The truly shocking cost of State pensions

[Conan]

The capital cost of an annuity of €24,000 indexed at 2% p.a. and reducing to 50% on the death of the pensioner (assuming a surviving spouse) is circa €1m. The retirement lump sum would be additional.
But of course State pensions are not funded and are paid out of ongoing taxation.
However for someone retiring from the private sector (DC) they would need a pot of c€1m to fund above pension (plus an amount for the retirement lump sum).

Another point worth bearing in mind. We have seen numerous cases over the years where senior(?) civil and public servants are granted "added years" of service on retirement (often early retirement) and because there is no concept or recognition of the "capital costs" involved in such cases it can be easy to increase Joe Bloggs pension by an extra couple of years service. After all what is (say) €5,000 p.a. extra pension (in reality the capital cost is circa €210,000).

 

[Páid]

Sarenco, are you're getting the €98bn figure from here? http://www.per.gov.ie/en/monitoring...the-accrued-public-service-pension-liability/

Following an actuarial assessment carried out by Departmental staff, this accrued liability figure – of all expected future superannuation [or pension] payments to current public servants and their spouses in respect of service to the end of 2012, plus the full liability for all future payments to current and preserved pensioners and to their spouses, based on current pension rules – has been estimated as amounting to €98 billion as of the end of 2012.

When a single figure saying we owe a large debt is published, it can be very disconcerting, so it is important to clarify what this figure is – and more importantly what it is not.

It is equal to the sum of all the future payments that public service occupational pension schemes had committed to make as at 2012, based on the current pension rules. It will not fall due to be paid on a single day; in fact, we estimate that it is payable over the next 70 years or more because pension payments can continue for a very long time.

At the end of 2012 there were about 300,000 serving public servants? How many public servants were in receipt of a pension?

 

[Sarenco]

Yes, the results of the 2012 actuarial valuation, with all relevant assumptions, are available on the Department's website.

I'm afraid I have no idea how many individuals were in receipt of a public sector pension at the end of 2012. Why do you ask?

 

[Páid]

Ignoring the people (public and civil servants) already in receipt of a pension.

There are about 30,000 serving civil servants each having a pension with an actuarial value of €1.5m. That alone makes up €45bn yet they only represent 10% of the serving public servants.

Why the huge disparity?

 

[stuffit]

Here's an article from today's Irish Examiner http://www.irishexaminer.com/ireland/overpaid-former-tds-owe-42k-to-pension-scheme-425058.html

Contributions from serving politicians (TD + Senators) to their pension in 2015 : €900,927

Amount paid out to retired politicians or their surviving spouses in 2015: €11.5m

 

[Sarenco]

Why the huge disparity?

Sorry Paid but you are inappropriately mixing and matching figures.

The figure of €98bn represents the present value of all expected future superannuation payments to current public sector staff and their spouses in respect of service to December 2012, plus the liability for all future payments to current and preserved pensioners and to their spouses.

Nobody has suggested that all serving civil servants, whatever their age, gender or marital status, have accrued pension entitlements with a present value of €1.5m.

Again, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace, making the various assumptions outlined above. That represents a good, if imperfect, actuarial estimate of the value of that pension.

 

[PMU]

I respectfully disagree.

The cost of purchasing an annuity that provides a comparable benefit to an individual State pension is a perfectly valid, if imperfect, way of estimating the actuarial value of that pension. I believe I have already explained why I consider your "sinking fund" approach to be inappropriate.

A pension is no different from a lease, I.e. it's a series of know payments to be made in the future over time. Nobody prices a lease at the cost of buying an annuity to pay for the regular payments of the lease. Similarly, the price to the pensioner of a public sector pension is the price of working in the public sector for 40 years; the price of the pension for the government is its capital sum (I.e. the pension amount by the estimated number of years to be paid). The fact that this may have an annuity value of over a million is neither here nor there; the actual value is at around 672,000. That's what the taxpayer, via the government, has to pay for this person's pension.

As you know, the Department of Public Expenditure and Reform carried out an actuarial valuation of the State's public service pension liabilities as at December 2012. The key result was that the total accrued liability in respect of public service pensions was estimated at €98bn. This compares with the previous estimate of €116bn for 2009. Therefore, over the three years from 2009 to 2012 the liability had fallen by €18bn or by 16% and the main reasons for the reduction were the pay and pension cuts since 2009 and the freeze in pay and pension rates that are currently under negotiation. The Department itself has estimated that the accrued liability would fall by a further €16bn if future pension increases were linked to inflation, rather than the salary increases of serving staff members.

Something we can agree on. This backs up what I showed my post no 162 above; public sector pension costs have fallen and continue to fall. This point was also ignored in that nasty IT article; apart from giving the impression that public sector workers on modest incomes have millionaire pensions, it ignored the fact that public sector pension costs are falling and this reduction has come out of the salaries and pensions of public sector workers.

As for pension increases there have been various proposals on how these should handled over the years, and these were evaluated in 2000 by the Commission on Public Service Pensions. But nothing has been done in the 16 years since then, why?

 

[ppmeath]

I haven't read the original IT article, as they want to charge me for access, but from what I can make out from the previous posts they calculate what it would cost to buy the equivalent of a civil service pension on the open market. This shows a stunning lack of knowledge of how public sector pensions work. The government does not go out and buy an annuity to pay civil service pensions. You don't need a capital sum to generate the pension. They are paid on a PAYG system. The pensions themselves are not particularly overgenerous and a comparison with an annuity is just bogus.

It does not cost 1.5 million to provide a pension of 24,000. If you assume the retiree will live for 25 years he / she needs 25 euro capital for each euro of pension. (Assuming the capital sum is depleted by 1 euro for each year of retirement).

If the envisaged pension is 24,000 euro, this equates to a capital sum of 600,000 euro. Add in 72,000 for the lump sum and the capital value of this retiree's pension is 672,000 euro – it's not over 1 million. For post 1995 employees you can deduct the accumulated value of contributions made.

And the astonishing failure in the article, that hasn't been picked up here (I haven't read the full thread yet, I will go through it though), is that since 1995 12k of that 24k Pension is supposed to be the State Contributory Pension that is to be integrated into the final 50% final pensionable salary.

 

[ppmeath]

So again the biggest grade in the Public service by far are Clerical Officers. After 40yrs service 350 euro pension per week. Dont get the old age pension. So someone can sit on their backside for 40yrs and receive a pension of approx 220 per week. A difference of 130 per week before tax after 40 yrs work.

That is because this is wrong - they do (or are supposed) to get what used to be known as the OAP, it is now called the State Contributory Pension, this is supposed to be "integrated" into the final retirement pension of 50% final pensionable salary.

There are two parts to the pension - the "occupational" part and the part that is supposed to be covered by the PRSI.

 

[Sarenco]

A pension is no different from a lease, I.e. it's a series of know payments to be made in the future over time.

Except that a PS pension is not a series of known payments to be made in future over time. PS pensions payments are linked to PS salaries that increase over time.

A pension of €24k pa would have been worth an absolute fortune 40 years ago! You could buy a fine house in Dublin for under €20k at that time.

This backs up what I showed my post no 162 above; public sector pension costs have fallen and continue to fall.

More than happy to acknowledge (again!) that the State's total accrued liability in respect of PS pensions fell between 2009 and 2012, largely because of pay and pension reductions since 2009. However, these cuts have already started to be reversed.

Furthermore, the Department of Public Expenditure and Reform has recently confirmed that there is no current plan to sever the link between PS pay and pensions.

 

[Sarenco]

And the astonishing failure in the article, that hasn't been picked up here (I haven't read the full thread yet, I will go through it though)

The State pension is dealt with in the article and was discussed earlier in the thread.

 

[ppmeath]

Except that a PS pension is not a series of known payments to be made in future over time. PS pensions payments are linked to PS salaries that increase over time.

Not anymore. This is one of the changes of the many that have been made since 1995.

• post retirement pension increases are linked to CPI.

The State pension is dealt with in the article and was discussed earlier in the thread.

And here's an indicative quote based on the criteria described in the article, ie:

• Male age 60; female age 57
• Fund to buy annuity is €1,500,000
• The annuity increases in line with inflation, subject to a cap of 5% per annum
• The annuity provides for a 50% spouses pension
• The guaranteed term is 5 years
• nil commission
• The annuity income is €23,542.20

Correct me if I am wrong, is this the comparison to the 24k PS average pension? If it is then it is wrong, because since 1995 the 24k is supposed to me made up of an "occupational" part and the State pension (formally OAP), that is supposed to be integrated to give the final 24k.

 

[Sarenco]

Not anymore. This is one of the changes of the many that have been made since 1995.

Legislation introduced in 2012 enabled the minister to link public sector pensions to inflation, rather than existing salaries, though the relevant section has not been brought into operation. The IT reported last week that the Department confirmed there are “no plans at present to change that.”

Correct me if I am wrong, is this the comparison to the 24k PS average pension? If it is then it is wrong, because since 1995 the 24k is supposed to me made up of an "occupational" part and the State pension (formally OAP), that is supposed to be integrated to give the final 24k.

Whether its integrated or not, the cost to the State doesn't change.

 

[ppmeath]

But the cost to buy it would. Because both the private and PS worker (PRSI A) are entitled to the State Contributory pension.

 

[PMU]

Again, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace, making the various assumptions outlined above.

Agreed. But this does not mean the retiree has a pension worth 1.5 million. The retiree will get 672,000 (plus some cost increases) if he / she lives 25 years. And this is the cost of the pension the government.

That represents a good, if imperfect, actuarial estimate of the value of that pension.]

No. It does not represent the value of the pension; it represents the cost of buying an annuity which is totally different. This is the 'mistake' (and I'm being charitable here) the IT article made. The value of a pension is what the pensioner gets (in this case about 672,000 over 25 years – more if he / she lives longer). The actual cost of the pension to the government is the amount the pensioner receives (i.e. also 672,000+).

An actuarial estimate of the value of the pension is its net present value, with future payments and PRD appropriately discounted. And there is no way this will come in at 1.5 m .

 

[Sarenco]

The retiree will get 672,000 (plus some cost increases) if he / she lives 25 years.

"Some" increases?!

Again, PS pension increases are linked to PS salary increases. 40 years ago, the average civil service salary was around €4,000 pa so that's increased by ~1,000% over the intervening period.

You are also ignoring the benefits that will accrue to any surviving spouse.

Fun fact - the last widow to receive a soldier's pension from the US civil war died in 2008. The US civil war ended in 1865!

 

[Sarenco]

But the cost to buy it would.

No, the cost to the State would be the same.

The article estimates that the State pension would cost around €500k in the open market.

 

[elacsaplau]

Hi Sarenco,

Very brief answers required....

(a) Just wondering if you wanted to buy an annuity for €24k p.a. on the open market and that this annuity would have broadly the same terms and conditions as the standard civil servant's pension (in terms of reversion, escalation, etc.) - any idea what the capital/annuity cost of that would be?

(b) Is there any place where a member of a DC plan (whether in the private or public sector) could purchase this guaranteed income stream in the market-place for less money than required under point (a)?

 

[Sarenco]

(a) Just wondering if you wanted to buy an annuity for €24k p.a. on the open market and that this annuity would have broadly the same terms and conditions as the standard civil servant's pension (in terms of reversion, escalation, etc.) - any idea what the capital/annuity cost of that would be?

Around €1.5m (making certain assumptions re age at retirement, etc.)

(b) Is there any place where a member of a DC plan (whether in the private or public sector) could purchase this guaranteed income stream in the market-place for less money than required under point (a)?

Not that I know of.

 

[Páid]

Sorry Paid but you are inappropriately mixing and matching figures.

The figure of €98bn represents the present value of all expected future superannuation payments to current public sector staff and their spouses in respect of service to December 2012, plus the liability for all future payments to current and preserved pensioners and to their spouses.

Both are actuarial estimates of pensions, one of the liability to the State and the other how much the pension would cost in the marketplace. That €98bn represents the cost of pensions for what must be at least 400,000 public service workers and pensioners. How much would that cost be if the Government were purchasing annuities for every worker? €500 billion?

Nobody has suggested that all serving civil servants, whatever their age, gender or marital status, have accrued pension entitlements with a present value of €1.5m.

Both you and the author are playing with words to make it look like civil servants are millionaires because of their pensions, citing how much it would cost in the marketplace and not stating how much those pensions actually cost the State.

Again, the pension paid to the average civil servant who retires at 60 with 40 years of service would cost €1.5 million if bought in the marketplace, making the various assumptions outlined above. That represents a good, if imperfect, actuarial estimate of the value of that pension.

That says more about the marketplace than anything else.