Are civil service pensions funded?

[DingDing]

Just wondering in the private sector does the pension fund have any residual value that can be passed on as part of the estate.

I pay a widows and orphans contribution and if I predecease my wife she will get 50% of my pension for life, once she doesn't remarry. If I had children, they would get a payment but as not relevant to me I never explored it.

 

[LDFerguson]

Come on @LDFerguson - no sensible 65 year old with a one million pension pot uses it all to purchase an index-linked annuity! They might use some of it to do so but would keep the rest in equities to take advantage of superior returns over time. Likewise an ARF passes in full tax free to a spouse while a PS survivor’s pension is reduced by 50%, an ARF can be bequeathed to a child less 30% tax too. Added to this zero flexibility about when and how much to draw down for a PS pensioner - lump sum and pension start the day you retire and no later.

Also contrary to widespread belief pre-2013 PS pensions are not legally linked to salaries and can be reduced in payment ( indeed were 2009-2015).

So putting a capital value on a PS pension is a specious exercise and really should be avoided.

I wasn't talking about what a private sector person might do with their fund. I was putting an approximate value on a State guaranteed pension for life of €35,000 per year (usually increased annually), with widow's pension for the lifetime of the widow and a tax-free lump sum of €105,000. That would cost over a million to buy.

 

[LDFerguson]

Just wondering in the private sector does the pension fund have any residual value that can be passed on as part of the estate.

I pay a widows and orphans contribution and if I predecease my wife she will get 50% of my pension for life, once she doesn't remarry. If I had children, they would get a payment but as not relevant to me I never explored it.

It depends on what options the person chooses at retirement. If they are looking for a guaranteed pension for life like a Public Service pension provides, they would need to buy an annuity. It is possible to include provision for widow's and children's pensions on an annuity, but each option comes at an additional cost.

The alternative in the private sector is to invest your accumulated fund in an Approved Retirement Fund (ARF). An ARF provides no guarantee of a pension for life and could run out before you die. If you die before you have exhausted an ARF, any remaining fund can be inherited by your spouse or children.

 

[Dr Strangelove]

I wasn't talking about what a private sector person might do with their fund.

Nor was I. It was a thought experiment to demonstrate that a PS pension has huge inflexibility and limitations on use.

You say that such a pension would cost a million to purchase, I say someone with a million would never purchase it due to the inflexibility.

 

[Conan]

Nor was I. It was a thought experiment to demonstrate that a PS pension has huge inflexibility and limitations on use.

You say that such a pension would cost a million to purchase, I say someone with a million would never purchase it due to the inflexibility.

What Inflexibility? A Pension is a simple structure designed to provide an income in retirement, an income replacement (financial security for the individual when giving up work). Sum total. Its not intended to be any more than that. Its not intended to be an inheritance vehicle.
The PS Pension provides a guaranteed income for life (with a Spouses Pension for a surviving spouse). The more flexible Defined Contribution scheme, where the individual might invest in an ARF on retirement, might be more flexible, but comes with more risks- investment risk, bomb out risk etc.

 

[locknbarrel]

PS pensions are inflexible in that

• Nothing passes to the estate of the individual - so if someone is single and childless and dies the day after retiring the pension dies with them
• There is no benefit in working beyond full service - therefore, ps workers feel pressure to retire otherwise they leave behind benefits they've paid in
• Some workers who retire with full service post-95 have uncertain and awkward situation where the state contributary pension is not available until they are 67 - therefore have to investigate and apply for supplementary/go on the dole etc.
• Workers who do not have standard service e.g. full 40 years - have inflexible choices to make extra payments.

 

[Dr Strangelove]

What Inflexibility?

The PS Pension provides a guaranteed income for life

You answered your own question!

 

[Conan]

PS pensions are inflexible in that

• Nothing passes to the estate of the individual - so if someone is single and childless and dies the day after retiring the pension dies with them

So what do you want- to take some money with them?

• There is no benefit in working beyond full service - therefore, ps workers feel pressure to retire otherwise they leave behind benefits they've paid in

There are death in service benefits for those who die before retiring.

• Some workers who retire with full service post-95 have uncertain and awkward situation where the state contributary pension is not available until they are 67 - therefore have to investigate and apply for supplementary/go on the dole etc.

State Pension is payable from 66 and they can claim Benefit Payment for 65 year olds (not "dole") for 12 months between 65 and 66.

• Workers who do not have standard service e.g. full 40 years - have inflexible choices to make extra payments.

If they want to build up extra benefits, they can either buy "added years" or invest AVCs. So sufficient flexibility.

 

[locknbarrel]

So what do you want- to take some money with them?

There are death in service benefits for those who die before retiring.

State Pension is payable from 66 and they can claim Benefit Payment for 65 year olds (not "dole") for 12 months between 65 and 66.

If they want to build up extra benefits, they can either buy "added years" or invest AVCs. So sufficient flexibility.

Yes. All of the above - inflexible.

As regards taking money with them - the single person with without dependents is a tidy example. But for a person with children >18years - they leave nothing from a pension which they have contributed to for their working lives. Unlike a private pension which forms part of the estate. That's not an attractive characteristic of PS pensions.

 

[Conan]

Yes. All of the above - inflexible.

As regards taking money with them - the single person with without dependents is a tidy example. But for a person with children >18years - they leave nothing from a pension which they have contributed to for their working lives. Unlike a private pension which forms part of the estate. That's not an attractive characteristic of PS pensions.

Not all private pensions form part of the deceased's estate. Only DC schemes might have that facility, provided the retiree;
- invested in an ARF (not an annuity) and
- there was funds left on death.
But Pension Plans were never intended as an inheritance vehicle. They were intended to provide an income in retirement. PS pensions have advantages and private sector pensions have different advantages. You seem to suggest that PS schemes should have the best of both.

 

[Fortune]

Nor was I. It was a thought experiment to demonstrate that a PS pension has huge inflexibility and limitations on use.

You say that such a pension would cost a million to purchase, I say someone with a million would never purchase it due to the inflexibility.

The point of the exercise was to show the cost of what the State is providing for each employee by reference to the cost of purchasing it on the open market. The available product is exactly as inflexible as the PS pension

 

[Fortune]

Yes. All of the above - inflexible.

As regards taking money with them - the single person with without dependents is a tidy example. But for a person with children >18years - they leave nothing from a pension which they have contributed to for their working lives. Unlike a private pension which forms part of the estate. That's not an attractive characteristic of PS pensions.

The reason the private pension provides a fund to the estate is because the fund actually exists. There is not PS pension fund, it's just a promise from the government to pay them when they stop working. There's no investment risk, no longevity risk, just guaranteed income for life.

 

[LDFerguson]

Workers who do not have standard service e.g. full 40 years - have inflexible choices to make extra payments.

A private sector employee in an Occupational Pension Scheme who wishes to enhance their retirement benefits has the option of contributing to an AVC or an AVC PRSA, neither of which provides any guarantee of the return they will get. A public sector employee has the exact same availability of an AVC or an AVC PRSA but also has a further option of buying back years in the public service scheme, which gives them a guarantee from the State of what they'll receive in return.

 

[Threadser]

The biggest giveaway in terms of pension is the state pension. Full state pension at the moment it is available to workers who pay minimum 10 years A rate prsi contributions. Most public sector workers have this included in their pension entitlement but this benefit (available to all) is rarely subtracted when people are coming up with calculations for how much the "gold plated" public pensions are worth and how much they would cost to "fund". All civil servants/public servants pay compulsory pension from their first day of work. There is no option to delay or to decide to start a pension in your 40s.

 

[LDFerguson]

Full state pension at the moment it is available to workers who pay minimum 10 years A rate prsi contributions.

Only in very limited circumstances where the person paid no PRSI whatsoever until 10 years before State pension age and then suddenly starts paying 52 weeks PRSI every year until the State pension.

Anyway, this method of calculating eligibility for the State Pension is being phased out starting from next January. Once the phasing out has been completed, you won't get a full State pension unless you have 40 years' eligible PRSI paid.

Most public sector workers have this included in their pension entitlement but this benefit (available to all) is rarely subtracted when people are coming up with calculations for how much the "gold plated" public pensions are worth and how much they would cost to "fund".

Any pre-1995 public servants' pensions are not integrated with the State pension and in an earlier post on this thread, I was using an example of a public servant retiring now with full service. Any public servants (excluding fast accrual positions) retiring on or before 2034 with full service will be receiving their full pension from the public service superannuation scheme and not the State pension.

 

[Threadser]

I know this means of calculating the state pension is being phased and rightly so. I am thankfully a pre 95 public sector entrant. Had I worked outside the public sector and never made a pension contribution, just paid A rate prsi, but married we would have got €26,000 approx per annum from the state from age 66 under current system. My teachers pension after 32 years service to the state on retirement at age 60 (after some years of missed service) will be €34,000 approx. I am very lucky to be able to retire at a young age and have a guaranteed pension and appreciate that but no pension contributions and a marriage certificate might perhaps have been a better plan

 

[LDFerguson]

I know this means of calculating the state pension is being phased and rightly so. I am thankfully a pre 95 public sector entrant. Had I worked outside the public sector and never made a pension contribution, just paid A rate prsi, but married we would have got €26,000 approx per annum from the state from age 66 under current system. My teachers pension after 32 years service to the state on retirement at age 60 (after some years of missed service) will be €34,000 approx. I am very lucky to be able to retire at a young age and have a guaranteed pension and appreciate that but no pension contributions and a marriage certificate might perhaps have been a better plan

Warning - the acquisition of a spouse can cause serious damage to your financial health.

 

[locknbarrel]

I take all the comments here pointing out characteristics of the different PS pensions. There are pros and cons of PS pensions and DC private pensions. But the oft-quoted "PS Gold Plated Pension" is not reality.
But if a person starting out in their working life were to analyse a Post '95 PS pensions vs making the same contributions to a private DC pension over 40 years, and look coldly and logically at the pros and cons of each, I think most would choose the private DC pension. Picking out individual benefits of the PS pension and quoting them doesn't change the overall contributions made vs value gained equation.

 

[Fortune]

The biggest giveaway in terms of pension is the state pension. Full state pension at the moment it is available to workers who pay minimum 10 years A rate prsi contributions. Most public sector workers have this included in their pension entitlement but this benefit (available to all) is rarely subtracted when people are coming up with calculations for how much the "gold plated" public pensions are worth and how much they would cost to "fund". All civil servants/public servants pay compulsory pension from their first day of work. There is no option to delay or to decide to start a pension in your 40s.

Ah now, the biggest giveaway is ministerial pensions.

 

[Threadser]

I also think that something that needs to be considered when comparing pension benefits is the possibility for private sector workers to be made redundant and be paid a considerable lump sum. All public servants post 95 pay full A rate PRSI but will never have the possibility of being made redundant. This can be seen a huge advantage as redundancy can be catastrophic for someone who will struggle to get another job. However I have a number of friends who have been made redundant and have received quite considerable lump sums (more than I will be entitled to after my decades of PS service) and have secured another job within a number of months. I know the company themselves will fund some of this payment but they are also getting maximum benefit for their PRSI contributions. Bonus payments and share options can also be diverted towards the pension pot if desired. The simplistic notion that PS pensions are a wonderful perk is far from the reality for most low/middle level employees.

Ah now, the biggest giveaway is ministerial pensions.

We can definitely agree on that.