Key Post The Single Public Service Pension Scheme

[Ent319]

Hi Gerard, I think it makes more sense in the context of Cornmarket’s overall business model.

I know from other sources that the vast majority (I think 90%+) of those who set up AVCs with cornmarket take advice and end up in the public sector funds with high fees and low growth. I suspect very few ever make it significantly past the 140,000 mark. So the tiered AMC, which superficially justifies a higher base AMC across the selection of funds, actually works against them and they end up paying high fees in perpetuity. Some of the AMC levels set for old funds were also agreed by trustees before the tiered AMC came in. The number of customers getting the low fees described in this thread are, I suspect, vanishingly small and not enough to affect Cornmarket’s business model in any meaningful sense.

At the end of the day, as a consumer, I don’t care what cornmarket get paid in Commission from Irish Life so long as I’m getting my AVC at low charges. Agree further chat on fees may be better placed in another thread.

Thank you for very much for your contributions to the thread (which are always helpful / appreciated).

 

[Donrr123]

I am wondering about the yearly limit.

A person below 30 is 15%, looking up the single scheme it seems the contribution rate is 6.5% (See below attached where I found from Circular 0007/2013 Rev 2015). So that means when I sign up the max I can put into it is 8.5% (15%-6.5%=8.5%) is that correct?

Also generally speaking I should put 100% into Indexed Ethical Global Equity, since AMC is 0.75% the lowest? Compare to the other two you are suggesting?

• Indexed Ethical Global Equity (0.75% AMC)
• Indexed World Equity Fund (1% AMC)
• Indexed Developed World Equities (1% AMC)

 

[GSheehy]

So that means when I sign up the max I can put into it is 8.5% (15%-6.5%=8.5%) is that correct?

The most accurate way to do the calculation is to look at your payslip, see what percentage of your salary the pension contribution is (don't include ASC) and then subtract that from your age realted limit. 6.5% is more like a rule of thumb.

Gerard

www.prsa.ie

 

[Ent319]

Also generally speaking I should put 100% into Indexed Ethical Global Equity, since AMC is 0.75% the lowest? Compare to the other two you are suggesting?

Hi Donrr123,

You have to make a choice that's best for you after researching the options or getting someone to give you financial advice.

Asset allocation is a fairly complex topic that a lot of people disagree on. You can never time / predict what the market will do but you can make informed choices about what you invest your money in to and hope for the best. I'm personally 70 % Indexed Ethical Global Equity / 20% Indexed Emerging Markets Equity / 10% Indexed Fixed Interest. I can explain why I've chosen this for myself.

I have about 25/30 years before I throw in the towel and I'm shooting to have a very large pension. With my timeline I've decided that a portfolio with 90% equities is best for me to maximise long term growth. I'm fine with volatility over the long term and if I lose 50% of the value of my portfolio overnight I'm not going to lose sleep over it because my time horizon gives me a long time to recover. I’m aware that it I switched out or changed my allocation at the bottom of the market this could have fairly catastrophic consequences for my portfolio.

I decided to go with the Indexed Ethical Global Equity fund (0.75% AMC) instead of the World Equity Indexed Fund (1% AMC) as the main "growth" portion of my portfolio because of the 0.25% discount I get on the AMC for the former. The developed world equities fund tracks the same index as the world equity index fund so both are interchangeable.

All the funds invest in US stocks and non-US developed world stocks (Europe, UK, Japan etc.) at their respective values in the market so you get nice diversification in them that rebalances over time. I'm not jazzed about how the ESG fund excludes certain stocks but these are roughly only 100 of the 1400 stocks within the full MSCI World index. The stocks from the excluded / reduced sectors would have to significantly outperform those from other sectors over the long term to make up for the 0.25% AMC difference. I expect the ethical fund will deliver roughly the same returns as the other funds over the long term and I'll get the full benefit of the 0.25% AMC reduction as a discount on top of that.

Going with any of the above funds fully for the equity portion of my portfolio probably would have been fine but I've included a fairly high allocation of 20% to emerging markets stocks to add some extra juice for the following reasons:

* Emerging markets stocks – over the very long term – deliver a premium over developed world stocks because of the extra risk they entail. These risks (political instability, currency risk etc..) are already "priced in" to the value of the stocks when you buy them.
* I have a very long time before I expect to retire so can take the risk.
* I get an extra discount for investing in emerging markets – they have a 0.65% base AMC
* Emerging market stocks are a nice diversifier vs. developed world stocks.
* Emerging markets stocks have been pretty stagnant for the last 15 years because everyone's been ramming money into US equities. They're currently very fairly priced as a result and long periods of poor performance tend to precede periods of higher performance and vice versa.
* The Emerging market fund has a higher proportions of stocks in sectors that are excluded from the ethical index (Energy, Mining etc...), so tilting towards emerging compensates for this somewhat.

Emerging markets are not for the faint of heart and have historically had gut wrenching volatility. In 2008 they lost 53% of their value only to gain 78.51% in the following year. I'm fine with this but I think it would be suicidal to go for any more than 20% allocation because of how long periods of poor performance could drag down my portfolio's ability to compound.

I've decided to allocate a small 10% portion to the indexed fixed interest fund (1% AMC) because:

* When I chose my allocation a few years ago I expected there was going to be a market correction coming because US stocks have been priced through the roof. The past few months have suggested this may be happening ...!
* In the event of a downturn a modest allocation to fixed income will help preserve the value of my portfolio and its compound annual growth rate (Kelly Bet).
* I don't want to completely preclude the possibility of retiring early so this might help a bit with that if I need to adjust my plans.
* Irish Life don't have any good funds available on the forsa scheme in gold, global property etc... that would act as a typical small allocation defensive counterweight.
*More diversification.

All of the above only applies with the AMC rates set on the Forsa Scheme. So my weighted average AMC across all funds will be 0.75% on amounts <€40,000, 0.5% on amounts between €40,000 and €140,000 and 0.25% on everything above €140,000.

 

[Donrr123]

Thank you Gerard I calculated from my payslip I am only paying 4.46% (Pension/gross pay).

Ent319 thank you for your analysis.

There is another thing I am also wondering.

Auto-enrolment pension will starts kicks in on 30,Sept, 2025 (See citizens information).

"Auto-enrolment is a new pension savings scheme for certain employees who are not paying into a pension. They will be automatically included in the scheme but can opt out after 6 months."
"Under the scheme, the employee, employer, and Government all pay a certain amount into the employee’s pension fund."

Year of the auto-enrolment scheme	Employee Contribution Rate	Employer pays	Government pays
1 to 3	1.5%	1.5%	0.5%
4 to 6	3%	3%	1%
7 to 9	4.5%	4.5%	1.5%
10 and after	6%	6%	2%

(All From Citizens information)

What I want to point out here is:

1. Looking up everywhere the only thing I can find employer contribution rate is they are likely not contributing anything. (Attached is what I found from "SINGLE PUBLIC SERVICE PENSION SCHEME, Frequently Asked Questions, Last Updated: September 2020 (5th edition)". This basically means all the pension I am paying for the Single Public Service Pension Scheme came out from my gross salary.
2. Comparing to the table above, the auto-enrolment scheme makes employer and government pays some of the pension out of their pocket. employee only pays 1.5% and getting 3.5% paid (employee 1.5%+ employer 1.5%+ government 0.5%), pays 3% and have a 7% pension paid. Etc etc.
3. My conclusion is single scheme is trash because it is better to opt-out and enroll auto-enrolment scheme? Since paying less and bigger value?

 

[LDFerguson]

While it's true that the government doesn't make an explicit employer contribution towards the Single Scheme each month, instead they underwrite a guarantee to provide you with the agreed level of lump sum and pension at retirement.

The end pensions and lump sums from the Single scheme are a lot greater than what you'd get if it was just funded by your own contributions alone.

I think there's figures available showing what the equivalent notional employer contribution to the Single scheme is.

 

[Donrr123]

I think the annual benefit statement you get from the pension department can cross reference they are paying nothing.

I have done the calculation for single scheme to projectile my estimated pension and lump sums for 40 years.

From what I can see is even working for 40 years at €50k starting now, that would only gives you something as good as state pension or less, so I can just assume it is basically double state pension (roughly and less). Ent319 also has similar calculation here for 30 years except it is half of state pension. This reflects how bad the pension is. I have figured out this is due to the calculation is heavily relying on state pension value.

Lump sums on the other hand can be a separate thing since it is kinda funded by AVC which is paid separately.

I think most AVCs product would give you the option for annuity+lump sums at the end? I would assume auto-enrolment scheme is the same as those products and there must be some options you can pick.

This is also encouraging people to not join any pension scheme/plan first, because once you are on auto-enrolment scheme you can take out another pension if you want (See attached). The extra bonus paid by the employer and government is just too nice to not be ignored

I am considering this is a huge downside because public servants are forced to join single scheme (I think you can quit the scheme on the first two years? not entirely sure), the government should also make it in a way where other people can also join with their existing pension scheme.

It also shows there are some fees, AUM 0.5%? I assume that is AMC, but no one knows what is going to happen until 30th September 2025, they are being very sneaky.

 

[GSheehy]

I am only paying 4.46%

There's a worked out example here from 2023 so you have to remember to adjust the State Pension figure as it changes. But, payslip is the more accurate.

 

[Donrr123]

There's a worked out example here from 2023

That is way more complicated than I thought, but I just simply use the pension I paid divide by gross pay to get that.

 

[LDFerguson]

I think the annual benefit statement you get from the pension department can cross reference they are paying nothing.

All public service pension schemes are unfunded. There is no fund that employers or employees pay into, which then gets cashed in later to pay for their pensions like how it works in the private sector. In the public service, pensions are just paid out by the Exchequer. Same with the State pensions.

 

[LDFerguson]

It also shows there are some fees, AUM 0.5%? I assume that is AMC, but no one knows what is going to happen until 30th September 2025, they are being very sneaky.

I have serious doubts about the Auto Enrolment scheme being ready to go in September. I'd say it will be delayed / postponed. The full technical details have yet to be published. There will be an annual charge on the funds, but it has also been said that there will be fixed charges. Fixed charges are nasty as they affect people with small contributions and funds more than large. And the whole point of the Auto Enrolment scheme is to get people on lower salaries contributing to pensions.

 

[GSheehy]

This thread is running the risk of going down another AE rabbit hole. It'll ruin this fine informative thread on Public Sector Scheme
There's a whole forum for discussing/speculating on what that AE system will look like in seven years time, when they finally have to stop tinkering with it.

 

[Donrr123]

I did not realize there's a forum for AE. It just something comes up in my head about how single scheme can be worst than AE due to the self funded vs multiple fund source as bonus.

I will leave it now and move this topic to the other place

 

[Protocol]

From what I can see is even working for 40 years at €50k starting now, that would only gives you something as good as state pension or less, so I can just assume it is basically double state pension (roughly and less). Ent319 also has similar calculation here for 30 years except it is half of state pension. This reflects how bad the pension is. I have figured out this is due to the calculation is heavily relying on state pension value.

PS pensions are designed to deliver the following benefits:

(1) death-in-service benefits
(2) a lump-sum of 1.5x salary
(3) a pension of 50% of salary (this includes the State Pension)
(4) survivor benefits


The AE scheme will come nowhere near this level of benefits.

 

[Ent319]

I think the last time I tried to work this out I concluded that the state more or less matches what you pay for Single Scheme benefits at a 1:2 ratio.

So if you make €50,000 a year you'll get €290 pension for that year and €1875 lump sum. In actuarial terms if you're male the value of the €290 is roughly €6786. €6786 + €1875 = €8661. This would cost you €2235 (Contribution) + €510 (ASC) = €2745. So total ratio of what you get vs. what you've put in is €8661/2745 = 3.15. (roughly 1:2 ratio). There's also those benefits described in protocol's posts that feed into the value of what you’re getting.

If you wanted to weigh up the value after tax relief is given it's a better deal. It's also very important to take into account that the value of whatever you bank rises at the rate of inflation in a given calendar year for the rest of your life and is not reduced if, overall, there was deflation in a given calendar year. So the value of everybody else's DC pension is going down at the rate of inflation and yours is preserving its value.

You don't get as much pension on the Single Scheme vs. the older schemes but the pension you do pay for is a pretty good deal. Also bear in mind that public servants on pre-2013 schemes pay roughly an extra 5%/7% annual salary of ASC on top. The elephant in the room is that you can't pull off stunts like getting promotions later in your career to increase your pension by hundreds of thousands of euros. But if you’re already starting your public service career at a high enough salary you wouldn’t have been able to capture that excess growth as much anyway.

I often wonder, personally, whether reducing the value of a defined benefit pension scheme to its actuarial value reflects its true value. Once you die on a DB scheme you're dead and your pension dies with you, subject to payment of spouse / children's benefit. I don't mind having my pension be a mix of inflation proof state-backed annuities and some of it in the market to grow my overall wealth. The latter gives me a pot of money that I'll have control over, but I'm not risk averse.

Most people will get caught out big time though with their Single Scheme pensions because they don't set up AVCs

 

[Ruffian]

PS pensions are designed to deliver the following benefits:


(2) a lump-sum of 1.5x salary
(3) a pension of 50% of salary (this includes the State Pension)
(4) survivor benefits

For the Single Scheme that is career average salary rather than final salary.

 

[Donrr123]

You can ignore my odd calculation above, I was assuming CPI growth in my own calculation and comparing to the state pension now. I think you are right to say the ration is probably 1:2. Looking up the forum I also just realized AE is taken from net pay rather gross pay.

I know my manager always talks about how good his old pension scheme is because the pension he gets is half of his final year pay. For simplicity assuming he is on 50k, half of that is 25k. Compare to single scheme assumed using your calculation €290 * 40 years = €11600. I have no knowledge on how his pension is calculated except what he told me, weather he is on 1977 scheme or 2004 I am not sure. I think retire at 60 without penalty is also a good perk and that is what he is going to do at 62.

I can see now single scheme is not as bad as I thought. I think cornmarket also advised me about ARF can pass down to my kids but subject to CAT (or CGT?), I would still think it is nice to have multiple income plus tax relief on the pension.

 

[Ruffian]

I know my manager always talks about how good his old pension scheme is because the pension he gets is half of his final year pay. For simplicity assuming he is on 50k, half of that is 25k. Compare to single scheme assumed using your calculation €290 * 40 years = €11600.

If he gets half his final pay as a straight pension then he is in the pre-1996 scheme - and so he will not get the State Pension. If he is post-1996 the €25k is inclusive of the State Pension. But you are omitting the State pension component when comparing the Single Scheme.

 

[Ent319]

Your manager could die the year after he retires and his pension would be worth nothing. Best not to worry about things not in your control or what people get under older schemes. Starting an AVC is within your control.

 

[Ent319]

Not to re-open up fees chat again, but some further confirmation re: fees on the Cornmarket product:

My Email

So just to confirm:

Let’s say my fund is worth €10,000 and has a 1% AMC and stays static for the year.

Based on what you’ve said the value of the fund would be €9,900 (€10,000 - €100) and the renewal commission Cornmarket receives would not get taken out of my AVC pot / lower it.

Is this understanding correct?

Cornmarket Response

The renewal commission is what Irish Life pays Cornmarket and is not an additional charge on your fund.

From your example [above], that is correct, only the AMC is taken which is calculated daily and is included in your fund value. You won’t see a deduction for your AMC on your statement. There is a 0% contribution charge meaning 100% of your AVC contributions are allocated to the AVC fund.

I would like to do a bit more detail on Cornmarket vs. other providers in the OP when I get some time. The Cornmarket execution only route makes most sense when you can get low cost index funds and a weighted AMC of around 0.8% and are shooting for a reasonably large pot (or if you really value convenience).

I have mentioned it before but I really do think there is scope for someone to do a Key Post / super comprehensive and idiot proof guide on claiming tax relief for AVC PRSAs. It's not something I'm personally going to have a reason to do because the fees on my Cornmarket plan are very good.

I also think the OP needs a greater nod to the benefits of advisors in general. If someone's struggling better for them to get advice from an independent advisor, pay the cost, rather than end up in the Public Sector funds with Cornmarket.