The contributions to achieve such a pension pot

depend on the expected rates of return. Table 7

shows optimistic, base and pessimistic scenarios

where rates of return vary from 3%, 4% and 5%. Here

the required annual contribution varies from €7,600

to €3,300. At current annuity rates, the required

annual contribution would be equivalent to 10-16%

of average public sector pay.

Table 7: Market value and contributions to match average public sector pensions

Required annual gross contribution over 40 years

Annuity rates Capitalised value 3% return p.a. 4% return p.a. 5% return p.a.

Current market rate, 2.18% €589,358 €7,589 €5,964 €4,646

Higher rate, 3.27% €416,606 €5,364 €4,216 €3,285

Source: Davy calculations

However, these calculations are extremely simplistic.

The majority of existing public servants are still

entitled to pensions linked to their final salary rather

than the average salary. In these cases, it is pay at

the end of their career that is relevant, well above

the average of €47,400 illustrated above. Also, many

public sector pensions are linked to public sector

wages, which we would expect to grow faster on

average than CPI (Consumer Price Index) inflation.

Taking this benefit fully into account would increase

the capitalised value of their pensions.

In addition, because the public sector pension takes

into account a fixed level of income the value of

pension benefits rises sharply for public servants

who have pay levels above the average. For example,

a salary of €47,400 results in a pension of €11,300;

however, a salary of €75,000 would result in a

pension of €25,100. Effectively, a c.60% higher salary

results in a c.120% higher pension. At current annuity

rates, a pension that provided €25,000 of income per

annum would cost significantly in excess of €1 million.

Many public sector workers also have the option to

retire on full benefits from age 60 (or earlier for some

workers) or the ability to buy extra service at very

generous rates.

Of course, these estimates need to be seen in the

context of the pension levy imposed on public

servants who, like private sector workers, are asked

to contribute to their pensions. Finally, public sector

pensions are free of the risks facing employees in

defined contribution schemes. Those left in private

defined benefit schemes also face the threat of

wind-up if they run unsustainable deficits.

In summary, while valuing public sector pensions is

highly complex, their worth is certainly far in excess

of the contribution from the employee – particularly

for average and higher earners – and should be

taken into account by the PSPC.

“The majority of existing public servants

are still entitled to pensions linked to their

final salary rather than the average salary”


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