Do defined benefit pensions cost the state a lot?

Eleven Benevolent Elephants

Take a teacher for example on a salary of €64,000 per anum at retirement (the top of the pay scale) with a lump sum of €200,000 at retirement with 40 years' service.

DB pension annuities are half the final salary

In comparison, defined contribution pension annuities are usually ca. 3.5% of the value of the pot with an optional lump sum.

So to receive an annuity of €32, 000 you'd need nearly €915,000 in the pot, plus the €200,000 lump, bringing it to €1,150,000.

To achieve this, you'd need to average €950 pm going into your retiremnt account (assuming 4% growth). That's assuming a recession doesn't ravage the fund of the government does a cash grab.

EmmetSpiceland

The politicians get a full pension after only a “handful” of years. The cost of that is massive.

Nothing will change anytime soon, they’ll just borrow more and more to keep the “gravy train” chugging along.

razorblunt

Simply? Yes, if there's a disparity then they bridge the gap.

Loads of private companies are moving away from DB to DC.
We had a rake or "early retirements" when my employer introduced it a few years ago.

Hager

Someone retiring on a salary of 64,000 will get a lump sum of 96,000 not 200,000.

BrianD3

1) A public servant who finishes on 64k with full service gets a lump sum of 96k, not 200k.

2) For anyone that started after 1995, assuming 40 years service and final salary of 64k, the pension of 32k includes the contributory old age pension of about 12k.

3) This pension of 12k is routinely described as "no pension" by the gutter media when talking about private sector workers

So if you want to have a go at teachers and not look like an idiot, it's a lump sum of 96k plus a pension of 20k not 200k/32k.

Earthhorse

DB pensions can cost more than DC pensions, it's true.

But it's also more complex than you're making out and you'd need to look at each one individually.

A lot of people will take early retirement which will reduce their pension and the costs associated with it.

As BrianD3 has pointed out your understanding of the numbers is quite poor. Nonetheless I would say, all other things being equal, DB pension schemes are more costly.

facehugger99

Yes - it's a giant ponzi scheme.

Public servants today in their 20's-40's who think the voters of 20-30 years in the future are going to stump up for their pensions are in for a rude shock.

They'll be too busy paying back the debt that this generation is racking up.

Geuze

EmmetSpiceland wrote: »

The politicians get a full pension after only a “handful” of years. The cost of that is massive.

Nothing will change anytime soon, they’ll just borrow more and more to keep the “gravy train” chugging along.

You need to be a TD for 20 years to get a full TD pension.

KaneToad

EmmetSpiceland wrote: »

The politicians get a full pension after only a “handful” of years. The cost of that is massive.

Nothing will change anytime soon, they’ll just borrow more and more to keep the “gravy train” chugging along.

Don't forget about the fast accrual pensions that some sections of the public sector get. Retire after 30 yrs.

Necro

Mod:

Moving to Banking & Pensions, reminder to read the charter before posting.

Geuze

Eleven Benevolent Elephants wrote: »

Take a teacher for example on a salary of €64,000 per anum at retirement (the top of the pay scale) with a lump sum of €200,000 at retirement with 40 years' service.

Top of teachers pay scale is 64,302 + allowances.

It could be 70k incl allowances.


As others have said, after 40 years service, the lump-sum is (40 yrs)(3/80) of final salary = 96k.

The pension is 20k, plus the PRSI pension of 12k.



The contributions are 6.5% + 10% PRD/ASC.

LegallyAbroad

facehugger99 wrote: »

Yes - it's a giant ponzi scheme.

Public servants today in their 20's-40's who think the voters of 20-30 years in the future are going to stump up for their pensions are in for a rude shock.

They'll be too busy paying back the debt that this generation is racking up.

You forget that the 300,000 public servants, 90,000 retired public servants, and all their families are voters too.

I moved from private sector to PS (post 2012). I won't retire until my late 60s and my DB PS pension is actually no better than my DC private sector pension. This is because the pay cut I took to join to the PS was so large that the large sums I was paying in to my DC pension (tax free/subsidized) obviously had to be stopped.

Jim2007

MOD: If you want to discuss politics, take it somewhere else... this about personal finance...

Eleven Benevolent Elephants

Jim2007 wrote: »

MOD: If you want to discuss politics, take it somewhere else... this about personal finance...

Say for example I amass €1m in my pension fund, my understanding is that I can withdraw €200k in a tax free lump sum.

The remaining 800k will be used to buy an annuity. Say, at 3.5%, so I'll get €22,000 per year roughly.

Will this sum be paid for the rest of my life? Even if I lived 50 years after retirement?

Can I draw down my pension at 60 and make do with what I have in the pot at that stage?

I know DC pension annuities are taxed, but do you pay USC?

Are DB public sector pensions 100% tax free?

Earthhorse

Eleven Benevolent Elephants wrote: »

Say for example I amass €1m in my pension fund, my understanding is that I can withdraw €200k in a tax free lump sum.

That seems to be correct: https://www.pensionsauthority.ie/en/lifecycle/tax/tax_on_lump_sums_at_retirement/

But you’ll note that for DB plans there's a limit relating to your earnings.

Will this sum be paid for the rest of my life? Even if I lived 50 years after retirement?

It would depend on the terms of the annuity but yes, basically. You could also get a guarantee on the annuity, I think, whereby even if you die, say, a week after retiring, it would have to paid to someone for a period of time (usually five years).

Can I draw down my pension at 60 and make do with what I have in the pot at that stage?

That may depend on the rules of your plan, assuming you are in a plan, but basically yes.

I know DC pension annuities are taxed, but do you pay USC?

Yes: https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/universal_social_charge.html

Are DB public sector pensions 100% tax free?

They are taxed as income.

If you are in a pension plan at work then I advise talking to HR about who you can talk to about your pension. If you have a private pension it may be an idea to talk to a broker as you don't seem to fully understand your options.

To get back to your original question: the main advantage in a DB plan for you is that your employer (state or private) bears the risk. They owe you a pension (based on a formula) when you choose to retire and if the overall pension fund cannot meet that liability then the employer must make up the shortfall. You don’t have a fund, per se, you make contributions to a shared fund and it is responsible for discharging all its liabilities (your pension and everyone else's). State and semi state pension funds are known to be quite generous (i.e. the formula used is generous) but you would really have to assess each one to see how good it is.

A DC plan, by contrast, places the risk back on you. In this case there is no calculated liability, there is a fund which can be used at retirement to fund your pension. There are various different investment vehicles that can be used here so that is why I’d recommend talking to a broker to understand your options. If you want a pension of X per annum then it’s your responsibility to fund for it but there is no guarantee, even after taking advice, you will be able to afford that. If you cash in your fund in just after a market crash that’s your bad luck.

So you may think that DB plans are more costly but the real issue is risk (which you can regard as a type of cost if you’re so inclined).

Eleven Benevolent Elephants

If DB pensions are so risky, I can't see any private employer offering them.

Is there any positive for an employer to offer one?

Earthhorse

They aren’t "so risky", just more risky than DC.

There’s been a huge shift from DB to DC in the private sector, DB really is a thing of the past.

The only positive would be attracting top notch talent; if I were you I wouldn’t worry about it.

Henry Ford III

Earthhorse wrote: »

That seems to be correct: https://www.pensionsauthority.ie/en/lifecycle/tax/tax_on_lump_sums_at_retirement/

But you’ll note that for DB plans there's a limit relating to your earnings.



It would depend on the terms of the annuity but yes, basically. You could also get a guarantee on the annuity, I think, whereby even if you die, say, a week after retiring, it would have to paid to someone for a period of time (usually five years).



That may depend on the rules of your plan, assuming you are in a plan, but basically yes.



Yes: https://www.citizensinformation.ie/en/money_and_tax/tax/income_tax/universal_social_charge.html



They are taxed as income.

If you are in a pension plan at work then I advise talking to HR about who you can talk to about your pension. If you have a private pension it may be an idea to talk to a broker as you don't seem to fully understand your options.

To get back to your original question: the main advantage in a DB plan for you is that your employer (state or private) bears the risk. They owe you a pension (based on a formula) when you choose to retire and if the overall pension fund cannot meet that liability then the employer must make up the shortfall. You don’t have a fund, per se, you make contributions to a shared fund and it is responsible for discharging all its liabilities (your pension and everyone else's). State and semi state pension funds are known to be quite generous (i.e. the formula used is generous) but you would really have to assess each one to see how good it is.

A DC plan, by contrast, places the risk back on you. In this case there is no calculated liability, there is a fund which can be used at retirement to fund your pension. There are various different investment vehicles that can be used here so that is why I’d recommend talking to a broker to understand your options. If you want a pension of X per annum then it’s your responsibility to fund for it but there is no guarantee, even after taking advice, you will be able to afford that. If you cash in your fund in just after a market crash that’s your bad luck.

So you may think that DB plans are more costly but the real issue is risk (which you can regard as a type of cost if you’re so inclined).

All pension annuities are payable for life. No exceptions. It's an important consideration.

Roger_007

There is nothing wrong with DB pensions provided that the overall cost of pension payments is always covered by the value of pension contributions on an annual basis.
Many operators in the private pension industry make the argument that DB pensions in the public sector are ‘unfunded’ because there is no ‘pension pot’. This is not true. They are, or should be, fully funded by the pension deductions from current employees.
Of course this model of funding pensions is only possible where there is an absolute guarantee that the employer,(the state in this case), will not go out of business.
The reason why private pension contributions are larger than those in the public sector for an equivalent pension is because much of the pension contribution made by private employees is ‘skimmed’ off in charges and fees etc. need to pay the middlemen, middlewomen and investors in the pension provision industry.

Henry Ford III

Roger_007 wrote: »

There is nothing wrong with DB pensions provided that the overall cost of pension payments is always covered by the value of pension contributions on an annual basis.
Many operators in the private pension industry make the argument that DB pensions in the public sector are ‘unfunded’ because there is no ‘pension pot’. This is not true. They are, or should be, fully funded by the pension deductions from current employees.
Of course this model of funding pensions is only possible where there is an absolute guarantee that the employer,(the state in this case), will not go out of business.
The reason why private pension contributions are larger than those in the public sector for an equivalent pension is because much of the pension contribution made by private employees is ‘skimmed’ off in charges and fees etc. need to pay the middlemen, middlewomen and investors in the pension provision industry.

Nonsense. A control funded DB scheme is very labour intensive to run, and is far from cheap.

Jim2007

Roger_007 wrote: »

There is nothing wrong with DB pensions provided that the overall cost of pension payments is always covered by the value of pension contributions on an annual basis.
Many operators in the private pension industry make the argument that DB pensions in the public sector are ‘unfunded’ because there is no ‘pension pot’. This is not true. They are, or should be, fully funded by the pension deductions from current employees.
Of course this model of funding pensions is only possible where there is an absolute guarantee that the employer,(the state in this case), will not go out of business.
The reason why private pension contributions are larger than those in the public sector for an equivalent pension is because much of the pension contribution made by private employees is ‘skimmed’ off in charges and fees etc. need to pay the middlemen, middlewomen and investors in the pension provision industry.

Absolute Nonsense.

- In thirty years doing performance and attribution analysis on pension funds I can’t recall a single case of a DB pension that was adequately funded. They all required an additional injection of cash from the employer every few years.

With the exception of a few state bodies, public sector pensions are financed on a pay as you go basis, so it most certainly is true that there is no pension pot being built up.

Private DB pension funds are higher primarily because there is an attempt to fund them, although unsuccessful. And yes of course there are costs when you actually try to do it, although costs tend to be lower than other types of financial products.

But claiming a pay as you go system with a funded alternative is a none starter.

Eleven Benevolent Elephants

The money paid by public sector workers to get the value of their DB pension is miniscule in comparison to what a private sector worker would have to contribute to get the equivalent amount.

Why don't the state guarantee the value of our DC pensions?

Henry Ford III

Eleven Benevolent Elephants wrote: »

The money paid by public sector workers to get the value of their DB pension is miniscule in comparison to what a private sector worker would have to contribute to get the equivalent amount.

Why don't the state guarantee the value of our DC pensions?

Because they are private arrangements?

p.s. No political nonsense in here please.

Geuze

Roger_007 wrote: »

There is nothing wrong with DB pensions provided that the overall cost of pension payments is always covered by the value of pension contributions on an annual basis.
Many operators in the private pension industry make the argument that DB pensions in the public sector are ‘unfunded’ because there is no ‘pension pot’. This is not true. They are, or should be, fully funded by the pension deductions from current employees.

The first sentence is correct.

The second paragraph is false.

PS pensions in Ireland are "unfunded", as in there is no accumulating fund of assets to meet future liabilities.

There are ongoing contributions from staff, yes, but these are on a PAYG basis.

The contributions from staff are substantial, but obviously do not, and should not, cover the full actuarial costs of the pension benefits.

Earthhorse

Eleven Benevolent Elephants wrote: »

The money paid by public sector workers to get the value of their DB pension is miniscule in comparison to what a private sector worker would have to contribute to get the equivalent amount.

Why don't the state guarantee the value of our DC pensions?

One of the benefits of working in the public sector is the pension. If you think it's so valuable you should get a job there.

Eleven Benevolent Elephants

I turned 29 this year, so I'm still in the under 30's age bracket.

I contribute 15% of my pension and work puts in 10% on top.

Come January, will revenue let me contribute 20% because I turn 30 that year, or do I have to wait until I actually turn 30 in June?

Eleven Benevolent Elephants

Our work gave us about €8,000 in bonuses and allowances throughout this year.

They didn't make pension deductions for us because they fell outside the scope of normal income.

Can I retrospectively put it in my pension before January and get the refund in my p60?

Or will I get an immediate refund in my October wages if I contribute in September?

Geuze

Any worker can make pension conts up to 31-Oct, and then claim against the previous year's income tax.

Obviously not sensible to wait until 31-Oct, but that is the deadline for the tax return submission.