IIF Pensions Conference

1
IIF Pensions Conference
Dermot Corry

• An Overview of Pension Benefits in Ireland

November 16, 2006
2
Breakdown of the population

• Based on figures at the end of 2005
• 928,900 with no Pension (47)
• 310,800 with Personal Pension or PRSA (16)
• 234,800 members of DC Schemes (12)
• 239,100 members of Private Sector DB Schemes
  (12)
• 257,700 members of Public Sector DB Schemes (13)
• Total Labourforce - 1,971,300 (age 20-64)
• Sources CSO and Pensions Board Annual Report

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Personal Pensions

• 310,800 people with a Personal Pension or PRSA,
  of which 68,300 were PRSAs
• Approximately 7.5bn in assets (450m PRSA)
• Total Contributions of approximately 1.2bn, incl
  526m single premium
• Average Contributions of 3,860 per annum, incl
  Single Premium
• Typical contribution of 9 of salary
• Assuming that contributions are paid from age 25
  (unlikely)
• This delivers a private pension of approximately
  17 of earnings
• This rises to 40 when the State Pension is added
• Assuming contributions from age 40 onwards only
  would reduce the private pension to 12 of
  earnings (35 incl State Pension)
• Obviously all of this assumes even levels of
  contribution which in reality are much more
  skewed across age and income

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Defined Contribution Pensions

• 82,800 schemes of which 62,800 are one member
  schemes
• 234,800 members, including 172,000 in group
  schemes
• Group schemes have an average of 8.5 members
• Only 26 schemes have over 1,000 members
• Approximately 9.5bn in assets
• Total Contributions of approximately 1.5bn, incl
  660m Single Premiums
• Average Contributions of approximately 6,500 per
  annum
• Typical contribution of 16 of salary, incl
  Single Premiums
• This is much higher than previous estimates which
  were generally based on regular premiums only
  regular contributions to group schemes average
  10.5
• Single premiums are probably skewed to higher
  earners and one member schemes so level of
  contribution varies widely

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So what pension does this deliver?

• Assume contributions from 25 to 65
• Assume contributions of 16 of salary
• Starting salary of 31,000 - allow for salary
  scale
• Allow for PRSA style costs
• Allow for escalating pension with spouses
  benefits
• No tax free cash at retirement
• Estimated benefits at retirement
• State Pension 23 of Earnings
• Private Pension 30 of Earnings
• Total 53 of Earnings
• Investor carries investment and longevity risk
  and has no guarantees on early retirement
• Pension at retirement will depend on contribution
  levels over time, incl date contributions start

6
Private Sector DB

• 1,305 active schemes at end 2005
• 239,000 members
• Average scheme has 183 members
• Downward trend in numbers of schemes and members
• Many schemes closing to new members or closing
  altogether
• Total assets of approximately 50bn
• Annual Contributions of 1.8bn, incl 500m
  employee
• Average contributions of 19 of pensionable
  earnings incl 4 employee contributions
• Equivalent to approximately 13 of salary incl 3
  employee
• Typical benefits
• Pension integrated with Social Welfare
• n/60ths of pensionable salary (typically 30 years
  service)
• Spouses of 50
• Increases in pension are discretionary

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Typical Public Service Benefits

• 1/80 for each year of service, to max of 40 years
• 3/80 lump sum gratuity
• Retirement at 65, but optional retirement from 60
  with no actuarial reductions
• Pension increases on the principle of pay
  parity
• Spouses and childrens benefits
• Integration introduced in 1995 for new joiners
  (applied to pension, not gratuity)
• Contributions introduced in 1995 3.5 of
  pensionable salary plus 3 of salary (including
  SC). Typically 5-5.5 of salary total
• From 2004 some additional changes
• Forced retirement at 65 removed for new entrants
• More flexible early retirement subject to
  actuarial reduction from 65 for new entrants and
  60 for existing

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Some sample new entrant costs and benefits
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Public Service Summary

• Pension increases linked to salary increases
• Benefits and contributions based on year of
  joining public sector
• Different grades have enhanced early retirement
  options
• Typical costs
• Teacher 25
• Nurse 18
• Civil Servant 20
• Garda 30
• These compare with 16, 11, 16 and 25
  respectively in 1997 (Source Commission on
  Public Service pensions)

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Public Sector PAYG vs Funded

• Public Sector pensions are not funded PAYG
  basis
• Employee contributions do not go into a fund
  either
• PAYG cost in 2006 estimated at 1.6bn to pay
  current pensions
• Total pay is 14.6bn
• Applying a 23 average contribution implies long
  run cost of 3.4bn (incl employee contributions)
• So current PAYG level is less than half the long
  run cost
• Long run cost has increased from 1.1bn in 1997
  to 3.4bn now

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Comparison of Risks

• Risks for members of private sector schemes
• Full investment risk for DC customers
• Where will interest rates be when you retire?
• Longevity risk
• Risk that DB fund may be closed when underfunded
• Exposure to the employer what is the value of
  the employer covenant?
• Discretionary pension increases who will be
  making the decision in 20 years time when you are
  retired?
• Generally exposed to market conditions on early
  retirement
• Risk for public sector employees
• State guarantee on their pension and pay parity
• Contributions not going into a fund
• PAYG will our kids be able to afford their
  generous pension?

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Summary of Contributions and Benefits
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Overall Summary

• 928,900 people have no pension
• Just over 1m people have a pension, incl 258,000
  public service
• Total private sector assets approximately 67bn
  at end 2005
• Total contributions to private sector pensions
  are approximately 4.5bn per annum
• Private sector contributions are very variable
  depending on type of benefits age and earnings
  levels
• Public Service contributions 20-30 of salary
  depending on retirement options

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IIF Pensions Conference
Dermot Corry

• An Overview of Pension Benefits in Ireland

November 16, 2006
15
Appendix Public Sector Assumptions

• Inflation 2.25 per annum
• Core Salary increases - 3.75 per annum (1.5
  above inflation)
• Allowance for salary scales and promotions
• Increase in Social Welfare pension in line with
  earnings
• Investment Return (pre retirement) 6.25 per
  annum
• Interest rate at retirement 4.25 per annum
• Increases in pensions at retirement Core Salary
  increases
• Mortality - 100 PA92 mid cohort
• Normal public service benefits with some
  allowance for special circumstances
• Consistent with Commission on Public Service
  Pensions except post retirement return (they used
  the same as pre-retirement) and mortality
  assumption updated