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A “career average” pension scheme?
Read more about: Coalition, Comment, Fianna Fail, Green Party 
The way Cowen, Gormley, Lenihan and Harney have set to restructure civil service pensions in today’s Budget is strange. They’ve danced around the details using a fudgey term – “career average”, I’m trying to figure out exactly what they mean…
It appears the Government will restructure the way civil servant pensions are paid from its current form; people are paid based on what they were earning at the end of their career; to paid as per the average salary they earned over the course of their 25 year career.
So, you go in there as a clerical officer at 20 years old, move up the ladder in the well-known un-meritocratic way, eventually 25 years later, reaching principal or assistant principal grade upon retirement.
As you hit the rocking-chair, those who started their career under the pre-Budget scheme would have pensions based on the salary of a principal officer. However, it appears for post-Budget entrants to the civil service, pensions will be based on whatever the median salary was earned over the full 25 years. It’ll mean those who enter the public service from next year onwards will have a pension of approximately 50% the value of those who entered this year…fuck. An odd system to say the least (to me) not alone in the way it is calculated, but in the way it will impact work practices…
The civil service is demoralised and at present – from the outside – unmotivated. The new pension policy doesn’t look like it will change this – why bother busting your arse for the last 10 years of your career when a promotion will mean very very little to your pension?
On productivity; the top ranks of the civil service are often capable people, but I’m left wondering will they be so in twenty years time under this new system, when the monetary motivation at least, will be minimal. “Reform of the public sector”, I think not.
Of course, the other side of this is the fact that short-term benefits, which we need most, are almost non-existent. Odd indeed, on first viewing.
We’ll have to wait and see what the actual proposals are, but they’re unlikely to be based on averaging out your earnings over your entire career. Some private sector pensions have looked for averaging, usually over the last five years or so of someone’s time with a company, and partly to guard against people getting opportunistic promotions right at the end of their careers for pension purposes.
I agree with you. We have a demoralised public service and getting more demoralised and not only in regard pay and pension. Now the “licks” are getting the promotions. Experience counts for nothing. I am sure we all know what it is like to have someone much junior to us becoming our boss. But politicians like only to be told what they want to hear. The “Yes minister” days when the astute public servant saw the pitfalls and was not afrid to say so are gone and so are the real politicians. Hense recent disasters.
@Eddie
Now the “licks” are getting the promotions.
Yeah, it was so much better when all you needed was a pulse and enough years seniority to be guaranteed that promotion.
Darned licks, with their qualifications and work-ethic … ruining it for everybody else.
Darned licks, with their qualifications and work-ethic … ruining it for everybody else.
Yes, just like those He-Men of Irish capitalism, who get ahead by sheer grit, talent and hard work.
(And not at all due to Daddy’s connections, the “right” school or going into one of those professions like economics where it seems that no idiot is left behind)
True story EWI, I was a director on an SME for seven years. Ah… the pension provision for those at the top, as distinct from those in middle and lower positions in the company. Quite an education for me (I didn’t benefit, I was, as it were, merely passing through, albeit myself and the most overtly Thatcherite of the Directors made common cause against this… to no effect, company democracy being a strange thing). Not much work ethic or qualifications I saw there, mostly just having the word Director on the Co. docs… I fear there’s a lot of that that goes on.
I will get when retired the average of whatever I save for my pension scheme and it will be quite less than most public servants.
No incentives? ok, leave the public service and come to the real world, the one that generates the profits that by paying taxes generate the revenue that pays for those demoralising low salaries and low pensions.
I don’t expect many to leave public services, so I guess they are still better than most.
I will get when retired the average of whatever I save for my pension scheme and it will be quite less than most public servants.
I would be in favour of a mandatory (better) universal pension for all – part-fund it by scrapping the pension contribution tax-break of the rich! I suspect that there’d be others who’d think the same way.
IBEC and ISME would fight it tooth and nail, though. You might want to think on that, and why that is.
Proposition Joe: “Darned licks, with their qualifications and work-ethic … ruining it for everybody else.”
We never had more “qualified” people in this country than we had in the last ten years. Proof of the pudding is in the eating and the result could not be clearer – an economy that had been built up in very harsh times with the sacrifice of many within and outside the country over about 80 years frittered away in the last 5-8 years.
This proves that there is one thing worse than a fool and that is a fool with “qualifications” and “work-ethics”.
Career Average is a progressive pension system that will drive down the cost of pensions in the long run.
The easiest way to understand Career Average is to view it as instead of getting 1 pension when they retire an individual will receive 40 “mini” pensions:
1/80 * Sal at age 25 plus allowance for inflation to retirement date +
1/80 * Sal at age 26 plus allowance for inflation to retirement date +
…..
1/80 * Sal at age 65 plus allowance for inflation to retirement date +
If the Government decided to close down the Public Sector pension scheme tomorrow it would cost them 108 billion to pay out everyone (current Pensioners and the value of what current employees have accrued) what they are due.
This is clearly unsustainable. The current market cost of a public sector pension of €50,000 is nearly a million Euro – check http://www.pensionchoice.ie for projections.
You mention a lack of incentive to higher paid General Secretaries. If they feel that their pension entitlements are inadequate they can make Additional Voluntary Contributions. With the switch to Defined Contribution in the public sector the Career Average scheme may actually be viewed as relatively generous in 40 years time. The pension’s landscape will be radically different come 2050. Projections at the moment indicate that a 65 year old male will live to 88 come 2050 and this may actually be understating mortality
Cheers Eoin, good round up of what exactly it entails. Will lift a link to your comment into the post.
Mark
Slight Point:A current full Civil service pension is over 40 years. That is you gain a 1/80th fraction for each full year of service. up to a maximum of 40 years. I am going to assume the new one is the also going to be over 40 years!
Gareth, you are correct.
My description of Career Average is only to give an overview and visualise what’s going on.
In reality on retirement a member’s entire salary history is converted into “today’s money” with inflation factors. This is then averaged to determine Final Pensionable Salary.
Career Average is a fairer pension system. There is now a direct link between contributions and the portion of the pension to which that contribution relates to.
In a final salary scheme a member could hypothetically pay a contribution on say a salary of €40,000 for their entire working life then lets say jump to €80,000 in the year before they retire. Under a Final Salary scheme the pension would be based on the €80,000 despite contributions having been paid on €40,000 for the majority of the members working lifetime.
Career Average avoids this with the pension being based on the average salary on which contributions were paid.
However in the long run Career Average will have to be replaced by either pure Defined Contribution or a Hybrid Defined Contribution / Defined Benefit scheme.
As individuals continue to live longer and the balance between working members of the population and retirees shifts even Career Average will be unsustainable.
A sticking plaster for what is potentially a bigger sore than two Nama’s.
Eoin: So even “Career Average will be unsustainable”. Once upon a time there was the barter system where the family business or farm was left to the eldest son. Then the parents were able to live comfortably with their family. Now we live in boxes in cities and you tell us that an assured reasonable comfort in retirement is unsustainable even though we are constantly being told that Ireland was never as well off.
Where is all this leading to? We all know that some pensions, public and private, are way above the earnings of most of those now entering the “minimum wage” work force due to an endles supply of cheap foreign labour.The obvious question then is are pensions overpaid or are wages underpaid? You obviously believe that pensions are overpaid but one simple fact is that low wages mean poverty.
I expect the answer to that question will be provided in the next five years.
@BigFredi
“ok, leave the public service and come to the real world, the one that generates the profits that by paying taxes generate the revenue that pays for those demoralising low salaries and low pensions.”
So private sector businesses run entirely without public sector input? Without clients from the public sector? Or without public services like water, electricity, policing? They make no gain from the education system? Business owners teach themselves to add and subtract? (After they’ve taught themselves to read the ‘basic arithmetic’ manual?) The health of private-sector staff churning out all that profit owes nothing to state health provision?
This inane “I pay your salary” argument needs a bit of chicken-and-egg reflection.
Emer is absolutely right. 6.5 billion in capital expenditure, houses rented to the health boards, our so-called educated workforce, the education service, the health service, the quangos, is there anyone who is not dependent on the state.
Why then pick on those who work for the state. The obvious answer is privatisation. Then we will have 166 T.D.s twiddling their thumbs in Dail Eireann able to say that it has nothing to do with them like Ms Harney is already saying about the health service.
Don’t say you weren’t warned.