# The government should provide everyone with a defined benefit scheme, not just public servants.



## Duke of Marmalade (10 Jul 2017)

Rather than everyone being on DC pensions everyone should be on DB.  The market is incapable in today's conditions of delivering that which points to the State underwriting longevity improvements and even investment return and inflation.  A society where middle income retirees are required to manage multi million euro pots is so terribly inefficient.


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## Duke of Marmalade (10 Jul 2017)

_cremeegg_ you think the State can guarantee to pay pensions 50 years into future?

DB provides huge societal benefits in terms of generation pooling of longevity and investment risks.  There is no point a punter handing the management of these risks to a professional, that's what I mean by inefficient.

The capital required for the risks involved are proving beyond the appetite of the market.  The State should get involved in mitigating the extreme risks. For example if folk live far longer than anticipated it is Society's problem.


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## Brendan Burgess (10 Jul 2017)

Duke of Marmalade said:


> _cremeegg_ you think the State can guarantee to pay pensions 50 years into future?
> 
> DB provides huge societal benefits in terms of generation pooling of longevity and investment risks. There is no point a punter handing the management of these risks to a professional, that's what I mean by inefficient.



Duke that is a really interesting approach.

I think it's worth fleshing out a bit in a separate thread.

Is it a theoretical point or a practical point?

The state has €300 billion of unfunded pension liabilities. By not providing for them, we are underestimating the cost of providing services and pushing them onto later generations.

Even if your suggestion is theoretically correct, in reality would you trust the Irish government to stay solvent long enough for such a scheme?

Would you do it for all salaries or for salaries up to, say €50k? 

How much would it cost? Put up PRSI from 4% to about 20%?

Brendan


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## Duke of Marmalade (10 Jul 2017)

_Boss_ they could start with State annuities.

These are ridiculously expensive in the market because of fears of longevity improvements, silly long term interest rates not to mention the expenses.

The State could price these using realistic longevity assumptions and discounting at the anticipated long term growth of the economy.

As well as encouraging ARF folk to buy such an annuity this would reduce the MFS [Minimum Funding Standard] which IMHO is one of the factors killing off Private Sector DB.

Oh and the State could then use the proceeds of these annuity sales to pay down the debt.  Win/win


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## cremeegg (10 Jul 2017)

Duke of Marmalade said:


> _Boss_ they could start with State annuities.



That is the most dangerous idea I have heard in a long time.

So the state is better placed to price annuities, than the private sector.

And able to resist every vested interest that will campaign for more generous rates for its constituency. The old, low earners, the most vulnerable in our society.

If the state gets it wrong, who will bail it out ?

As we are in the Euro the state could not inflate its way out of any misplaced annuities.

A short cut to disaster.


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## Duke of Marmalade (10 Jul 2017)

_cremeegg_ in pricing annuities the market needs capital for worst case longevity (99.5% certainty is the hurdle),  it has to price off wholly artificial long term interest rates, it assumes folk who opt for annuities think they are a good thing to live long. 
The State could assume best estimates and realistic economic returns  and avoid all these artificial overlays.
And yes sure it might turn out to be unaffordable along with PS pensions, State pensions, public health etc etc in which case hard decisions will need to be made. 

But I am attempting to address the inequity between the PuS and the PrS which is the focus of OP.


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## cremeegg (10 Jul 2017)

Duke of Marmalade said:


> it has to price off wholly artificial long term interest rates,



In what sense are long term rates "wholly artificial"

If you said unusually low, I would understand, but "wholly artificial"?


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## jjm (10 Jul 2017)

We would all be better off public and private sector if the Government took a % of what they take each week from our wages in prsi and ring fenced into a fund to pay the long term requirements of both groups of workers

  Hopefully It will not affect me I will be drawing state pension in less than 2 years I also have a private pension which the company paid 2/3 of the cost  this brings my pension well over what i would get for the same wages in the public service I would have contributed around the same % as as a public servant

The problem I see is unless part of the PRSI along with all of the public servants contributions are ring fenced and invested there will be no money to pay then long term .I am in the happy position of being able to look at this having worked in the private sector and seeing my  employers contributions sitting in a large pension pot along with my own contributions  .

Again the private sector worker needs to have part of there PRSI ring fenced for the same reason , The next generation of Public and private sector worker need to start moving on this now or there will be nothing in the pot when there time comes to retire ,
It needs to be in each prsi workers public/private own account,I dont think anyone needs reminding what happened to the last rainy days fund,

And they are spending the next rainy day fund before there is anything in it

If the Government takes in one euro they will promise to spend two euro ,

the government  has taken  borrowed more from public/private sector workers in PRSI and Public sector contributions with no way of paying it back long term,


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## cremeegg (10 Jul 2017)

jjm2016 said:


> We would all be better off public and private sector if the Government took a % of what they take each week from our wages in prsi and ring fenced into a fund to pay the long term requirements of both groups of workers



The government does not have the money to do this. As it is the government is borrowing money to meet its spending.



jjm2016 said:


> The problem I see is unless part of the PRSI along with all of the public servants contributions are ring fenced and invested there will be no money to pay then long term.



Unfortunately, even if this were done, and it cannot be done. It still would not allow future pensions to be paid. This is because of the looming change in the ratio of workers to retirees. If every retiree had a pension pot of their own, the return on it would not provide a pension, due to the lack of workers. Capital is useless without workers.



jjm2016 said:


> I dont think anyone needs reminding what happened to the last rainy days fund,



Actually I think everyone needs reminding, every day



jjm2016 said:


> And they are spending the next rainy day fund before there is anything in it



Exactly, and this is with FG in government.




jjm2016 said:


> the government  has taken  borrowed more from public/private sector workers in PRSI and Public sector contributions with no way of paying it back long term,



True.


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## jjm (10 Jul 2017)

Deiseblue out of the private sector pension pot they will call it the snowy day fund ,They are making hay in the summer only for the government to spend it in the winter

judging by some posters on hear the would rather the banks get it than public servants who may finish up have to wipe there a $$ sometime,no problem banks wiping there eye,


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## Brendan Burgess (11 Jul 2017)

Hi Duke 

I have moved the main posts and replies on this topic to this thread as a novel idea like this deserves more prominence. 

I certainly like the idea in theory. 

Agree that the uncertain longevity expectation,  Minimum Funding Standard, requirements for capital,   and low interest rates will eventually kill off Defined Benefit Schemes for the private sector.  

But we have a Defined Benefit system for all - it's called the contributory OAP.   A self-employed person earning €60k but declaring only €20k, pays €800 a year to have a healthy pension guaranteed from the age of 66!  An employee earning €100,000 a year has €14,750 contributed to the fund and gets the same pension as the tax-evading self-employed person. 

And despite all that or, maybe because of all that, it's totally unfunded. Which probably means that people in their 40s today who are contributing to this fund will be told when they reach 65 that there is no money to pay them. 

So that is the type of outcome one gets when long-term issues are managed by Irish politicians. 

If you proposed your scheme for a responsible country such as Denmark, and set up an independent body to manage it, it might well work. 



Duke of Marmalade said:


> _Boss_ they could start with State annuities.



That would be a good place to start and probably finish. 

All employees, public and private, have defined contribution pension schemes.  When they reach retirement age, they buy an annuity from this government guaranteed, not for profit, body.  If they have a bigger pension pot, they get a bigger annuity. 

It would absolutely have to be ring-fenced from government interference. The annuity level would be set by someone or some group completely independent of government. Probably a panel of three actuaries from outside Ireland. 

They would also decide the investment strategy which, I presume would be fully invested in equities outside Ireland. 

While the taxpayer would underwrite it, the clear mandate should be that it would actually build up capital. So the annuity levels should be a bit less than the "right" level. In other words, the recipients pay an insurance premium of 1% to help build up capital. 

It would probably be limited to a certain amount - maybe a fund of €800k. 

Would participation be mandatory or optional?  If it were optional, those with impaired life expectancy would stay outside the scheme.


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## Duke of Marmalade (11 Jul 2017)

cremeegg said:


> In what sense are long term rates "wholly artificial"
> 
> If you said unusually low, I would understand, but "wholly artificial"?


QE


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## Duke of Marmalade (11 Jul 2017)

_Boss_ State annuities have been seriously considered but I guess they were rejected for the reasons cited by _cremeegg_.

On funding of State pension liabilities, this is a bit of an accounting illusion.  The fund would be best invested in infra structure not in some offshore ETF. Effectively that's how we do operate.  Each year we set aside an amount for capital expenditure to invest for the future liabilities of the country/State.  If instead we started to invest in an offshore ETF it would be very damaging for the economy.


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## Brendan Burgess (11 Jul 2017)

Is it not a question of balance? 

The reality is that we should be paying far more today for our pensions. But instead we have very low PRSI rates. 

Brendan


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## cremeegg (11 Jul 2017)

cremeegg said: 
In what sense are long term rates "wholly artificial"

If you said unusually low, I would understand, but "wholly artificial"?



Duke of Marmalade said:


> QE



Interest rates are always the product of central banks' response to the economic circumstances. QE is a tool available to central banks that is not often used. The events of 2008 were real, the present low interest rates are the central banks response to that.

Current interest rates are extreme, and due to the use of extreme tools, QE, but they are not artificial. Rates are where CBs think they should be. Same as always.


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## cremeegg (11 Jul 2017)

Duke of Marmalade said:


> On funding of State pension liabilities, this is a bit of an accounting illusion.  The fund would be best invested in infra structure not in some offshore ETF. Effectively that's how we do operate.  Each year we set aside an amount for capital expenditure to invest for the future liabilities of the country/State.



This is the kernel of the whole pension dilemma.

Can sufficient capital infrastructure be created to allow a small cohort of workers support a large cohort of pensioners in the future.

If the answer is no, then it does not matter what pension "fund" a retiree has, there will not be enough to go around, even if the person with a large fund is ahead in the queue.

Of course if sufficient capital infrastructure is created, then the Brits will invade again. Cause it certainly not going to happen there.


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## jjm (11 Jul 2017)

Brendan Burgess said:


> Duke that is a really interesting approach.
> 
> I think it's worth fleshing out a bit in a separate thread.
> 
> ...



The thing most of you are missing is the PRSI contributions are used to pay defined contributions already ,

to understand this you need to understand and agree there is a PRSI FUND we often hear how much the government  taken in Income tax total for the year a breakdown of who paid what into it, How much they took in vat total for the year a breakdown of who paid what into it, How much they took in in Corporation tax total for the year a breakdown of who paid what into it  , When it comes to PRSI you will hear it is up or down never how much is taken in or who paid what into it,,Some posters try to close down any Discussion on PRSIA 1  , The problem with the PRSI Fund is lots of people who are well off compared to the people pay who pay the most in finish up getting most out of it .We need to cop on on and start referring to it as a fund then and only then will the people

The government have being using the PRSI Fund  As a defined benefit for Public Service workers pensions and lots of other things hired after  6 April 1995  .It is important to understand it is the Government not the Public sector worker who is using the prsi fund ,

Take  the state pension for example since 1995 both public and private sector workers pay the same amount in I have already suggested on a post hear that the state pension should be linked to a grade 3 public sector worker,state pension is around 12500 when you include Christmas bonus

In Germany  unemployment  insurance is 3%  employer pays 1.5% employee pays 1.5% I sort of understand how this system works for both the Employer /Employee the get great value for there 3% they have an actual fund which is ring fenced ,the longer you pay in the higher the % of your wages you get up until a few years ago you could get up to 100% of your wages paid by your employer who then recouped it from the fund,
I thing you now get  around 45% to 85% depending how many years you were paying in fund,

Lots of German companies operated a system agreed between workers and company to let the people with the most entitlements go first some even have insurance top up balance for a % of there workers on short time
this allowed them to down size fast if need be,


If we had the same system in Ireland lots of people would not have lost there houses in the last few years and the banks would not be charging such high interest rates on new mortgages  they would still be able to meet there loan payments, Banks would have lower risk of a default on a Mortgage

There must be posters on hear who remember we had a system in Ireland up to around 1988 which paid out up to 75%  of a workers wages for so many months followed by a lower amount on a sliding scale provided you had paid PRSI Class A1 insurance .I remember it because in 1986/87 I was on lay off and the 75% allowed me to keep paying the mortgage interest rates went up over 16% around this time

around 1984 They estate I lived in at that time was badly affected lots of people worked in a local factory  which closed the reason most of those former workers were able to hold on to there house was because the 75% payment from prsi fund  gave them time to pick up another job,

We need a system like Germany where people  get paid a higher % over a longer time frame[/QUOTE] a


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## Jim2007 (11 Jul 2017)

Duke of Marmalade said:


> The market is incapable in today's conditions of delivering that which points to the State underwriting longevity improvements and even investment return and inflation.



Nonsense, it just that what passes for investmenting in Ireland is bizarre to say the least!  If you concentrate in a couple of percent of a major market, invest in what are basically penny stocks and borrow to take a major position in high risk assets with low returns (property) you should not be surprised if it does not go well.


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## Brendan Burgess (11 Jul 2017)

jjm2016 said:


> The thing most of you are missing is the PRSI contributions are used to pay defined contributions already ,



Hi jjm

I am not sure what I am missing. 

I have long advocated a system whereby PRSI contributions are put in a person's name and their pension and unemployment benefit is based on the amount in their pot. 

Brendan


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## jjm (11 Jul 2017)

Brendan Burgess said:


> Hi jjm
> 
> I am not sure what I am missing.
> 
> ...


Then you should never refer to it as a tax
I am sure you know some posters did not know there was fund where all PRSI contributions went , we need to start following the money and seeing who is getting what out of the fund. Calling it tax is shooting oneself in the foot
LEO IS REALLY GOING TO MAKE A DOGS DINNER OUT OF IT IF HE IS ALLOWED PUT USC IN ALONG WITH PRSI,
we should use the usc to pay for things that should not be paid from prsi  in the first place
14.745 down from 18.75% in 2012 and 16.75% before that stopped from payroll and sent to the prsi fund if you become unemployed after 9 months you are treated the same as someone who never worked,

Once you move into 40% tax add the 14.75%prsi + usc goveriment get a total of 60% of payroll and the still can only pay you 193 euro for 9 months if you lose your job how can this be correct


 there are people who lost there jobs after working for lets say 20 years without a break  an avarage of 16.75% prsi stopped by payroll along with there income tax

is should never be allowed to happen again where people having paid  16.75%  for lets say 20 years finish up paying more each week in PRSI when working only to find out the get less when they are out of work each week capped at 9 months and no account taken of how many years the had paid to the system before hand,


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## galway_blow_in (12 Jul 2017)

if you see what was recommended by the citizens assembly at the weekend in relation to benefits for elderly people ( more money ) , i wouldnt hold out much hope for any radical reform in this area , the retired are the most powerful political force in this country with several salary drawing lobby groups to represent their interests , while public servants did see cuts from 2008 on , pensioners saw no cuts at all bar trivial reductions in fuel allowances during summer months etc 

minister doherty wasnt a week in her new job when she called for the state pension to be increased to 300 euro per week , this situation is going to get worse before it gets better


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## Duke of Marmalade (12 Jul 2017)

cremeegg said:


> cremeegg said:
> In what sense are long term rates "wholly artificial"
> 
> If you said unusually low, I would understand, but "wholly artificial"?
> ...


I think we are talking semantics here.  It is true that financial institutions are investing over 30 years at 2% p.a. but this is largely driven by regulatory considerations rather than a true belief that this is the correct "economic" return.  DC retirees I know (not one myself) manage their ARF to target a return of 6%p.a.


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## cremeegg (12 Jul 2017)

It seems to me that low rates are around for the foreseeable future.

They may become unmoored from economic growth. Returns to financial capital (as opposed to intellectual capital) may be less in the future than we are used to.

Large scale financial investment, to build car factories and the like, is not required by many new growth industries.

It takes a lot of financial capital to build a million new cars, not so much to produce the equivalent value in new software.

Increasingly start ups do not need or want the public markets. Investors in the public markets will find it increasingly difficult to get access to good returns.

Airbnb and its like don't need the money, and don't want the scrutiny. I cannot see anybody providing 6% to external investors in the medium term.


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## Dan Murray (12 Jul 2017)

Duke of Marmalade said:


> DC retirees I know (not one myself) manage their ARF to target a return of 6%p.a.



No country* for old men**

* asset allocation
** (Wo)men

Comments
The point being, well, that this seems like going from one extreme to t'other - as in, comparing really conservative annuities with really aggressive investments. You must have some thrill seeking pals.

I was thinking whether Sarenco could cope with a 6% return objective for his ARF. I decided that he possibly could on the basis that he'd know his retirement would be short lived due to incessant anxiety about sequence of return and related risks. (Apologies in advance, Sarenco!)

Questions
What asset allocation are your return/thrill seeking pals adopting?
To what extent do you think that they are aware of the risks?
For those of them that have significant others, are the SOs similarly relaxed about such bravery?

Remember...........and we don't know when...........but at some stage......

There will be blood.


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## Duke of Marmalade (12 Jul 2017)

_Dan_ this guy certainly knows his financial onions.  I believe he follows a high dividend strategy.  Maybe 6% is OTT but 4% is not unreasonable.  But for an ordinary individual not very financially aware targeting 4% could be a rough ride indeed.


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## Duke of Marmalade (12 Jul 2017)

Actually _Boss_ this is not so novel at all.  I seem to recall the UK ran a scheme called State Earnings Related Pension (SERP), they probably still have something similar.  I think it only went up to fairly modest incomes.  There is an argument it should go at least as high as the top public service pay.

I recall that companies could actually contract out of SERP so long as they provided equivalent benefits. In those days companies could even hope to make profits from surpluses in their DB schemes and many did contract out.  These days, given the weird financial dynamics, I presume there would be little appetite to contract out.


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## cremeegg (12 Jul 2017)

Duke most of your posts are well worth reading but this one has two clangers.



Duke of Marmalade said:


> Maybe 6% is OTT but 4% is not unreasonable.



There is a huge difference between 4% return and 6% return. A 50% difference in fact.



Duke of Marmalade said:


> _Dan_ this guy certainly knows his financial onions.  I believe he follows a high dividend strategy.  But for an ordinary individual not very financially aware targeting 4% could be a rough ride indeed.



Investors who "know their onions" are no more likely to beat the market than the "not very financially aware" among us.


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## Dan Murray (12 Jul 2017)

Duke of Marmalade said:


> _Dan_ this guy certainly knows his financial onions.  I believe he follows a high dividend strategy.



Superb. Marshmallow for me [......this guy (_singular)_ - when what I was questioning was the inference that retirees _(plural or generally)_ can nonchalantly obtain heroic returns] and another marshmallow for Sarenco [........the unbeatable and unparalleled high dividend approach]. Definite bonus points!



Duke of Marmalade said:


> In those days companies could even hope to make profits from surpluses in their DB schemes and many did contract out.



Where there is an asset/liability mismatch, there is almost invariably the possibility of a profit/surplus (relative to the current status). There is also the potential for loss/deficit. Folks taking excessive risk in pension plans is neither an exclusively historic nor a SERPS related thing - (6% ARFs - ouch). Pension schemes in Ireland enjoyed massive surpluses at the turn of the century. Standard actuarial advice, in my industry, was to enhance benefits in "the war for talent". This was like pushing an open door to local senior management who tended to benefit disproportionately from such enhancements. Instead of increasing liabilities, smart advice and behaviour would have been to de-risk assets. Really smart advice would have been to decrease liabilities. I took decisions then that were based on a poor understanding of the risks. The irony that I am being now rewarded for those bad decisions (via an enhanced pension) does not escape me.



Duke of Marmalade said:


> These days, given the weird financial dynamics, I presume there would be little appetite to contract out.



.....or maybe just because contracting out is no more


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## Nermal (13 Jul 2017)

Duke of Marmalade said:


> DC retirees I know (not one myself) manage their ARF to target a return of 6%p.a.



Hope they're not withdrawing on that basis.

I have seen sound arguments that the current interest rate environment is the normal one, and the last 50/60 years was quite exceptional.

I'd say the opposite: DB pensions should all be wound up and prohibited in future. They're pyramid schemes.


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## jjm (13 Jul 2017)

Even though I use the term on askaboutmoney public servants Defined Benefit That is not correct  there is no Defined benefit fund ,
 no 


Nermal said:


> Hope they're not withdrawing on that basis.
> 
> I have seen sound arguments that the current interest rate environment is the normal one, and the last 50/60 years was quite exceptional.
> 
> I'd say the opposite: DB pensions should all be wound up and prohibited in future. They're pyramid schemes.


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