Irish Times:"Exposing a two-tier and unequal pension system" public vs. private

Brendan Burgess

Brendan Burgess

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An interesting editorial in today's Irish Times.

Pension provision: exposing a two-tier and unequal system

Overhaul needed to put private and public sectors on more even footing

"For instance a TD retiring at the age of 60 on full benefits after 20 or more years service will get a tax free lump sum of €135,000 and a pension of €45,000 a year. The cost of this pension on the open market would be €2.38 million but the Revenue Commissioners calculate the value of a Dáil deputy’s pension at €1.48 million. The critical point here is that pension pots valued at €2 million or more are subject to a “super tax” rate of 70 per cent. A TD is treated as being well under this threshold but a private sector employee with the same pension entitlements is over the limit and liable to “super tax”.



I am not sure about picking out a TD as an example - it applies to all public servants I presume?

How does the 70% super tax operate?

The solution is to just put all public servants on defined contribution schemes.

Brendan
 
Using a TD as an example engages public sentiment more than if they had referred to a generic public servant.

The IT has long pushed the news business to the background, in favour of the sentiment driven campaigning business.

I happen to agree with them on this one, but it's still distasteful.

You are absolutely right that all public servants should be on DC schemes.
 
Brendan Burgess said:
An interesting editorial in today's Irish Times.

Pension provision: exposing a two-tier and unequal system

Overhaul needed to put private and public sectors on more even footing

"For instance a TD retiring at the age of 60 on full benefits after 20 or more years service will get a tax free lump sum of €135,000 and a pension of €45,000 a year. The cost of this pension on the open market would be €2.38 million but the Revenue Commissioners calculate the value of a Dáil deputy’s pension at €1.48 million. The critical point here is that pension pots valued at €2 million or more are subject to a “super tax” rate of 70 per cent. A TD is treated as being well under this threshold but a private sector employee with the same pension entitlements is over the limit and liable to “super tax”.



I am not sure about picking out a TD as an example - it applies to all public servants I presume?

How does the 70% super tax operate?

The solution is to just put all public servants on defined contribution schemes.

Brendan
Click to expand...

I like how you say "just" as if it's simple!

How would you see that being implemented?

Prospectively for new recruits only, or retrospectively for all existing staff?

Or somewhere in between?
 
Brendan Burgess said:
I am not sure about picking out a TD as an example - it applies to all public servants I presume?
Click to expand...

As far as I know TDs qualify for full pension after 20 years service (20/40), whereas for most public servants it is 40 years (40/80). Some groups have faster accrual, eg, Gardai.
 
Guys

Stay on topic. No need to argue about people editing their posts.

I would not discourage anyone from reviewing their posts after posting them, and editing them accordingly.

Brendan
 
Hi Mandlebrot

How are the many Defined Benefit schemes in the private sector converted to Defined Contribution schemes?

At the very least, stop them for all new entrants.

But I would also stop them for all existing employees as well.

I might do some sort of hybrid scheme whereby they are defined benefit for low earners or for the lower parts of people's salaries and then DC for the rest.

Brendan
 
Brendan Burgess said:
Hi Mandlebrot

How are the many Defined Benefit schemes in the private sector converted to Defined Contribution schemes?

At the very least, stop them for all new entrants.

But I would also stop them for all existing employees as well.

I might do some sort of hybrid scheme whereby they are defined benefit for low earners or for the lower parts of people's salaries and then DC for the rest.

Brendan
Click to expand...

Re the change from DB to DC in private sector: I've no idea, but then I'm not the one suggesting it should be done! If you're modifying it for existing employees I presume you'd have to preserve their accrued benefits up to the date of changing (x/80ths etc...), and then go DC thereafter.

That's probably not the trickiest part though; it's the negotiations around the employer's contribution to the new DC scheme, where things would get very interesting...!
 
Brendan as you should know there is no pension pot/fund in the public service to convert there is only an entitlement in law to a pension as set out in there comtract of Employment in the public service,Which is the point i was going to make to torbednam when he said he agreed public servants should have a defined contributions pension,The problem is into the future any money the government takes in tax will first have to go to honoure there contracts and all other contracts the government have entered into on our behalf,

I think what happens in the private sector in Employer /employees get an pension actuary to see if fund covers pension entitlements they it is transfered to the employees name/This can be a buy out bond/ up untill a year ago thas pension had to be taken as an annuity. law is now changed so can be used as an ARF
 
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Brendan Burgess said:
The critical point here is that pension pots valued at €2 million or more are subject to a “super tax” rate of 70 per cent. A TD is treated as being well under this threshold but a private sector employee with the same pension entitlements is over the limit and liable to “super tax”.

I am not sure about picking out a TD as an example - it applies to all public servants I presume?

How does the 70% super tax operate?

The solution is to just put all public servants on defined contribution schemes.
Click to expand...

I think the more realistically attainable solution, in the short to medium term at least, is for the Revenue Commissioners to apply an objective actuarial assessment to the value of public service pension pots and apply the 70% supertax accordingly. There is no reason this could not be done immediately.

For post 2013 entrants the value of the pension has been reduced severely. Even post 2005 entrants don't qualify for full pension until 65 (reducing actuarial value). For low to middle grades even a full pension is very modest when the State Pension element from PRSI is taken out of it. As jjm2016 has pointed out, there is no pension pot/fund so changing to DC would be very challenging.
 
The key sentence for me is as follows:

There are understandable and valid reasons why public servants were given more favourable treatment in the past. The generous pensions were an inducement to some of the best and brightest people in the State to stay in the public sector rather than bringing their skills and experience into the private sector where they could have earned more.

This was the case in the past where PS workers earned less than private sector workers. The pension was seen as the handcuff as is where to keep people in the PS. Today however, thanks to bench-marking in particular, PS workers earn more than those in the private sector. With job security thrown in, it's gone out of kilter IMO. Wages are "sticky" - easy to increase but difficult to reduce. Therefore, in the name of fairness, the sooner the PS pensions are converted to define contribution the better.
 
I read the IT article and was inclined to write them a stiff letter except I am right out of cardboard:rolleyes:

The "super tax" is an anomaly which no one is meant to incur. It arises because if you over fund your pension in the second pillar (tax relief supported) you are taxed at marginal rate on the excess. So let's say your excess is 100. 40 is lopped off giving 60 and when you go to tax that at 50% marginal rate only 30 is left, a total tax take of 70.

But as I say only a fool would allow that to happen. It's an anomaly for sure but not evidence of a wicked conspiracy against the private sector. In fact there is a strong argument that no one should let their second pillar pension pot get anywhere near that level since the latter part of the pot will be taxed at 50% when benefits are taken whilst relief on contributions was only at 40%. The reality is that at these levels private sector pensions should come from third pillar savings and again at these levels there are usually some very handsome bonuses (not enjoyed by the Public Sector) to fund such third pillar provision.
 
This article appears to be a stitch up to start another public v private sector arguement.

From what I understand from the article, they are comparing the valuation of the public service pension to going to an insurance company and saying "how much for a pension of €45,000 a year?". What they seem to have left out is that members of private sector defined benefit schemes have the exact same valuation methods.

And that the Revenue recently changed the valuation method of defined benefit pensions. It used to be 20 times the benefit, regardless of when you drew down benefits. That meant that Brian Cowan's pension which was paid from age 52 would have had the same value as the same pension drawn down at age 65. The new method reflects the age that the benefit is payable from. The new method is only used for benefits accrued from 01 January 2014. All benefits accrued before that are still on 20 times benefit basis.

And where is the details of the lower paid public servants whose public service pension also includes the OAP? So if they are due a pension of €14,000 a year, €12,000 is from the OAP and €2,000 is from 40 years of contributions? Or the career average method that is now in place for new public servants?

Very poor article


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
torblednam said:
Re the change from DB to DC in private sector: I've no idea, but then I'm not the one suggesting it should be done! If you're modifying it for existing employees I presume you'd have to preserve their accrued benefits up to the date of changing (x/80ths etc...), and then go DC thereafter.
Click to expand...
I agree. Existing benefits should be honoured

torblednam said:
That's probably not the trickiest part though; it's the negotiations around the employer's contribution to the new DC scheme, where things would get very interesting...!
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A lot of large organisations have a matching system where they match employee contributions up to 7 or 8 %, so I would be in favour of this.
 
Brendan Burgess said:
The solution is to just put all public servants on defined contribution schemes.

Brendan
Click to expand...

I would rephrase that and put it along the lines of" The solution is to just put all new entrants to the public service on defined contribution schemes". It would be political suicide to change existing built up DB pensions.

I am surprised, given the unions are on the back foot for the last number of years, DC schemes for new entrants were not forced through during the FEMPI era.
 
torblednam said:
Re the change from DB to DC in private sector: I've no idea, but then I'm not the one suggesting it should be done! If you're modifying it for existing employees I presume you'd have to preserve their accrued benefits up to the date of changing (x/80ths etc...), and then go DC thereafter.

That's probably not the trickiest part though; it's the negotiations around the employer's contribution to the new DC scheme, where things would get very interesting...!
Click to expand...
I suspect the fiscal space for increases/cutbacks in all governments payouts let it be wages /Entitlements would have to be tilted for the first time in favor of people public/Private who are over paying for there long term entitlements compared to others who get the same long term entitlements ,I suspect the lid is going to come off this can of worms very shortly ,
The irish times is only the start pity the only picked on public servants,

When i put money into my Employer defined pension scheme along with my employer is invested and not spent which is a government requirement. Pity they do not do the same also

PENSION PROVISION EXPOSED A TWO TIER AND UNEQUAL SYSTEM

THERE IS NO PROVISION SO WE WILL NOT HAVE A TWO TIER SYSTEM WHEN WE RUN OUT OF MONEY LONG TERM FIRST IN LINE WILL BE THE SYSTEM USERS,
 
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Firefly said:
This was the case in the past where PS workers earned less than private sector workers. The pension was seen as the handcuff as is where to keep people in the PS. Today however, thanks to bench-marking in particular, PS workers earn more than those in the private sector
Click to expand...

There is some validity in this but I wouldn't go with you all of the way. In speciality roles, particularly at the higher end, the income rewards are often greater in the private sector and there is active recruitment going on. Retention is an issue in some areas. The difficulty is lack of flexibility in the Public Sector and "linkages" negotiated by the unions. Rates of reward cannot be increased in any one area (where there is a shortage) without knock on effects right across the board.

As regards the handcuff, I suspect that for many security of tenure has been a bigger factor in this than pensions. Back in the pre-crash boom times (with bench-marking in full swing) I recall several opting for the private sector in the expectation of "making it" quickly. And I have subsequently heard some of them complain about public sector pensions.
 
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SBarrett said:
I don't need any cardboard when there is a comment section at the end of the article! :D


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
Click to expand...

It was very poor and badly researched but it is a start and as you can see getting traction which can only be good for public/private sector long term ,
 
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