Comparing the expected pension benefits at retirement of an employee in the public sector with that of a private sector worker of a roughly similar age and salary level is like comparing chalk and cheese.
This is because they are both structured in entirely different ways.
Public sector pension schemes for staff in the civil service, local authorities, Garda Síochána, the permanent Defence Forces, the health and education sectors and in non-commercial State bodies are financed on a pay-as-you-go basis, which means that liabilities are just paid as they arise by the taxpayer as part of public expenditure.
“I suppose in some ways it’s a bit like comparing chalk and cheese but, on the other hand, the thing about public sector pensions is that we’re all paying for it, because it is paid out of general taxation rather than funds or investments,” explains Gerry Moriarty, the chief executive of the Irish Association of Pension Funds (IAPF).
Private sector pensions are paid for using funds that are built up to try and match the value of the expected benefits.
Commercial semi-State bodies, however, have a fund to meet their employees’ pension liabilities rather than them being paid out of current expenditure but, like all public sector schemes, they are defined benefit (DB), which means that your pension benefits are clearly defined by the rules of the schemes and must be met. The level of benefits depend on your service in the organisation and salary at retirement.
But DB schemes in the private sector, while they still exist, are fast becoming a rarity. Most private sector company pension schemes are now defined contribution (DC), where your contribution and the contribution paid by your employer are usually fixed as a percentage of salary.
As a 2012 report by the OECD into our pension sector points out: “There is unequal treatment of public and private sector workers due to the prevalence of DB plans in the public sector and DC plans in the private sector. “
According to the IAPF, less than 8 per cent of private sector DB schemes are open to new members.
In a DC scheme, the contributions are invested in a fund in order to provide your retirement benefit, but unlike DB schemes, they do not provide any guarantees.
They will only pay you benefits that your individual pot can pay for. These benefits will be dependant on a number of different factors, including contribution levels, fund performance, fund charges and the annuity rates available when you retire.
Yet another difference between public and private pension schemes is that most public schemes, at least for now, pay benefits based on final salary - the salary the worker is on when they retire, capped at a maximum of 40 years’ total service. This means that a lifelong civil servant who works their way to a senior position in their final years of service would have their pension calculated on the basis that they had worked in that senior position for their entire career.
However, new recruits to the public sector (which means anyone who joined after January 2013) will become members of a new ‘single scheme’, whereby their pensions are calculated on the basis of their average career earnings and not their final salary.
Under the new scheme, most public servants will contribute about 3 per cent of their pensionable wage, and 3.5 per cent of their net pensionable wage, towards their overall pensions and lump sums.
Those who joined the public sector before 2013 still pay into the old public sector occupational schemes, under which most of them must contribute 5 per cent of their salary to the main scheme, plus a further 1.5 per cent for the scheme for spouses and children, which is compulsory even if you are unmarried with no children.
But many experts claim that the average private sector worker today would still have to pay around 20per cent of annual income to match current public sector pension benefits.
So its no surprise to learn that there is increasing flexibility for both employers and employees to increase their level of contributions in a DC scheme.
The IAPF has a quality award for employers with DC schemes showing contribution rates of at least 10% (with the employer paying at least 6%), while those employers who pay at least 8% would qualify for a higher award mark.