Understanding Public Sector Schemes & Defined Benefit. John McInerney Senior Pension Consultant

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1 Understanding Public Sector Schemes & Defined Benefit Schemes John McInerney Senior Pension Consultant Standard Life

2 Public Sector Schemes Very complicated Unfunded Scheme Broad brushstrokes Exceptions to every rule Case by case basis

3 Cheap Cheats Brilliant section on all of this in the QFA Pensions Book Chapter 6 Scheme Rules Benefit e Statementse ts

4 Pension Related Deduction Not a pension contribution Deduction is made from the employees remuneration before PAYE is applied to the balance in the normal way Government s way of reducing a civil servants salary but trying to tell them they hadn t

5 Rate First 15,000 Exempt Next 5,000 5% Next 40,000 10% Excess over 60, %

6 Example Gross Remuneration is 50,000 First 15,000 Nil Net Remuneration is 46,750 Next 250 Pensionable remuneration based 5,000 on gross remuneration Next 30,000 3,000

7 Key Factors Benefits and retirement ages vary by three main factors Did the person join the public service Pre or post 6 th April 1995 Pre or post 1 st April 2004 Post January 2011

8 Retirement Ages Pre 1 st April 2004: Min age 60, Max 65 Can go on retirement at ay age between 60 and 65 Post 1 st April 2004 but pre 2011: 65 Post 1 st Jan 2011: Min age 66, Max 70 Some occupations have earlier retirement ages guards for example

9 How are retirement benefits calculated? Total Reckonable Service Completed years and days service/purchased Service/Transferred Service/Service purchased by a TV/Added years Pensionable Remuneration Salary payable on the last day of reckonable service plus average of the best three consecutive years pensionable allowances in the final ten years of service Service started before or after 6 th April 1995

10 Pre 6 th April 1995 Entrant A pension of 1/80 th of pensionable remuneration for each year of service Maximum 40/80ths A separate lump sum benefit of 3/80ths of pensionable remuneration for each year of service maximum 120/80ths Class B or D PRSI Will not get the State Contributory Pension

11 Pre 6 th April Entrant Example Pensionable Remuneration of 50,000, retiring at 65 after 40 years service Pension = 50,000 x 1/80 x 40 = 25,000 Lump Sum = 50, x 3/80 x 40 = 75,000

12 Post 6 th April 1995 Entrant Pension entitlements (not lump sum) integrated with their expected social welfare pension entitlement A pension of 1/200 th of pensionable remuneration up to times the state pension and 1/80ths for pension remuneration in excess of this limit A separate lump sum benefit of 3/80ths of pensionable remuneration for each year of service maximum 120/80ths

13 Post 6 th April 1995 Entrant Example Pensionable Remuneration of 50,000, 000 retiring at 65 after 40 years service 40/200 x x 11,976 plus 40/80 x (50,000 (3.33 x 11,976)) = 13,024 Lump Sum = 50,000 x 3/80 x 40 = 75,000

14 Early Retirement Typically can take voluntary early retirement within 10 years of their minimum retirement age From 50 onwards for Pre 1 st April 2004 New Entrants From 55 onwards for post 1 st April 2004 but prior to 1 st January 2011 new entrants Subject to reduction factors Pro rata

15 What contributions are payable? Most employees appointed before 6 th April 1995 do not generally pay contributions Employees appointed after 6 th April 1995 pay at a contribution tib ti rate of: 1.5% of their gross pensionable remuneration plus 3.5%of net pensionable remuneration (gross pensionable remuneration less 2 x state t pension single person rate)

16 Contribution Example Example: Penionable Remuneration 50, Contributory Pension currently 11,976 50,000 x 1.5% = % x ( 50,000 (2 x 11,976)) = 911 Total Deduction 1,661

17 Death In Service A lump sum is payable to the deceased employee s estate the greater of: 1 x pensionable remuneration at date of death The immediate retirement lump sum the individual could have got had he retired on ground of ill health up to max of 1.5 pensionable remuneration

18 Spouses & Childrens Scheme Compulsory Death In Service 50% of the pension the employee would have got at age 65 Death In Retirement 50% of the member s pension Dependant children under the age of 16 or age 22 if in full time education 1/3 of of the spouse s pension for each of the first three eligible children

19 S & C Contributions 1.5% of salary Paid by both pre and post 6 th April 1995 joiners Can be a deduction d from lump sum May not have paid contributions o for every e year/additional years/pensionable allowances

20 Preserved Benefits Leave Service Can t take a transfer value Benefits payable at pension age Must apply for them From minimum pension age Can be paid earlier on permanent ill health

21 Opportunities Fund For AVC to provide higher h lump sum Consider Age 65, 30 yrs Service, Salary 50,000 Scheme pays 30 x 3/80 x 50,000 = 56,250 Revenue rules allow 75,000 Fund through an AVC for the difference

22 AMRF/ARF For AVC Funds Any AVC Fund that is not used to top up the lump sum can transferred to AMRF/ARF/Annuity Meet Guaranteed Income of 18,000 no need to invest in an ARF

23 AVCs Rather than pay to Group AVC Scheme or current PRSA AVC Relief won t be under the Net Pay Arrangement Transfer of existing PRSA AVC Fund or AVC Scheme Fund

24 Public Sector Schemes

25 Underwritten by the sponsoring employer not the state (Or not) 75% to 80% of funds underfunded Many members do not understand d the Unguaranteed nature of the promise More and more rare 1000 DB Scheme

26 The Basics Usually based only on basic pay Does not take account of Bonuses/BIKS/Overtime/Holiday Pay 80% of schemes have an NRD of 65

27 Retirement Benefit Calculation A pension of 1/60 th of final pensionable salary for each year of completed service to a max of 40/60 th You will have to commute your pension for lump sum Not a separate build up of lump sum

28 Pensionable Salary Definition Integration ti Offset the members anticipated State Pension Entitlement in determining pension Not a legal or Revenue requirement Employers reduce the benefits and hence the cost of the Occupational Scheme Common Definition Basic Salary 150% Contributory Pension (Personal Rate

29 Example Jim, retires at 65 after 40 years service. Entitled to pension of 1/60 th of final pensionable salary Pensionable Salary is 35, % x 11,976 = 17,036 40/60ths x 17,036 = 11,357 11, ,976 = 23, ,000 x 2/3 = 23,333

30 Can Member Have A Lump Sum? Yes Up to Revenue limits Must commute (give up) certain amount of pension to produce lump sum Commutation o Rates are in scheme e rules Effectively give up 1 in pension payable in life for 9 Lump mpsum 9:1 Commutation Factor

31 Example Mary entitled to a pension of 50,000 per annum and assume that entitled to lump sum of 150,000 Assume Commutation Rate of 9:1 Need to give up 16,666 of pension 150/9 50,000 pension per annum 150,000 Lump Sum plus pension of 33,334 per annum

32 Other Issues Early Retirement Leave Service Death In Service Indexation of pensions Spouses Pension Transfer Actuarial Value of pension entitlement

33 Advice Opportunities Scheme Wind Ups BOB and PRSA Scheme Wind Ups New DC arrangement AVCs - Fund for lump sum by AVC fund rather than diminishing your pension Leave Service Should I stay or should I go now

34 The Issue Default Setting If you are in a DB Scheme and leave service you do not transfer out What if the scheme is horribly underfunded? What if it becomes horribly underfunded Transfer Value getting lower and lower May not get a pension at all in extreme circumstances The is no right answer and never was

35 Funded Versus Underfunded Actuarial Valuation Of A Scheme Can a scheme meet its liabilities Pensions Act Sufficient funds to secure pension rights members have built up Scheme e wind up bass basis rather than a continuation basis Funding Standard/Every 3 Years

36 An Example Assets of 10,000,000 Liabilities of 14,000,000 Scheme is underfunded (71% Funded) If the scheme does win up the scheme assets are not used proportionately o over all members. NB THERE IS A HIERARCHY & COULD BE LEFT WITH NOTHING

37 Order Liabilities Are Met AVCs Pensions In Payment Active & Deferred Members Other Benefits

38 Remember. Client is at most risk as an active deferred/member Does not need to be in deficit now. In deficit before you become a pensioner A scheme is only as strong as its funding/its sponsoring employer Section 50 by Pensions Board No state guarantee Be very very careful

39 Sorry about that Questions