This page has been developed for Irish investors who are currently members of, or who are deferred members of, their employers Defined Benefit Pension Scheme (also known as a Final Salary Scheme).
We believe that it is important to make a distinction between the issues faced by those with Public Sector Pensions and those in the Private Sector.
What sort of Defined Benefit Pension do you have?
In Ireland today, there are essentially three types of scheme that investors will be members of either;
- Un-funded Public Sector Schemes
- Underfunded Private Sector Schemes
- Adequately Funded Private Sector Schemes
Public Sector Schemes
These are sometimes known as an "unfunded" arrangement since future pensions are paid out of current tax receipts. There is no investment fund providing the pensions. Because the State can always raise money by raising taxes, issuing government debt in the form of Bonds or selling off assets, we view these as essentially guaranteed arrangements.
One should note however, that the estimated future liabilities of the State-backed pensions are very considerable and probably unsustainable into the future. It is therefore highly likely that future benefits will be less generous as we have already seen with the current application of a State Pension disregard.
The liabilities of public service defined benefit schemes were estimated at €114.5bn in 2015, making up 26% of the total. The number of active employees across all sectors of the public service at end-2015 was approximately 298,000 with an average age of 43.8 years.
In our experience many members of Public Sector pensions understate the commercial value of their pensions.
Our calculator allows you to estimate the cost of replicating your projected retirement benefits in the Private Sector in order to give an approximate "cash equivalent" value.
The purpose of this exercise is that it should inform the right amount of risk that one should be taking in your personal savings for example any Additional Voluntary Contributions (AVCs)
Jim is married to Jane and is 51 years of age. His projected pension at Normal Retirement age of 65 is €20,622pa increasing in line with inflation and with a 50% widows pension payable to Jane.
Jim is very conservative when it comes to investing and has been saving his AVCs in a very low risk investment strategy and even though he is saving the maximum possible as a percentage of his salary his fund is hardly growing due to the negative interest rates on offer.
In order to work out the inherent value of Jim's pension, he needs to apply a "discount rate" which reflects his attitude to investment risk since if Jim were to attempt to provide these benefits himself, it would be his investment strategy that mattered.
If you do not know your risk tolerance, please contact us and ask for a complimentary Financial Personality Assessment
Jim used our calculator to estimate the current value of his Public Sector pension on the "open market" compared to the €85,000 he has currently accumulated in AVCs.
For illustrative purposes only
When presented with this information, Jim was stunned. He had no idea how valuable his occupational pension was to him and realised that he was significantly overplaying the relative importance of his AVCs. With our guidance, Jim understood the need to take more investment risk with his AVCs and better appreciated that in the scheme of things he was being far too conservative for his own good.
Private Sector Schemes
If you have a Private Sector Defined benefit Pension, please use the following form to request a copy of our Guide to Defined Benefit Pensions in Ireland - what you need to know
A Defined Benefit Scheme pension typically provides promised inflation protected retirement benefits for you and your spouse or civil partner if you have one.
Since the ability to pay the pension is dependent upon the financial strength of the scheme, we describe the defined benefit pension as “promised” rather than guaranteed.
The high profile collapse of Waterford Wedgwood in January 2009 and the impact on around 1,800 workers who not only lost their jobs but also discovered they would have little or no pension on which to retire has, understandably, made many people with defined benefit pensions in the private sector nervous about leaving their money with their former employer.
However, following the intervention of the European Court of Justice (ECJ) which scolded the Government for being in “serious breach” of its obligations to protect the workers, the State agreed to step in with a €178 million package.
The ECJ ruled in April 2013, that any pension to the workers affected should be “not less than 49 per cent” of their promised benefits
“Member States shall ensure that the necessary measures are taken to protect the interests of employees and of persons having already left the employer’s undertaking or business at the date of the onset of the employer’s insolvency in respect of rights conferring on them immediate or prospective entitlements to old-age benefits, including survivors’ benefits, under supplementary company or intercompany pension schemes outside the national statutory social security schemes”.
Article 8 of the Insolvency Directive (2008/94/EC)
In Ireland, the following rules apply to members of defined benefit pension schemes when there is an insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover the level of benefits.
Both defined benefit scheme and employer is insolvent
- 50% of the pension is protected for both pensioners and active and deferred members. Those on pensions of €12,000 or less are guaranteed 100% of their pension (Old Age Pension is additional).
- If there is anything left, the pensioners have their annuity topped up to 100%.
- Current/ deferred members have their benefits topped up from whatever (if anything) is left.
- If there is not enough money to cover the 50% minimum protection level (or 100% of pension is less than €12,000), the government will pay for it from general taxation.
Defined Benefit Scheme is insolvent, but employer is not
- Pensioners receiving pensions of less than €12,000 are prioritised and get 100% of their pension.
- Pensioners who receive between €12,000 and €60,000 receive 90% of benefits.
- Pensions who receive over €60,000 receive 80% of benefits.
- Once the retirees have been paid, the current/ deferred members receive 50% of benefits.
- If there is anything left at this stage, pensioners get their annuities topped up and then current/deferred members
- As the company is still trading, there is no government funding in this situation.
- The same type of structure applies in the situation where the pension scheme is being restructured.
- There are certainly more protections in place for those who have yet to receive their benefits. In the past, there were ranked so far down the list, they got little if anything after everyone else was looked after.
There is some statutory protection at an EU level in the event that your former employer is bankrupt and can no longer meet its obligations to pay your defined benefit pension and the Irish Government has been held to account by the European Court of Justice over this matter.
You should bear this in mind when considering if you should transfer your benefits out of the defined benefit scheme because in doing so, you will expose yourself to these risks:
In a Defined Benefit Scheme, all of the investment risk rests with the sponsoring employer. Whereas, if you transfer the benefits to a personal arrangement, this would expose you personally to investment risk.
Failure on your part to take enough investment risk would result in a lower "expected return" on your pension fund and consequently the risk that overall you will receive less in pension benefits. Of course, taking adequate investment risk does not guarantee you will achieve an adequate investment return. This is simply the nature of investment risk and return.
A defined benefit pension is payable for the whole of your life and that of your spouse and civil partner. In Ireland today, an average life expectancy is around 82 years of age which of course means that half of us will live for longer than this. If you are in good health it is reasonably likely that one of you could live well into your 90's.
This is known as a longevity risk and in the defined benefit pension this risks rest with the scheme. If you take a transfer then this risk transfers to you personally. The best way to deal with the risk is to purchase an annuity which provides a guaranteed income for the whole of the rest of (both) your lives.
Historically low interest rates, combined with increasing life expediencies have put downward pressure on annuity rates in recent years.
A couple aged 65 retiring today with a pension fund of €100,000 requiring an inflation protected pension with 50% of the pension payable to the survivor on first death for the rest of their life (which matches a typical defined benefit pension) would receive just €2,147pa (source Irish Life 31/8/2020)
Inflation riskA transfer from the Defined Benefit Scheme would expose you to inflation risk. Investment, mortality and inflation risks work against your long-term financial interests in combination.
Financial Health of the scheme
The advice on this site is intended to be general in nature and does not represent a specific analysis of a particular scheme.
If you wish for us to formally engage with you to review your individual circumstances, we would also recommend the following:
Analysis of Trust Deed and Rules
Before making a decision it is important to analyse the Trust Deed and Rules of your Employer's Defined Benefit Scheme. This will provide important detail including;
- Wind up notice
- Who sets the contribution rate
- Benefits on retirement
The covenant is the employer’s legal obligation and financial ability to support their defined benefit scheme now and in the future.
- What legal entity is the principal employer to the scheme?
- Is there a parent company?
- Balance Sheet
- Future expectations
- Attitude to staff benefits
- Union representation
Please note that the Central Bank of Ireland does not directly regulate the Global Wealth Financial Life Planning Service which may include general guidance or information in relation to your pension and retirement planning needs, protection policies, investments, or Tax and Estate Planning.
Information on this website is not and should not be construed to represent financial advice as it does not take into account the objectives, knowledge and experience or circumstances of any particular person.
Prospective clients should make their own assessment of the information provided and obtain advice suitable to their own individual circumstances. Global Wealth Financial Life Planning may include general guidance or information on tax and estate planning. Please note that Global Wealth does not provide tax or legal advice, nor accept liability for it. Our service is intended to integrate with tax and legal advice from third-party professionals