Potential solution to looming pensions crisis

[Gordon Gekko]

Pretty simple really...

Why not offer transfer values to people who are entitled to public sector pensions or State Pensions of any kind?

The NTMA can raise the finance at close to zero.

The people who take up the offer should tend to be the more expensive ones. The State gets off the hook and investment markets take care of the rest.

In my view, the State would actually gain in the form of taxation.

Gordon

 

[jpd]

Why would anyone, in their right mind, exchange their public sector pension or State pension to a private pension fund, unless the transfer value was VERY attractive to compensate for exchanging a guaranteed pension for a pension based on fluctuating returns from the markets?

 

[noproblem]

Pretty simple really...

Why not offer transfer values to people who are entitled to public sector pensions or State Pensions of any kind?

The NTMA can raise the finance at close to zero.

The people who take up the offer should tend to be the more expensive ones. The State gets off the hook and investment markets take care of the rest.

In my view, the State would actually gain in the form of taxation.

Gordon

Some of the general public don't think much of public sector employees, but to think they're silly and stupid enough to accept what you are proposing is beyond even that. As jpd said, why would they transfer to a private pension fund?

 

[Brendan Burgess]

Hi Gordon

I think that Defined Benefit Schemes should just be closed down. They should just be transferred from DB to DC. There should be no option.

If you offer it, there would be adverse selection. For example, single people would avail of it as the spouse's pension is valueless to them.

People who may have a lower life expectancy would avail of it also.

Brendan

 

[Gordon Gekko]

Hi Brendan,

People are wondering why someone might accept it?

Because when I die, my spouse continues to get the 4%/5%/6% income from my ARF instead of 50% of my defined benefit.

Because when we both die, our kids get 70% of a decent enough number instead of nada.

I prefer DC!

Gordon

 

[Sarenco]

The NTMA can raise the finance at close to zero.

Not in real life.

The extent of the State's unfunded pension liabilities is so large that such a sum couldn't possibly be borrowed at anything like a sustainable cost.

And then there's the small matter of the State's obligations under the Growth & Stability Pact...

 

[Gordon Gekko]

Not in real life.

The extent of the State's unfunded pension liabilities is so large that such a sum couldn't possibly be borrowed at anything like a sustainable cost.

And then there's the small matter of the State's obligations under the Growth & Stability Pact...

Sarenco,

The State is raising debt at close to zero as we speak, so it’s very much real life.

We identify swathes of public servants in (say) the €20k to €40k pension range.

We then do exactly what companies are doing right now and offer the person who’ll get €30k in 20 years the “right” number as calculated by an actuary. Say that’s €250k.

Gordon

 

[Steven Barrett]

Hi Gordon

I think that Defined Benefit Schemes should just be closed down. They should just be transferred from DB to DC. There should be no option.

If you offer it, there would be adverse selection. For example, single people would avail of it as the spouse's pension is valueless to them.

People who may have a lower life expectancy would avail of it also.

Brendan

I think this is a better idea and may not attract as much opposition as you may think. The public service pension has been watered down so much over the years that it is nothing like the original one. And the "temporary" emergency pension levy that was imposed on public servants during the recession is being made permanent in 2019. A reduced DC contribution may be more palatable.


Steven
www.bluewaterfp.ie

 

[Sarenco]

The State is raising debt at close to zero as we speak, so it’s very much real life.

You're missing my point Gordon.

The total value of the State's unfunded pension liabilities equates to something like ~200% of our gross national income. There is no way the State could issue anything like that level of debt, on top of our existing national debt, to "buy out" these liabilities. It's simply not realistic.

 

[Gordon Gekko]

You're missing my point Gordon.

The total value of the State's unfunded pension liabilities equates to something like ~200% of our gross national income. There is no way the State could issue anything like that level of debt, on top of our existing national debt, to "buy out" these liabilities. It's simply not realistic.

I’m not talking about issuing that amount of debt.

When a DB member is entitled to a pension of (say) €30k pa, the capital value of that is deemed to be (say) €900k. But if he’s (say) 20 years from normal retirement age, he’ll be offered far less, say €300k. The State’s unfunded liability is the €900k. I’m suggesting we borrow the €300k to get Johnny off our books.

 

[Sarenco]

Sorry Gordon but that example doesn't make any sense.

If Johnny, to use your example, has an accrued pension entitlement with a discounted present capital value of €300k then that's the State's (unfunded) liability today. If Johnny had an entitlement worth €900k today, why would he exchange that for €300k?

 

[Gordon Gekko]

Sarenco,

When the State’s unfunded pension liabilities are talked about, it’s the €900k figure that’s used.

They don’t apply a discount factor and say “this year it’s €300k / next year it’s €320k / etc”.

Gordon

 

[Itchy]

Totally agree with your idea GG. But you are jumping the gun IMO. The state should be obliged to put the nominal 'employer contribution' part of a public servants salary into a ringfenced fund in order to ensure pension liabilities are no longer met from current expenditure down the line. And in addition, as BB said, every new employee of the state should be on a DC scheme.

Lets be prudent and fiscally responsible in the first instance.

 

[Sarenco]

When the State’s unfunded pension liabilities are talked about, it’s the €900k figure that’s used.

Maybe I'm being thick but that still makes no sense to me.

The CSO's estimates of the State's unfunded pension liabilities certainly refer to accrued-to-date liabilities.

 

[RichInSpirit]

I don't fully understand your proposal Gordon but it's good to see people thinking creatively and constructively about such important matters.

 

[Gordon Gekko]

Maybe I'm being thick but that still makes no sense to me.

The CSO's estimates of the State's unfunded pension liabilities certainly refer to accrued-to-date liabilities.

I have seen figures indicating that the liability is three times that of NAMA plus the banks. It’s the future number that’s quoted (e.g. the capitalised value of Johnny’s €30k, so say €900k).

But even if it’s not and you’re correct, we should look to get as many people off the books as possible. €50b taken off the bill now would save us multiples of that down the line and yield tax in fact (quasi-CAT on ARFs).

 

[Gordon Gekko]

Use Johnny as an example:

The numbers need to be tweaked by the actuaries, but say he’ll be entitled to €30k per annum in 20 years.

Offer him €300k now into a DC fund.

Borrow the €300k at close to zero now.

It should grow to circa €900k.

It should be maintained at €900k.

Close to €300k gets paid in inheritance tax.

 

[Sarenco]

Now you really have me scratching my head.

The State's holdings in our banks are assets, not liabilities. Ditto whatever assets are remaining in NAMA.

Anyhow, let's say Johnny has accrued-to-date pension entitlements of €300k and Johnny would be happy to settle this liability for €300k transferred into a pension account today, which Johnny can then invest as he sees fit in a tax-deferred environment.

Even if this was considered a good deal for the State (which is debatable) where does the State get the moolah? The capital markets would demand a massive coupon for effectively securitising the State's future tax raising ability at that level. In reality the State couldn't borrow that type of money in any event as a result of the Fiscal Compact.

 

[Gordon Gekko]

Mother of God Sarenco, you’re in flying form tonight.

The State had to find a truckload of cash to shore up the financial system. It is often said that the pensions crisis represents a problem many times larger than the financial crisis.

A private sector DB contributor will happily accept a transfer value of €300k (again using that simple example) because he/she prefers the certainty of having his/her own fund, believes that the fund can be grown to €900k, believes that it can deliver at least as good an income, believes that his/her spouse can get the same income, and would like his/her kids to inherit the fund.

The missing piece on the government/public side is investment markets. Investment markets can solve the looming crisis if we use them.

You are far too negative about the State’s ability to raise cheap debt; we are now seen as a core stable EU member and can access cheap funding. Now is the time to do it.

 

[Sarenco]

The State had to find a truckload of cash to shore up the financial system.

It did indeed. And the ultimate net cost to the State of averting the near complete collapse of our financial system will prove a drop in the ocean compared to the ultimate cost of funding the State's pension liabilities. No doubt about it.

But that wasn't what you said.

Anyhow, the State is committed to certain fiscal obligations under the Fiscal Compact (which we approved by way of a constitutional referendum). Your proposal is incompatible with those obligations.

Regardless, there is no way the capital markets would allow the State to load up on additional debt at current borrowing rates to the extent that you are suggesting. To suggest otherwise is just delusional and betrays a complete misunderstand of the way that debt capital markets work.

I'm not trying to be argumentative, I'm just trying to explain why there's no reality to your proposal.