparity?



Sorry Paid but you are inappropriately mixing and matching figures.

The figure of €98bn represents the present value of all expected future superannuation payments to current public sector staff and their spouses in respect of service to December 2012, plus the liability for all future payments to current and preserved pensioners and to their spouses.

Nobody has suggested that all serving civil servants, whatever their age, gender or marital status, have accrued pension entitlements with a present value of €1.5m.

Again, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace, making the various assumptions outlined above.  That represents a good, if imperfect, actuarial estimate of the value of that pension.


----------



## PMU

Sarenco said:


> I respectfully disagree.
> 
> The cost of purchasing an annuity that provides a comparable benefit to an individual State pension is a perfectly valid, if imperfect, way of estimating the actuarial value of that pension.  I believe I have already explained why I consider your "sinking fund" approach to be inappropriate.


A pension is no different from a lease, I.e. it's a series of know payments to be made in the future over time. Nobody prices a lease at the cost of buying an annuity to pay for the regular payments of the lease.   Similarly, the price to the pensioner of a public sector pension is the price of working in the public sector for 40 years; the price of the pension for the government is its capital sum (I.e. the pension amount by the estimated number of years to be paid).    The fact that this may have an annuity value of over a million is neither here nor there; the actual value is at around 672,000.  That's what the taxpayer, via the government, has to pay for this person's pension.



Sarenco said:


> As you know, the Department of Public Expenditure and Reform carried out an actuarial valuation of the State's public service pension liabilities as at December 2012.  The key result was that the total accrued liability in respect of public service pensions was estimated at €98bn. This compares with the previous estimate of €116bn for 2009. Therefore, over the three years from 2009 to 2012 the liability had fallen by €18bn or by 16% and the main reasons for the reduction were the pay and pension cuts since 2009 and the freeze in pay and pension rates that are currently under negotiation.  The Department itself has estimated that the accrued liability would fall by a further €16bn if future pension increases were linked to inflation, rather than the salary increases of serving staff members.



Something we can agree on. This backs up what I showed  my post no 162 above; public sector pension costs have fallen and continue to fall.  This point was also ignored in that nasty IT article; apart from giving the impression that public sector workers on modest incomes have millionaire pensions, it ignored the fact that public sector pension costs are falling and this reduction has come out of the salaries and pensions of public sector workers.

As for pension increases there have been various proposals on how these should handled over the years, and these were evaluated in 2000 by the Commission on  Public Service Pensions.  But nothing has been done in the 16 years since then, why?


----------



## ppmeath

PMU said:


> _I _haven't read the original IT article, as they want to charge me for access, but from what I can make out from the previous posts they calculate what it would cost to buy the equivalent of a civil service pension on the open market. This shows a stunning lack of knowledge of how public sector pensions work. The government does not go out and buy an annuity to pay civil service pensions. You don't need a capital sum to generate the pension. They are paid on a PAYG system.   The pensions themselves are not particularly overgenerous and a  comparison with an annuity is just bogus.
> 
> *It does not cost 1.5 million to provide a pension of 24,000.* If you assume the retiree will live for 25 years he / she needs 25 euro capital for each euro of pension. (Assuming the capital sum is depleted by 1 euro for each year of retirement).
> 
> If the envisaged pension is 24,000 euro, this equates to a capital sum of 600,000 euro. Add in 72,000 for the lump sum and the capital value of this retiree's pension is 672,000 euro – it's not over 1 million. For post 1995 employees you can deduct the accumulated value of contributions made.



And the astonishing failure in the article, that hasn't been picked up here (I haven't read the full thread yet, I will go through it though), is that since 1995 12k of that 24k Pension is supposed to be the State Contributory Pension that is to be integrated into the final 50% final pensionable salary.


----------



## ppmeath

DCD said:


> So again the biggest grade in the Public service by far are Clerical Officers. After 40yrs service 350 euro pension per week. *Dont get the old age pension*. So someone can sit on their backside for 40yrs and receive a pension of approx 220 per week. A difference of 130 per week before tax after 40 yrs work.



That is because this is wrong - they do (or are supposed) to get what used to be known as the OAP, it is now called the State Contributory Pension, this is supposed to be "integrated" into the final retirement pension of 50% final pensionable salary.

There are two parts to the pension - the "occupational" part and the part that is supposed to be covered by the PRSI.


----------



## Sarenco

PMU said:


> A pension is no different from a lease, I.e. it's a series of know payments to be made in the future over time.



Except that a PS pension is not a series of known payments to be made in future over time.  PS pensions payments are linked to PS salaries that increase over time.

A pension of €24k pa would have been worth an absolute fortune 40 years ago!  You could buy a fine house in Dublin for under €20k at that time.



PMU said:


> This backs up what I showed  my post no 162 above; public sector pension costs have fallen and continue to fall.



More than happy to acknowledge (again!) that the State's total accrued liability in respect of PS pensions fell between 2009 and 2012, largely because of pay and pension reductions since 2009.  However, these cuts have already started to be reversed.

Furthermore, the Department of Public Expenditure and Reform has recently confirmed that there is no current plan to sever the link between PS pay and pensions.


----------



## Sarenco

ppmeath said:


> And the astonishing failure in the article, that hasn't been picked up here (I haven't read the full thread yet, I will go through it though)



The State pension is dealt with in the article and was discussed earlier in the thread.


----------



## ppmeath

Sarenco said:


> Except that a PS pension is not a series of known payments to be made in future over time. PS pensions payments are linked to PS salaries that increase over time.



Not anymore. This is one of the changes of the many that have been made since 1995.

post retirement pension increases are linked to CPI.



Sarenco said:


> The State pension is dealt with in the article and was discussed earlier in the thread.







Sarenco said:


> And here's an indicative quote based on the criteria described in the article, ie:
> 
> Male age 60; female age 57
> Fund to buy annuity is €1,500,000
> The annuity increases in line with inflation, subject to a cap of 5% per annum
> The annuity provides for a 50% spouses pension
> The guaranteed term is 5 years
> nil commission
> The annuity income is €23,542.20



Correct me if I am wrong, is this the comparison to the 24k PS average pension? If it is then it is wrong, because since 1995 the 24k is supposed to me made up of an "occupational" part and the State pension (formally OAP), that is supposed to be integrated to give the final 24k.


----------



## Sarenco

ppmeath said:


> Not anymore. This is one of the changes of the many that have been made since 1995.



Legislation introduced in 2012 enabled the minister to link public sector pensions to inflation, rather than existing salaries, though the relevant section has not been brought into operation. The IT reported last week that the Department confirmed there are “no plans at present to change that.”



ppmeath said:


> Correct me if I am wrong, is this the comparison to the 24k PS average pension? If it is then it is wrong, because since 1995 the 24k is supposed to me made up of an "occupational" part and the State pension (formally OAP), that is supposed to be integrated to give the final 24k.



Whether its integrated or not, the cost to the State doesn't change.


----------



## ppmeath

But the cost to buy it would. Because both the private and PS worker (PRSI A) are entitled to the State Contributory pension.


----------



## PMU

Sarenco said:


> Again, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace, making the various assumptions outlined above.


Agreed. But this does not mean the retiree has a pension worth 1.5 million. The retiree will get 672,000 (plus some cost increases) if he / she lives 25 years. And this is the cost of the pension the government.



Sarenco said:


> That represents a good, if imperfect, actuarial estimate of the value of that pension.]


No. It does not represent the value of the pension; it represents the cost of buying an annuity which is totally different. This is the 'mistake' (and I'm being charitable here) the IT article made. The value of a pension is what the pensioner gets (in this case about 672,000 over 25 years – more if he / she lives longer). The actual cost of the pension to the government is the amount the pensioner receives (i.e. also 672,000+).

An actuarial estimate of the value of the pension is its net present value, with future payments and PRD appropriately discounted. And there is no way this will come in at 1.5 m .


----------



## Sarenco

PMU said:


> The retiree will get 672,000 (plus *some cost increases*) if he / she lives 25 years.



"Some" increases?!

Again, PS pension increases are linked to PS salary increases.  40 years ago, the average civil service salary was around €4,000 pa so that's increased by ~1,000% over the intervening period.

You are also ignoring the benefits that will accrue to any surviving spouse.

Fun fact - the last widow to receive a soldier's pension from the US civil war died in 2008.  The US civil war ended in 1865!


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## Sarenco

ppmeath said:


> But the cost to buy it would.



No, the cost to the State would be the same. 

The article estimates that the State pension would cost around €500k in the open market.


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## elacsaplau

Hi Sarenco,

Very brief answers required....

(a) Just wondering if you wanted to buy an annuity for €24k p.a. on the open market and that this annuity would have broadly the same terms and conditions as the standard civil servant's pension (in terms of reversion, escalation, etc.) - any idea what the capital/annuity cost of that would be?

(b) Is there any place where a member of a DC plan (whether in the private or public sector) could purchase this guaranteed income stream in the market-place for less money than required under point (a)?


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## Sarenco

elacsaplau said:


> (a) Just wondering if you wanted to buy an annuity for €24k p.a. on the open market and that this annuity would have broadly the same terms and conditions as the standard civil servant's pension (in terms of reversion, escalation, etc.) - any idea what the capital/annuity cost of that would be?



Around €1.5m (making certain assumptions re age at retirement, etc.)



elacsaplau said:


> (b) Is there any place where a member of a DC plan (whether in the private or public sector) could purchase this guaranteed income stream in the market-place for less money than required under point (a)?



Not that I know of.


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## Páid

Sarenco said:


> Sorry Paid but you are inappropriately mixing and matching figures.
> 
> The figure of €98bn represents the present value of all expected future superannuation payments to current public sector staff and their spouses in respect of service to December 2012, plus the liability for all future payments to current and preserved pensioners and to their spouses.


Both are actuarial estimates of pensions, one of the liability to the State and the other how much the pension would cost in the marketplace. That €98bn represents the cost of pensions for what must be at least 400,000 public service workers and pensioners. How much would that cost be if the Government were purchasing annuities for every worker? €500 billion?



Sarenco said:


> Nobody has suggested that all serving civil servants, whatever their age, gender or marital status, have accrued pension entitlements with a present value of €1.5m.


Both you and the author are playing with words to make it look like civil servants are millionaires because of their pensions, citing how much it would cost in the marketplace and not stating how much those pensions actually cost the State.



Sarenco said:


> Again, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace, making the various assumptions outlined above.  That represents a good, if imperfect, actuarial estimate of the value of that pension.


That says more about the marketplace than anything else.


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## elacsaplau

Hi Paid,

Can you answer just one question please? (Note: I asked a very similar question to noproblem, 3 times in a row, and he refused to answer!!)

If I was in a private DC plan and am at the point of retirement at age 60 and have a fund of €1.5m and want to use this fund to buy myself a pension with the same terms and conditions as a civil servant's pension (i.e. spouse's pension, escalation, etc.).....how much income could I receive if I wanted to convert my fund into a guaranteed income for life?


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## Páid

I'm not a pension expert (far from it). Someone else may be able to answer.


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## Cervelo

elacsaplau said:


> Hi Paid,
> 
> Can you answer just one question please? (Note: I asked a very similar question to noproblem, 3 times in a row, and he refused to answer!!)
> 
> If I was in a private DC plan and am at the point of retirement at age 60 and have a fund of €1.5m and want to use this fund to buy myself a pension with the same terms and conditions as a civil servant's pension (i.e. spouse's pension, escalation, etc.).....how much income could I receive if I wanted to convert my fund into a guaranteed income for life?



From Irish Life  (pensionplanetinteractive.ie)
*Annuity Details*
Quote Basis: Standard
Quote Date: 12/10/2016
Interest Rate: 0.2%
Payment Frequency: Monthly
Currency: Euro
Pension Type: Compulsory Purchase
*Pension Details*
Available fund: €1,500,000.00
First Life Pension Amount: €24,817.20
Second Life Pension Amount: €12,408.60
Escalation Type: Inflation - Annual Cap
Inflation Cap: 5%
Investment Protection: No
Guarantee Period: 5 years
Commencement Date: 12/10/2016
Commission: 2%
Reversion %: 50.0
Overlap Indicator: No
*Beneficiary Details*
First Life: Ringo Star
DOB: 12/10/1956
Gender: Male
Second Life: R Star
DOB: 12/10/1956
Gender: Female


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## elacsaplau

Thanks Paid,

Your honesty is appreciated.

And thanks Cervelo!

What Cervelo has shown is the annuity cost!

That is just a fact. That was the point of the article.

Two key reasons annuities are so expensive are:
- long-term high-grade European bonds yielding c. 0.60 p.a.
- actual and anticipated increases to life expectancy

Sarenco has already shown that annuities are not especially profitable from the perspective of the insurer.

I get the idea that the capital value appears enormous - again the point of the article was simply to illustrate just how valuable these benefits are. As another poster put it so well recently - a nickel ain't worth a dime anymore!

************

For what it's worth, and this is related but separate but the point of the article, if I had a DC fund of €1.5m, I would find it difficult to hand-over €1.5m in return for the guaranteed annuity of €24k p.a. This question is probably worth a separate thread that would have the potential to run as long any Big Short thread....


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## Sarenco

Páid said:


> That €98bn represents the cost of pensions for what must be at least 400,000 public service workers and pensioners.



No, the figure of €98bn represents the present value of all expected future superannuation payments to current public sector staff and their spouses in respect of service to December 2012, plus the liability for all future payments to current and preserved pensioners and to their spouses.  

That group would include individuals as diverse as newly qualified nurses and 95 year old widows.  It would also include individuals that only worked for a short time in the public service.  



Páid said:


> Both you and the author are playing with words to make it look like civil servants are millionaires because of their pensions, citing how much it would cost in the marketplace and not stating how much those pensions actually cost the State.



No, I'm not playing with words.  The fact that you either cannot understand what the article is saying or that you are uncomfortable with the implications of what is being stated does not mean that anybody is playing with words.

You can only tell the actual cost of a pension with the benefit of hindsight.  At the time that an individual starts drawing a pension you do not know how long that individual (or his spouse) will live, the future cost of living, etc.


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## Páid

Sarenco said:


> No, the figure of €98bn represents the present value of all expected future superannuation payments to current public sector staff and their spouses in respect of service to December 2012, plus the liability for all future payments to current and preserved pensioners and to their spouses.
> 
> That group would include individuals as diverse as newly qualified nurses and 95 year old widows.  It would also include individuals that only worked for a short time in the public service.


How is that different than what I said? There were about 300,000 public service workers and 90,000 retirees at the end of 2012. It's the total projected pension liability of the State for the next 70 years for all of those people.



Sarenco said:


> No, I'm not playing with words.  The fact that you either cannot understand what the article is saying or that you are uncomfortable with the implications of what is being stated does not mean that anybody is playing with words.
> 
> You can only tell the actual cost of a pension with the benefit of hindsight.  At the time that an individual starts drawing a pension you do not know how long that individual (or his spouse) will live, the future cost of living, etc.



The article is claiming that civil servants could be millionaires based on their pensions. That is a direct quote from the title of the article. How is that not playing with words? The Government will never be going to the marketplace for an annuity for any of the people mentioned in the article. It seems to be ok to assess how much the fund would cost in the marketplace but not how much it could cost the State for those pensions.


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## Sarenco

Páid said:


> It's the total projected pension liability of the State for the next 70 years for all of those people.



That's correct but in your previous post you said "€98bn represents the cost of pensions", which is incorrect. 

I might owe somebody an apple in 10 years' time but I don't _know_ what that apple is going to cost in 10 years' time - hence the projection.



Páid said:


> The article is claiming that civil servants could be millionaires based on their pensions.



Broadly, a millionaire is a person whose assets are worth one million euro or more.  A pension is an asset - it is the right to receive a stream of income.  Cervelo's post shows what a particular pension (an asset) is worth in the marketplace.

Again, the cost of purchasing an annuity that provides a comparable benefit to an individual State pension is a good, if imperfect, way of estimating the actuarial value of that pension.  The actuarial value is the anticipated total of cost of the benefit provided by the pension.


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## Páid

Sarenco said:


> Broadly, a millionaire is a person whose assets are worth one million euro or more.  A pension is an asset - it is the right to receive a stream of income.  Cervelo's post shows what a particular pension (an asset) is worth in the marketplace.


Public servants don't own annuity pensions hence it cannot be one of their assets.



Sarenco said:


> Again, the cost of purchasing an annuity that provides a comparable benefit to an individual State pension is a good, if imperfect, way of estimating the actuarial value of that pension.  The actuarial value is the anticipated total of cost of the benefit provided by the pension.....


....in the marketplace. Is it not possible to assess how much an average public service pension will cost the State in the future?


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## Sarenco

Páid said:


> Public servants don't own annuity pensions hence it cannot be one of their assets.



Sigh.

Once more, nobody is suggesting that the State buys annuities to make PS pension payments.  However, a retiring PS employee (and his/her surviving spouse) will have a claim on the State in respect of those pension payments that is comparable to the claim that an annuitant will have on a life company for a similar stream of income.

The right to a stream of income from a PS pension is an asset that has a value.  That value is comparable to the value of a comparable annuity.



Páid said:


> Is it not possible to assess how much an average public service pension will cost the State in the future?



Yes, that's called an actuarial valuation. The actuarial value is the anticipated total of cost of the benefit provided by the pension.

The cost of an annuity that provides a comparable benefit to an individual State pension is a good, if imperfect, way of estimating the actuarial value of that pension.


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## mtk

The cost of unemployment assistance paid to those who have never worked over their lifetime is an even bigger number ! Pensioners deserve their state pension


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## invest101

Annuities are probably not attractive for anybody to buy right now. Most with a choice should stay out of that market until prices improve and look to alternatives.

The cost of providing a retirement benefit to a state employee is not the today open market annuity cost. 

The State has an advantage today - is a seller, not a buyer of government bonds.

Perhaps when comparing benefits to the private sector the value to the state employee needs to be approximated using open market cost for the same benefit. It is a bit opportunistic to use the today value when the market isn't offering any value to anyone. We should use a longer term average of that cost.


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## Sarenco

invest101 said:


> The State has an advantage today - is a seller, not a buyer of government bonds.



The State issued 30-years bonds last year at a coupon of 2% and those long-term bonds would have been purchased, inter alia, by life assurance companies that write annuities.

So the State borrows money at long term rates of ~2% to put itself in funds to make PS pension payments (amongst other things), whereas life companies lend money to the State at a rate of ~2% to fund annuity payments (amongst other things).  The State is effectively securitising a future income stream (tax) whereas the life company is buying an income stream (the bond coupon).

In other words, the State and the life company are simply on opposite sides of the trade - one does not have an inherent advantage over the other.


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## invest101

Sarenco said:


> The State issued 30-years bonds last year at a coupon of 2% and those long-term bonds would have been purchased, inter alia, by life assurance companies that write annuities.
> 
> So the State borrows money at long term rates of ~2% to put itself in funds to make PS pension payments (amongst other things), whereas life companies lend money to the State at a rate of ~2% to fund annuity payments (amongst other things).  The State is effectively securitising a future income stream (tax) whereas the life company is buying an income stream (the bond coupon).
> 
> In other words, the State and the life company are simply on opposite sides of the trade - one does not have an inherent advantage over the other.



Yes I agree. 

The point is that the current rate is way below the long term average because of an unusually large gang of motivated buyers. Including the European Central Bank as a major player. These buyers are not mostly motivated to generate a future income stream but to provide liquidity to markets, counter deflation and others motivated by general risk aversion with memories of 2008/9.

Those looking for annuity type income streams are caught up in this and are are offered very poor value compared to the average long term rate. Those forced to buy also added, further reduces the rate. Perhaps it could be argued that today's rate is not the one to generally value the yes very significant value of the income stream of a public service pension, but rather the longer term average rate in a more normal market which is higher. 

On the other side if this higher long term average rate reduces the approximated value of a state pension then not included and what would increase increase the value, is the risk in accumulation phase for DC pensions e.g. Volatility, Investment returns, charges, job security, USC on entry and drawdown, political risk and uncertainty around changing maximum contribution limits, risk of levies and maximum fund thresholds etc.

My point regarding the states advantage in the current market is on the cost side not the value side. People are perhaps trying to equate the value to the person between the public and private sectors using annuity rates, which I agree with, just not today's rate it should be a longer term average rate. Hopefully we will get back there again and the annuity market will reopen for private sector retirees. They are also perhaps assuming the costs to the state and the costs to the private buyers of annuities using today's annuity rates, which I also don't agree with. The original article was perhaps simplistically saying the cost to both is the same using today's rate. The state is actually now borrowing at a very low rate to pay annuities and other things reducing the cost, while DC annuity buyers are only getting that low rate. In a sense debt buyers - central banks and annuity buyers are subsidising the state, that is to the states current advantage. You can't say the cost to both is the same at this moment.


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## PMU

Sarenco said:


> Except that a PS pension is not a series of known payments to be made in future over time.  PS pensions payments are linked to PS salaries that increase over time.



Well, as very few people live beyond 90, I think 25 years is a reasonable duration to estimate the capital value of a pension.

In the case in question, a pension of 24,000 pa equates to the pension payable to a person who retires on the max of the executive officer scale (currently 47,379 pa).    25 years ago, in 1991 the same salary point was, as far as I can determine, 22,862 IEP, equivalent to 29,029 EUR. So the salary increase over 25 years is equivalent to a CAGR of 1.98%, which by any standard is a very modest increase.  Note also that civil service salaries do not increase linearly but in steps due to national wage agreements etc. typically with a duration of 4 years.
So, if we assume that these type of increases will apply in the future, discounted at the ECB's inflation rate target of 2%, the NPV of the pension of a civil servant retiring on final salary of 48,000 (i.e. pension of  24,000) over 25 years is about 646,243, let's say 650,000. This is its a actuarial value. It's nowhere near 1.5ml. Benefits paid to a surviving spouse will reduce this figure.

The comparison made by the IT with a annuity is bogus. Only a real fool would pay 1.5 ml for a series of future payments with a capital value of 672,000. The annuity value does not represent the potential call on the state / taxpayer to pay the pension – the capital sum does. Civil servants, particularly those who retire on modest incomes, are not the equivalent of millionaires and do not have 1.5 ml pension pots.


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## Sarenco

I wonder is it the title of the thread that's causing confusion?

If so...


Sarenco said:


> Perhaps I should have titled this thread:-
> 
> "The truly shocking cost for somebody in the private sector to buy an annuity that provides an income comparable to the pension currently payable to an average civil service pensioner".



By way of a reminder, the contentious statement in IT article was simply that the pension paid to the average civil servant that retires at 60, with 40 years service, would cost €1.5m if bought in the marketplace and the assumptions underlying that statement were explicitly set out in the article.

After a lengthy discussion, I think (hope?) that everybody now accepts that this statement is entirely reasonable.

I went on to suggest that the cost of purchasing an annuity that provides a comparable benefit to a State pension is a good, if imperfect, way of estimating the actuarial value of that pension benefit.  I would still maintain that this is the case although I appreciate that this is contentious.

That is different from estimating the net present value (PV) of the cash payments that the State will need to make to discharge its obligation to that pensioner.  As invest101 correctly points out above, the PV of the State's liability is likely to be materially lower than the market value of the pension benefit in this era of financial repression.

In other words, the actuarial value of the State's liability in respect of a particular pension will be lower than the actuarial value of the benefit of that pension due to generationally low bond yields.



PMU said:


> So, if we assume that these type of increases will apply in the future, discounted at the ECB's inflation rate target of 2%, the NPV of the pension of a civil servant retiring on final salary of 48,000 (i.e. pension of  24,000) over 25 years is about 646,243, let's say 650,000. This is its a actuarial value. It's nowhere near 1.5ml. Benefits paid to a surviving spouse will reduce this figure.



I would quibble with some of those assumptions.

Firstly, the C&AG assumes that PS pensions will increase by 1.75% above cost of living increases;
Secondly, the Irish 30-year bond is currently trading at a YTM of 1.36% and I would suggest that is a more appropriate discount rate than the target inflation rate; and
Thirdly, the accrued benefits of the (57 year-old, female) spouse would increase, not decrease, your PV figure.



PMU said:


> Only a real fool would pay 1.5 ml for a series of future payments with a capital value of 672,000.



And yet somebody in the circumstances described above that is retiring with a DC pension will have to pay ~€1.5m to purchase a guaranteed income of €24k pa.  Perhaps you are right and anybody who finds themselves in these circumstances must feel like a fool for not taking a job in the PS.



PMU said:


> Civil servants...do not have 1.5 ml pension pots.



I don't believe anybody suggested that they did.

What has been suggested is that the average civil servant will retire today with pension benefits that would cost €1.5m if bought in the open market.


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## orka

PMU said:


> Well, as very few people live beyond 90, I think 25 years is a reasonable duration to estimate the capital value of a pension.


Not true.



US figures - can't find Irish ones but I doubt they are vastly different (Ireland actually has a slightly higher life expectancy than the US).  A man aged 65 has a 20% chance of reaching 90, a woman of 65 has a 32% of reaching 90 and a couple both aged 65 have a 42% of at least one of them reaching 90.

Using the calculator on the website above, our 65/62 couple have a 55% chance of one of them surviving your 25 years...


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## Sarenco

It's also important to allow for future increases in longevity - life expectancy in Ireland has increased by two and a half years since 2004!

Another nuance is that Irish public servants have been found to have lower mortality rates than those experienced by the general population - on average they live longer.


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