The truly shocking cost of State pensions

Hi noproblem,

First of all, I am a public servant so I'm not intending to self-flagellate here - well, not overly so, anyways!

Secondly, I did not understand the general points you were making so I resorted to a single specific question which required repeated posing - and even then you have refused to answer.

I just happen to believe that the annuity quotes from Irish Life are accurate (albeit very unenticing) and consequently that public/civil servants pensions are highly valuable. As others have pointed out, there are reasons why annuity rates are so low (long-term high-grade EU bonds at incredibly low yields, actual and anticipated longevity improvements, etc.) and why, as a consequence, pensions have such massive equivalent capital values these days.

All the IT journalist was saying is that if you were to buy a typical civil servant's pension in the marketplace (i.e. an annuity), it would cost a fortune. I tend to agree with him because, getting all technical, dems da facts. Your decision not to acknowledge this is your prerogative.
 
Cervelo said:
I find it hard the believe that a civil servant would give up a DB pension and opt for a DC pension for a 20% salary increase givin' the cost of the DC fund needed to provide the same as the DB pension,
or am I missing your point ??
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Maybe I'm young and foolish, but right now I'd be happy to have the bird in the hand, financially speaking. An implicit assumption for me would be that any DC scheme would involve employer and employee contributions, so the funding cost would still be shared to some extent.

I'm guessing the vast majority of posters here are a lot closer to retirement than I am, with houses / mortgages and family already sorted... given my grade I shouldn't need to make any other provision apart from appropriate life cover, but I worry about what might happen to the DB scheme, and my ultimate benefits, over the substantial remainder of my career - at least if the scheme was DC I'd know exactly where I stand all the way along.
 
Jon Stark said:
Maybe I'm young and foolish, but right now I'd be happy to have the bird in the hand, financially speaking.
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Well, maybe you should take the comparable private sector job in that case.

Jon Stark said:
...given my grade I shouldn't need to make any other provision apart from appropriate life cover, but I worry about what might happen to the DB scheme, and my ultimate benefits, over the substantial remainder of my career - at least if the scheme was DC I'd know exactly where I stand all the way along.
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I share your concerns regarding the sustainability of the State's pension liabilities, which is why I posted a link to the IT article in the first place.
 
It may be worth noting that the article does not deal exclusively with PS pensions.

It also notes that the State pension has a present value of approximately €500,000. Minister Varadkar has recently acknowledged that this is unsustainable but it looks as though the State pension is actually going to be increased. Making it, eh, more unsustainable.o_O
 
How can the State Pension have a present value of €500k?

It'll be payable from age 68 and average life expectancy is 79 for a man and 83 for a woman. So 13 years of paying something worth €12k a year with no automatic increases or indexation.

€156k gets paid out on average.

How can the present value be €500k?
 
Sarenco said:
Well, maybe you should take the comparable private sector job in that case.
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Oh so now you're happy to keep going with what you previously viewed as my off topic ramblings...

You're choosing to take my post out of context - for someone who wants to come across as being very polite and all P's and Q's you actually seem to thrive on selective quoting and taking a post in isolation rather than in context... I said IF a suggestion made by an earlier poster to IMMEDIATELY change the terms of PS pensions from DB to DC was to be implemented then HYPOTHETICALLY I wouldn't be too miffed AS LONG AS the gap in gross pay between my job in the civil service and an equivalent private sector role (which I can currently rationalise away as being accounted for by my very valuable pension and the few extra days of annual leave that I don't get to take anyway) is bridged as part of the same exercise.

And absolutely, if there ever is a major move like that and after all industrial action ends, if there's a major cut to the value of the overall (pay & pension) package available to the PS workers then you will indeed see the best and brightest cross back into the private sector.

Sarenco said:
I share your concerns regarding the sustainability of the State's pension liabilities, which is why I posted a link to the IT article in the first place.
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Well you see, this is just it, you didn't really say a whole lot in your OP, you just linked to an article - in other fora I frequent your thread would've been closed and deleted or at a minimum you'd have been asked to actually start the discussion.
 
Gordon Gekko said:
How can the State Pension have a present value of €500k?

It'll be payable from age 68 and average life expectancy is 79 for a man and 83 for a woman. So 13 years of paying something worth €12k a year with no automatic increases or indexation.

€156k gets paid out on average.

How can the present value be €500k?
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To be fair the life expectancy figures you quote are at birth - the life expectancy of a person who actually reaches 68 is probably a bit higher...
 
Gordon Gekko said:
How can the present value be €500k?
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That's what it would cost to purchase an annuity that would provide a comparable income.
  • Male aged 66 (the State pension is currently payable at 66).
  • Fund of €500,000 available to purchase annuity.
  • Pension escalates line with inflation, subject to cap of 5% per annum.
  • No guaranteed term.
  • Nil commission.
  • Annuity income - €12,507.20
Increases in the State pension have actually outpaced inflation to a very material extent over the last 20 years and there is no indication that this trend is going to be reversed in the short term.
 
@John Stark - if you have a problem with any of my posts then please feel free to use the "report" button.

I don't propose to debate the issue of public sector v private sector pay on this thread as, in my opinion, it would only serve to distract from the topic under discussion - namely, the truly shocking cost of State pensions.

Thank you.
 
Jon Stark said:
Maybe I'm young and foolish, but right now I'd be happy to have the bird in the hand, financially speaking. An implicit assumption for me would be that any DC scheme would involve employer and employee contributions, so the funding cost would still be shared to some extent.

I'm guessing the vast majority of posters here are a lot closer to retirement than I am, with houses / mortgages and family already sorted... given my grade I shouldn't need to make any other provision apart from appropriate life cover, but I worry about what might happen to the DB scheme, and my ultimate benefits, over the substantial remainder of my career - at least if the scheme was DC I'd know exactly where I stand all the way along.
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So after you have got your 20% salary increase your still looking for your employer to fund part of your pension, how much would you consider is a reasonable contribution by your employer ??
 
Sarenco said:
Increases in the State pension have actually outpaced inflation to a very material extent over the last 20 years and there is no indication that this trend is going to be reversed in the short term.
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Just to flesh out that comment -

In 1996 the full State pension (contributory) was IR£78 per week. That's the equivalent of about €145 per week in 2016 money, compared to the current payment of €233 per week.
 
Cervelo said:
So after you have got your 20% salary increase your still looking for your employer to fund part of your pension, how much would you consider is a reasonable contribution by your employer ??
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Do most occupational schemes in large organisations not have some element of matching by the employer?
 
Sarenco said:
That's what it would cost to purchase an annuity that would provide a comparable income.
  • Male aged 66 (the State pension is currently payable at 66).
  • Fund of €500,000 available to purchase annuity.
  • Pension escalates line with inflation, subject to cap of 5% per annum.
  • No guaranteed term.
  • Nil commission.
  • Annuity income - €12,507.20
Increases in the State pension have actually outpaced inflation to a very material extent over the last 20 years and there is no indication that this trend is going to be reversed in the short term.
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But the present value isn't the number that an insurance company demand to pay such an annuity.

€500k is a sensationalist figure.
 
Hi Gordon

This entire thread is about what it would cost to purchase an income equivalent to a State pension on the open market. I would strongly encourage you to seek alternative annuity quotes if you consider what I have posted to be unrepresentative of the current market.

Yes, a life assurance company will seek to generate a profit from its annuity book - no question.

However, this profit margin would be swamped by the actual increases that can be anticipated in State pension payments over and above cost of living increases based on our recent history. Look at the gap between increases that you would anticipate based on increases in the cost of living over the last 20 years and the actual increases in the State pension over that period - it's massive!

Is there any evidence that this trend is likely to change in the future? Not that I can see.

Also, bear in mind that life companies have a natural hedge to the longevity risk that they bear on their annuity books - the mortality risk that they bear on life contracts. Obviously, an individual (or State) doesn't have that advantage.
 
Jon Stark said:
Do most occupational schemes in large organisations not have some element of matching by the employer?
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I'm sure some if not most do, but not everybody works for a large corporation in the private sector, a lot of people work for smaller companies who dont have a pension scheme or have their employers pay part of their pension.
 
Cervelo said:
I'm sure some if not most do, but not everybody works for a large corporation in the private sector, a lot of people work for smaller companies who dont have a pension scheme or have their employers pay part of their pension.
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Well which private sector group do you think public sector workers are more comparable to?!
 
elacsaplau said:
Can someone tell me how many more times Sarenco needs to say the same thing?
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Thanks elacsaplau but I do understand the ongoing scepticism - the numbers are truly shocking, almost unbelievable.

Pensions are expensive - really, really expensive.

I don't think we can have a proper discussion on how best to secure the sustainability of the State's pension liabilities until people fully absorb just how expensive they really are.
 
elacsaplau said:
Can someone tell me how many more times Sarenco needs to say the same thing?
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But really, what is its relevance? Does the state buy an annuity for every PS pensioner / OAP?? If not, what is the relevance of the cost of a notional annuity to fund something that IN FACT is never going to be funded by an annuity?!
 
It's absolutely true that the State will never purchase annuities to discharge its pension obligations.

The State will, however, provide a stream of pension income from current revenue that is comparable to the income stream provided by an annuity. Therefore, it is entirely appropriate to compare the income stream from a pension with the income stream from an annuity.

Annuities are priced in the open market and are a very good proxy for estimating the market value of a State pension.

Hope that helps.
 
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