When comparing public sector pensions to various scenarios in the private sector, there really is little to speak of.
There continues to be virtually 100 per cent coverage in the public sector, funded mainly by the taxpayer, while the latest available data provided by the Department of Social Protection indicates only 35 per cent of private sector workers have supplementary pension coverage.
There is automatic scheme membership for any permanent employee in the public sector but in the private sector it’s dependent on the employer or the individual’s own circumstances as to whether they engage in pension provision.
There are three main types of private pension arrangements in Ireland: occupational pension schemes; personal retirement savings accounts (PRSAs); and retirement annuity contracts (RACs).
Occupational schemes are set up by employers. They can be established as defined-benefit (DB) schemes, where the employer pays employees a certain percentage of previous earnings when they retire; or as defined-contribution schemes (DC), where employees will receive a benefit in line with the contributions made by themselves and/or their employer on their behalf plus any interest and capital gains earned from investing those contributions.
Defined benefit in decline
However, DB schemes have been in decline in recent years and many are being wound up.
PRSAs and RACs are personal pension savings plans. Contributions to those pension savings plans are generally from individuals, although the employer can also contribute.
Public and private sector schemes are funded in two fundamentally different ways, senior financial planning manager at Davy Peter Feighan says.
“Within the public sector it is effectively funded by the exchequer and it operates on a pay-as-you-go basis. The Government allocates funds from current expenditure to meet the liabilities on an ongoing basis to pay the pensions that are due for existing pensioners and for pensioners that are accruing benefits over the working life.
“The private sector is based on contribution levels and the accumulated value of those contributions plus the investment return to accumulate a capital pot, which will then provide a pension on the chosen return date,” Feighan says.
The pension that is provided in the public sector is based on years of service and final salary, whereas in the private sector it is the valuation of the accumulated pot that it accrued over time. In a private pension scheme, you’re subject to market performance, investment and return.
However pensions are changing somewhat within the public sector.
Career average
“From 2013, they are using a careers average earnings rather than a final salary basis so that should make the cost of providing public sector pensions less. Typically, salary grades increase, so currently the liability is based on the final salary whereas for new members they take a career average and base the pension figure on that,” Feighan says.
A spokesperson from the Department of Public Expenditure and Reform said the scheme, known as the single public service pension scheme, will help reduce costs to the exchequer. The cost reduction will happen because of specific design features of the single scheme that will distinguish it from pre-existing pension schemes in the Civil Service. These include that pension benefits are based on average pay throughout the member’s career, not on final salary, which is normally higher; higher pension qualifying age is 68 years for most members compared with 65 years for people who joined pre-existing schemes in the period 2004-2012; pension rates are linked to consumer price inflation, not to the pay of the grade vacated at retirement; and there is no provision for professional/contractual or discretionary “added years”.
Other changes include civil servants making contributions to their pensions. Pre-1995 recruits, and a small proportion of 1995-2012 recruits, do not pay personal pension contributions, but they do pay a contribution towards dependent benefits. Payment of pension contributions has been the norm for most new civil servants since significant changes were introduced in April 1995. From then on, all new-hire established civil servants pay full social insurance, and have their Civil Service pension contributions integrated with the contributory state pension.
Early retirement
In terms of early retirement, this is still available to employees in the public sector, but the same cannot be said for those working in the private sector.
In the Civil Service, in certain circumstances, there are no reductions in their benefits, so they effectively have a full pension at the time they take early retirement.
“Again they are changing that in a scheme that they have put together for new entrants in the public sector. But there are still certain individuals and sectors that will qualify for early retirement, with full service, even though they haven’t done their 40 years,” Feighan says.
A spokesperson for the Department of Public Expenditure said, “early-retirement pensions are subject to special actuarially determined reductions. Early retirement can be applied for most public servants provided that they are within 10 years of their pension qualifying age.”
“In the private sector, contributions tax relief has been restricted; a pension cap has come down at numerous points over the past 10-15 years and the amount of pension people can accrue and the tax breaks given to them have been curtailed somewhat. This all makes it difficult for them to accrue sufficient pension pots to be in a position to retire early,” Feighan says.
Of these private sector employees, only 35 per cent have coverage. Feighan says currently 60 per cent of employees are solely reliant on the State pension, which is now going to be paid out from age 67. This means the majority of people will have to work into their late 60s in future.
Mandatory scheme
Minister for Social Protection Leo Varadkar is working on increasing pension coverage within the private sector through the introduction of a mandatory or quasi-mandatory earnings-related scheme and/or by improving financial incentives.
Last year, a group was established, chaired by the Department of Social Protection and made up of senior officials from a range of public bodies and some international pension reform experts, to look at the elements of a universal retirement savings scheme (URSS) and to produce a roadmap for the Government to consider.
Whether an opt-out scheme like a URSS can garner public backing in Ireland remains to be seen but it has been successful in the UK in recent years.