Potential solution to looming pensions crisis

You’re saying that there’s no basis to the idea of locking our liability in at a fraction of the ultimate liability?

Fair enough.

I love how you’re telling me what I’m saying and meaning!
 
I'm saying there is no reality to the State borrowing massive amounts of additional money to settle future pension liabilities at current rates.

Blow out our debt to GNI ratio to Greek levels and our borrowing costs will blow out to Greek levels. Pretty obvious really.

You said what you said. If you meant to say something else, well that's fair enough.
 
The State’s liability for public service pensions is circa €150bn as things stand. That only reflects benefits accrued to date. For example, a 40 year old person on €80k with 20 years’ service has accrued a €20k entitlement.

My suggestion is that we offer him/her the appropriate level of transfer value, which might be of the order of €200k. This would be borrowed by the NTMA leveraging the current historically low bond rates.

He/she then grows the fund over the next 20 years to (say) €800k. That transitions to an ARF worth €600k which is ultimately inherited, yielding €180k of tax for the Exchequer.

We issue the bonds for a term broadly equal to the life expectancy of the underlying members and their spouses.

The kernel of this idea is getting investment markets to help the State to deal with the issue.
 
Our national debt currently stands at around €198bn (roughly 106% of gross national income). You are fooling yourself if you think that it would be possible to borrow an additional €150bn at current rates.

In any event, we would be prevented from doing so under the Fiscal Compact.

I'm afraid your idea simply wouldn't work in the real world.
 

Sarenco,

I’m not proposing that we borrow €150bn! €150bn represents the cost of delivering all of those €20k’s in my example above. The transfer values would be a fraction of the €150bn. In simple terms, €50bn now might get us off the hook for the €150bn.

When faced with a crisis, and that’s what this is, countries routinely flout the rules.

You are also ignoring the fact that bond markets know that we have this crisis looming; measures taken to deal with the issue head-on, even if they involved borrowing, would be looked on favourably by the markets.

Gordon
 
Sorry I'm confused.

You are proposing that the State would settle its pension liabilities to its employees at less than the value of the benefits accrued to date. Is that correct?

Why would any sane person accept such a deal?!
 
Sarenco said:
Sorry I'm confused.

You are proposing that the State would settle its pension liabilities to its employees at less than the value of the benefits accrued to date. Is that correct?

Why would any sane person accept such a deal?!
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Sarenco,

I’m struggling to see what part of this you don’t understand.

Say I’m 40 and I’ve accrued €20k worth of pension entitlement.

It’s estimated that it will cost the State around €650k to deliver that.

Instead the State offers me a transfer value of €200k to €300k, I might take it.

Gordon
 
Gordon Gekko said:
It’s estimated that it will cost the State around €650k to deliver that.

Instead the State offers me a transfer value of €200k to €300k, I might take it.
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Why?

Why would anybody accept €250k for an entitlement with a present day value of €650k?
 
Ok, I think I now see the source of the confusion.

An accrued-to-date liability refers to the present day value of pension liabilities, ignoring any liabilities that may arise as a result of future service, etc. In other words, it's a snap-shot of the State's accrued pension liabilities today.

Basically, it's the capitalised value of the projected benefits (future cash outflows), applying an appropriate discount rate. A wide range of actuarial assumptions are obviously embedded in the calculation.

Put another way, if I say the accrued-to-date pension liabilities of the State to (current, deferred and retired) public servants are ~€115bn (or whatever), that is an actuarial estimate of what those liabilities will ultimately cost the State (expressed in 2018 money terms).

So, if those liabilities were crystallised and settled today, that would obviously cost the State ~€115bn.

Hopefully we can agree that would not be realistic.
 
I love the idea of using transfer values to reduce the State's public sector pension liabilities but the only way to reduce the liabilities is to essentially hoodwink the member into thinking they are getting a good deal when they are very likely not.

Even in regular DB schemes, transfer values are rarely good value for the member as they assume the member will be able to get a pretty high rate of investment return pre-retirement AND a good annuity rate - neither of which is even close to a 50/50 bet.

State pay scales/pension structures (in particular past accrual - things have improved a little bit for the tax payer) have a few features (final salary structure rather than accrued, increments, and the in-payment link to current pay scales) which mean a member would be very ill-advised to accept a transfer value. You just can't put a value on these features even if you wanted to - and because pay rises/promotions, increments and in-payment increases are not guaranteed, they won't form part of the transfer value calculation. Members will be strongly advised by their representatives NOT to take transfer values.
 
There is a precedent for a pretty similar course of action in the private sector.

Bank of Ireland offered top - ups to encourage a number of former employees to surrender their DB pension scheme rights - these are part of the cadre of 6,400 former employees who are deferred members of the pension scheme.

The Sunday Times reported that one offer they had seen would top up the pension of a former staffer to €300,000 , her pension would have been worth just €138,000 if she had opted out prior to the exit incentive being offered.

The Bank also stated that such members must take advise from Mercer financial services ( paid for by the Bank ) before accepting the offer - perhaps this is a requirement under the reforms introduced by Michael Noonan in June 2016 ?

My sources in BoI tell me that the offer take up has been very disappointing from the the Bank’s viewpoint.

In a hugely Unionised environment like the public sector it would appear that an opt out would have to be voluntary , incentivized & employees would have to be professionally advised as to the merits and risks of opting out.

I agree with those that believe this idea would not be a realistic runner.
 

I do not agree with your logic, but aside from that, why is it unrealistic?

If we could get €50bn of take-up, and finance that over 30 years at 2%, that’d only be €1bn a year.

And my ancillary point stands, in a world where the markets know we have a pensions crisis, steps to deal with it would be seen positively rather than negatively by the State’s creditors and ratings agencies.
 
I think there is a difference between Private Sector schemes and the Public/Civil Service.
In the Private Sector, the Employer always has the option of ceasing or reducing future funding (sect 50) and effectively closing down the DB scheme. In that case members may get either reduced benefits or a transfer value representing their accrued share of the fund. And this has happened in a number of cases. Effectively the DB promise is dependent on the Employer maintaining the funding level.
Theoretically the State could do the same - cease future DB accrual and move to DC for future service. But this is highly highly unlikely, and public servants know this. So why would they risk taking a Transfer value and have their future pension income subject to market vagaries as opposed to a “guaranteed”income?
When it comes to pension funding, most employees are conservative. Would they give up a guaranteed pension for a DC investment where the outcome is very uncertain? In addition, when you add in the post retirement indexation of Pensions in the case of Civil Servants, this makes the transfer option look very risky.
The State did introduce a type of DC scheme for new entrants to the Civil Service a few years back. But it only applied to new entrants. Existing staff remain in the “gold plated” DB scheme. Whatever about the viability of the State borrowing such capital to “buy out” accrued service:
- I cannot see the offer being attractive enough to tempt many, and
- presumably the same individuals would continue to accrue future DB entitlement

So whilst this may work in theory, in practice I doubt it. For it to be economically justified for the State that means the individuals have to lose out (to some degree). It’s not a zero sum game.
 
But say the number is €100bn in today’s terms.

The problem is that it’s (say) €200bn when it actually crystallises, but we’re doing nothing about it.

My idea is to use investment markets to bridge the gap.

Individuals don’t necessarily have to lose out; I would prefer an ARF of €1m rather than a DB pension of €40k a year. Why? Because when I die, the DB halves to €20k and when she dies the money’s gone. With an ARF, she still gets the €40k drawdown and my kids inherit €700k net of tax.
 
Gordon Gekko said:
I would prefer an ARF of €1m rather than a DB pension of €40k a year.
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I'm sure a lot of people would agree with you - but you're not proposing the option at point of retirement. Would you prefer 377K (1M discounted at 5%) 20 years out from retirement or a 40K pension?

What exactly are you proposing that the individual would give up? Say a 45 year old earning 80,000 with 20 years service and 20 years still to go to retirement. Their accrued pension for 1998-2018 (ignoring lump sum) is 20/80ths of salary so they have accrued a 20,000 pension to date. If they accepted a lump sum transfer, have they given up all value for their 1998-2018 years of service and then start to accrue pension again for the next 20 years to retirement?
 
Yep, I’d prefer the €377k.

My proposal is that they accept a transfer value and then become DC enployees.
 
Gordon, you might prefer the €377k, but I suspect the vast majority of civil servants would not and be even less inclined to opt for a DC scheme for future service.
The DB scheme offers certainty ( assuming the State remains solvent), whereas in a DC scheme the member takes the investment risk. The reason so many private sector DB schemes are closing and moving to DC is that Employers want to get out from under the “blank cheaue” funding and they are simply refusing to carry such an open liability going forward.
The State could adopt a similar approach. Simply close down the DB to future accrual and move to DC. But in a situation where the State employees are so heavily unionized, I suspect that suggestion would not fly.
When the State did move to introduce a DC scheme a few back, unions ensured that it would only apply to future employees after that date. Existing employees remained in the DB scheme. Unions were less concerned about future employees and were more focused in existing members.
Another problem with your proposal is the prevalence of giving “added years” to retiring employees ( as prevalent as “snuff at a wake”). How often have we seen public servants retire early and get additional years added to the service to maximize their benefit (all because this is unfunded, no financial accounting). Moving future service to DC would eliminate this windfall for many public servants.
 
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Conan , you’re a bit wide of the mark - public sector workers employed after 1/1/2013 are members of a defined benefit scheme , the difference being that their pension is calculated on a career averaging basis rather than on a final salary basis.
The Trade Unions involved were never going to allow a DC scheme which would be a very unfortunate precedent from their point of view.
 
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