CHAPTER 8 - OCCUPATIONAL PENSION ARRANGEMENTS IN THE PRIVATE SECTOR COMPARED WITH STANDARD PUBLIC SERVICE PENSION ARRANGEMENTS

8.1 Introduction

8.1.1 In January 1997 the Commission contracted the ESRI to carry out a study on public service and private sector pension arrangements. The purpose of the study was to compare the standard public service pension arrangements (represented by the Civil Service Pension Scheme) with pension arrangements in large companies in the private sector, i.e. those with 500 or more employees. A report on the study was presented to the Commission in June 1997. For the purposes of its final report the Commission will examine further the pension arrangements available in the private sector and how they compare with those available in the public service.

8.1.2 The information provided in the ESRI report was drawn from its 1995 survey of occupational pension schemes carried out for the Department of Social Welfare and The Pensions Board. That survey included 145 private firms and commercial semi-state organisations in Ireland which employed 500 or more people. The response rate from those firms was almost 57%. The large firms that participated in the survey included 12 commercial semi-state organisations, and these were excluded from the analysis. The ESRI advised that the remaining 70 firms included in the analysis were representative of all large firms in the private sector.

8.1.3 The headings under which comparative information is provided on pension arrangements in the private sector and the public service are as follows:

• Pension Scheme Coverage
• Admission Criteria
• Eligibility of Part-Time Workers
• Membership of Pension Scheme (Voluntary v. Compulsory)
• Normal Retirement Age
• Defined Benefit and Defined Contribution Schemes
• Calculation of Pensionable Pay and Contribution Arrangements
• Calculation of Pension Benefits
• Annual Accrual Rate
• Integration with State Social Insurance System
• Dependants' Benefits
• Early Retirement Due to Ill Health
• Early Retirement other than on grounds of Ill Health
• Early Leavers
• Pension Increases
• AVCs
• Professional, technical and specialist added years
• Financial Arrangements

The findings of the report under each heading are summarised in this Chapter.

8.1.4 Section 8.20 below presents the report's overall evaluation of pension arrangements in the civil service compared with the private sector, from the perspective of the scheme member. The report concludes that the history of the Civil Service Pension Scheme shows that it has been designed and adapted to changing circumstances over a long period of years to encourage civil servants to give loyal, diligent, and full-time service to the State over the whole of their working lives by offering civil service employees more favourable pension terms than are generally available in large firms in the private sector. This ensures that the average civil servant has a higher probability of being covered, of receiving better benefits, and of such benefits maintaining their purchasing power.

8.2 Pension Scheme Coverage

8.2.1 Over 144,000 persons are employed in the sample of large firms and 27,000 are employed in the civil service. There are important differences between large private firms and the civil service in the kind of employment offered. In the civil service there is an equal number of male and female employees, and very nearly 100% of all employees are in full-time permanent employment. In the large firms included in the sample there are 95,000 male employees and 49,000 female employees. Of the male employees, 89,000 are in full-time employment (47,000 permanent, 42,000 temporary) and 6,000 are in part-time employment (5,000 permanent, 1,000 temporary). Of the female employees, 35,000 are in full-time employment (31,000 permanent, 4,000 temporary) and 14,000 are in part-time employment (13,000 permanent, 1,000 temporary).

8.2.2 These differences have a major influence on the proportions of employees covered by occupational pension schemes in the private sector and civil service groups. The coverage rate for the civil service is almost 100% for both males and females. In large private sector firms the coverage rate is only 56%.

8.2.3 In the civil service full-time permanent employees are covered, but the very small number of those in part-time permanent employment are not. In large private sector firms the coverage rate is 69% for full-time permanent employees, 57% for full-time temporary employees, 9% for part-time permanent employees and 1% for part-time temporary employees.

8.2.4 Although membership of the civil service scheme is automatic on becoming a civil servant most occupational pension schemes operated by large private sector firms require fulfilment of minimum age or minimum length of service conditions for eligibility for membership of the scheme. In addition, membership of the civil service scheme is open to all civil servants except those who are part-time whereas membership of private sector schemes is restricted to certain kinds of employees. Only 8 out of 70 large private sector firms in the sample operated schemes that were open to all employees. The great majority of firms, 60 out of 70, had schemes that were open to some but not all employees, and a small minority of firms, less than 3% of the total, did not have an occupational pension scheme for any of their employees.

8.3 Admission Criteria

8.3.1 The civil service scheme does not operate minimum entry ages (although service prior to age 16 does not reckon for pension purposes), while 78% of private sector schemes have such a condition. Over 40% of large firms have a minimum age of entry for pension benefits of between 18 and 20 and nearly 45% of firms require that the employee must be aged 25 or more before admittance to the scheme.

8.3.2 The civil service scheme has a minimum service requirement of five years to qualify for pension benefits. For large firms in the private sector, the most prevalent length of service condition to qualify for pension benefits is one year, though a significant number require from three to five years service. In the civil service, there is no minimum service requirement to qualify for death in service benefits. Most large firms do not have different conditions for death in service benefits than for pension benefits.

8.4 Eligibility of Part-Time Workers

8.4.1 Less than 28% of the schemes run by large employers are open to all part-time employees. Most of the private sector schemes which do not exclude all part-time workers do not have any categories of such workers who are eligible for membership. The civil service scheme covers those who operate job-sharing arrangements. In the private sector only a minority of schemes cover part-time employees who are job-sharing or who work a specified number of hours. Almost a quarter of the schemes operated by large firms cover permanent part-time workers.

8.5 Membership of Pension Scheme (Voluntary v. Compulsory)

8.5.1 Membership of schemes run by large firms is compulsory for three-quarters of the schemes and it is compulsory for the civil service scheme.

8.6 Normal Retirement Age

8.6.1 The normal retirement age in the civil service scheme is 65, although there is a facility for established civil servants to retire on or after age 60, with no actuarial reduction. Using the definition of normal pensionable age given in the Pensions Act, 1990 (the earliest retirement age at which a scheme member is entitled to receive benefit under the rules of the scheme, disregarding ill-health provisions), the retirement age for established civil servants would be considered to be age 60. In large firms in the private sector, the retirement age is 65 for over three-quarters of all schemes, 60 for 15% of schemes, and 62-63 for around 10% of schemes.

8.7 Defined Benefit and Defined Contribution Schemes

8.7.1 The civil service provides defined benefit schemes for both established and non-established staff, and almost 90% of schemes operated by large firms also fall into this category, while the remaining 10% are defined contribution schemes.

8.8 Calculation of Pensionable Pay and Contribution Arrangements

8.8.1 The civil service scheme and almost all of the schemes operated by large firms take basic pay into account in reckoning pensionable pay. The civil service scheme takes shift premium and service pay into account, while only a minority of large firms do so. Bonuses, commissions, and other elements of pay are taken into account by a minority of large firms' schemes. These elements do not form part of civil service remuneration.

8.8.2 The civil service scheme is not contributory (with the exception of the civil service spouses' and children's pension scheme, which has a contribution of 1½% of pensionable pay). However, for pay determination purposes, it has been accepted in a number of arbitration findings that an implicit contribution is made through salary being set at a lower level to take account of the benefits payable under the pension scheme (see section 9.4 below). Civil servants recruited on or after 6 April 1995 to categories formerly having modified PRSI status pay a contribution of 5% (1½% of remuneration and 3½% of net remuneration) in respect of their pension. Less than one-third of schemes in large firms do not require a direct contribution to the pension fund from the members. The remaining two-thirds of schemes in large firms either require all or some members to contribute. There are 59 schemes in which members make a contribution towards their pension; except for one scheme (in which the contribution is a fixed sum) the contribution payable is a percentage of pensionable pay. The rate of employee contribution is less than 3% of pensionable pay in about one-fifth of schemes in which a contribution is required, between 3 and 4.9% in a further quarter of schemes, between 5 and 5.9% for a third of schemes, and 6% or more for the final one-fifth of schemes.

8.9 Calculation of Pension Benefit

8.9.1 In the civil service scheme pension benefit is calculated on the basis of pensionable pay on the final day of service, except in the case of promotion or change of grade in the three years preceding retirement, where an average of pensionable pay in the final three years of service is used. Almost three-quarters of schemes in large firms base their pension benefits on final pensionable pay. Over a quarter of schemes use average pensionable pay or some other method. Where averaging is used it is usually based on the last three years of pensionable pay.

8.10 Annual Accrual Rate

8.10.1 The accrual rates used by the civil service scheme and by about 5% of schemes in large firms are 1/80th for pension and 3/80th for lump sum. These accrual rates will provide a pension equal to half of final salary and a lump sum equal to one and a half times final salary after 40 years service. Over three-quarters of the schemes provided by large firms use an accrual rate of 1/60th per year of service, which will give a pension equal to two-thirds of final salary after 40 years service (part of which may be commuted to a lump sum of up to one and a half times final salary). The civil service accrual rates for pension (80ths) and lump sum (3/80ths) will effectively give the same outcome as the private sector (60ths) accrual rate. A small number of schemes in large firms use an accrual rate of between 1/30th and 1/50th, while the remainder use an accrual rate of 1/100th or some other fraction.

8.10.2 Half of the private sector respondents replied to a specific question about accrual rates in respect of part-time staff. Three quarters of those who replied indicated that they used the same accrual rate for part-time staff as for full-time staff.

8.11 Integration with the State Social Insurance System

8.11.1 The civil service scheme and two thirds of private sector schemes surveyed are integrated with the State Social Insurance system. In the civil service, established officers recruited on or after 6 April 1995 pay the full rate of PRSI and are subject to integration with Social Insurance benefits. Those recruited before that date pay the modified rate of PRSI and so have no entitlement to Social Insurance old age pension benefits. All non-established staff pay the full rate of PRSI and are subject to integration with Social Insurance benefits.

8.11.2 The civil service scheme and 90% of the two-thirds of schemes in large firms which apply integration achieve that objective by adjusting the level of pensionable pay on which benefits and contributions are based, through deducting a multiple of the basic Social Insurance old age pension. In the civil service scheme a multiple of twice the basic Social Insurance old age pension is used, while in large firms, a multiple of 1½ times the Social Insurance old age pension is used. The two multiples give the same effect when one allows for the different accrual rate of 60ths in the private sector and 80ths in the public service.

8.11.3 Three quarters of the respondents who gave information regarding pensions for part-time employees integrate their pension benefits with the Social Insurance system, 10% did not, and 15% said that their scheme did not cover part-time employees. Virtually all of the schemes that do integrate pension benefits for part-time employees use the same multiple of the basic Social Insurance old age pension as is used for full-time employees.

8.11.4 Where a scheme integrates the pensions of part-time staff with the Social Insurance system there are two main methods for achieving the integration when calculating pension benefits. Over 80% of the schemes use a method in which pensionable remuneration is taken as the equivalent full-time salary and pensionable service is actual service (i.e. two years working half -time is taken as one full year's pensionable service). The remainder use the second method in which pensionable remuneration is the actual salary earned and pensionable service in any one year is counted as a full year for pension purposes regardless of hours worked (i.e. a year of half-time work is taken as one year's pensionable service).

8.12 Dependants' Benefits

8.12.1 The civil service scheme and all of the schemes in large firms that replied to the question provide lump sum payments on death in service. The civil service scheme also provides a pension for the spouse of a married member who is a member of the spouses' and children's scheme and a pension for his or her children. Of the schemes in large firms, 60% provide a spouse's pension for married members, and 40% provide a pension for the member's children. A minority of schemes return the member's pension contributions to the deceased's estate, and some defined contribution schemes pay the value of the fund accumulated to the date of death.

8.12.2 In the civil service scheme, the multiple of salary paid as a lump sum in the case of death in service varies between 1 and 1½ times salary. In the private sector schemes surveyed, approximately 90% of those answering this question will pay a lump sum of at least two times salary, while approximately 40% will pay a lump sum of four times salary. The higher multiples applied in the private sector may relate to the fact that not all will pay a spouse's or children's pensions.

8.12.3 In the case of death after retirement, the civil service scheme will provide a pension for the member's spouse and a pension for his or her children (assuming the member contributed to the spouses' and children's scheme). In the schemes of large firms, 90% provide a spouse's pension where the member is married (22% provide a dependant's pension where the member is single), while 40% provide a children's pension or allowance. All schemes in large firms also pay the outstanding instalments of the pension guarantee - which usually covers a period of five years after retirement. There is no provision for a pension guarantee under the civil service scheme.

8.13 Early Retirement due to Ill-Health

8.13.1 The civil service scheme and almost all schemes in large firms provide benefits if a member retires early due to ill-health. In the civil service, the benefit is based on the pension entitlement accrued to date plus some fraction (usually a maximum of 6&2/3 years) of the service which would have been completed if the member had not retired on ill-health grounds. A quarter of schemes of large firms calculate the benefit on the basis of the full service the member would have completed if the member had not retired on ill-health grounds. Of the balance, 15% provide a pension based on actual service accrued to date of retirement, with no actuarial reduction in respect of early payment of benefit, while 33% provide a pension based on actual service to date of retirement, with actuarial reduction. The remaining 27% of schemes refund the value of the fund in a defined contribution scheme, or pay an amount based on a percentage of salary, or pay an amount determined by permanent health insurance plans.

8.13.2 In the civil service scheme, the member must be incapable of doing his or her normal job in order to qualify for an ill-health pension. The same approach applies in the majority of schemes in large firms, although a significant number require that the member be incapable of doing any job, before qualifying for ill-health retirement.

8.13.3 The civil service scheme and one-third of schemes in large firms require the member to have completed a minimum period of service before becoming eligible for an ill-health pension. The remaining two-thirds of large private sector schemes do not have a minimum service condition. In the civil service scheme the minimum period of service required is five years. Of the schemes in large firms which have a minimum service requirement, over two-fifths require five years' service, one-fifth require between eight and ten years' service, and almost two-fifths have less stringent requirements with service of one to two years being sufficient to qualify.

8.13.4 Occupational pension schemes may make provision for retirement on grounds of ill-health through a permanent health insurance or income continuance plan. Over half of the schemes in large firms provide such plans. The civil service scheme does not make separate provision as retirement on grounds of ill-health is catered for within the scheme.

8.14 Early Retirement other than on grounds of ill-health

8.14.1 Established and non-established civil servants are required to retire at age 65, but the former may retire with immediate pension at any age after age 60 (see 8.6 above), if they have at least five year's service. There is no provision to take retirement at an earlier age. Almost all schemes operated by large firms allow members retire earlier than normal pensionable age, but usually with some form of actuarial reduction. The minimum age at which a member can take early retirement is 50 for 86% of schemes, 55 for 7% of schemes, and 60 for 4% of schemes. There is no minimum service requirement to qualify for early retirement in 47% of schemes, while 38% require one to five years' service, and 15% require service greater than five years' service.

8.14.2 There is some variation in the basis for payment of early retirement pensions by large firms, most of which apply some form of actuarial reduction. Almost 30% of schemes pay the pension entitlement accrued up to the date of early retirement reduced by one third of one per cent per month, or some other factor more favourable to the member, to take account of the longer period over which the pension will be paid. Nearly 37% of schemes pay the benefit on a similar basis, but use a less generous reduction factor. Only 8% pay the pension accrued to date without actuarial reduction, 5% pay a benefit which depends on the length of service, and nearly 10% of schemes (which are defined contribution) return the value of the accumulated fund. Although respondents were not asked about the circumstances in which the pension accrued to date would be paid without actuarial reduction it is likely that private sector firms would only adopt this basis of payment in cases of redundancy or inability to work satisfactorily.

8.15 Early Leavers

8.15.1 Where a member opts not to transfer his or her pension rights to another pension scheme on leaving employment, the Pensions Act requires the scheme to adopt a specified formula in relation to the uprating of benefit, or a more favourable formula, to preserve early leavers' rights to a deferred pension. The civil service scheme operates a more favourable formula than that specified in the Pensions Act through uprating the benefit in line with increases in the salary of the grade occupied by the member before leaving service, while 91% of schemes of large firms operate the Pensions Act formula.

8.15.2 In the case of death before the age at which the pension becomes payable, the civil service scheme will pay a pro-rata pension to the member's spouse and surviving children. Only a small minority of schemes in large firms will pay a pension where the early leaver dies before retirement. The favoured course of action for almost 80% of schemes in large firms is to pay the actuarial value of the preserved benefit.

8.15.3 In relation to preservation of benefits, the Pensions Act does not cover service given before passage of the Act. The civil service scheme and most schemes in large firms preserve early leavers' benefits earned before 1991 on a voluntary basis. The civil service scheme uses a more favourable formula than that specified in the Act for post-1991 service. Over a third of schemes in large firms operate the Pensions Act formula, while 57% do not provide for revaluation in relation to pre-1991 service.

8.15.4 An alternative to preservation is the payment of transfer values in respect of pensionable service earned in the first employment. In the civil service scheme the public service transfer network allows employees to transfer their pension entitlements within a network which in 1995 covered over 130 public sector commercial and non-commercial organisations employing about 300,000 people. An individual coming into the civil service from the private sector can use the transfer value payable by the private sector employer to buy pensionable service under the Civil Service Purchase Scheme. Almost all the schemes of large firms accept transfer values in respect of service before the passage of the Pensions Act. The benefits that may be granted in respect of transfer values comprise additional pensionable service in 47% of schemes, a defined contribution or other benefit in 39% of schemes, and a fixed pension - which may be indexed in line with the consumer price index or grade increases - in the remaining 14% of schemes.

8.16 Pension Increases

8.16.1 The civil service scheme and 30% of schemes in large firms provide automatic guaranteed increases. A third of large firms' schemes either give a guaranteed increase subject to periodic review or a discretionary increase following an annual review. About 10% of large firms' schemes do not guarantee an increase, but do review the position from time to time. One fifth of schemes do not increase their pension benefit and somewhat less than 10% either have no pensioners or grant increases on some other basis than those already mentioned.

8.16.2 For large firms that provide a guaranteed annual increase in pensions with the rate of increase specified as a percentage of pension, almost all apply a maximum percentage figure of 3% or 4% per annum. For those providing a guaranteed annual increase by reference to increases in the Consumer Price Index, it is generally stipulated that the maximum increase will be 4% or 5% per annum. The civil service scheme provides increases in line with salary, but not subject to any maximum annual percentage figure.

8.17 AVCs

8.17.1 In the private sector, if scheme rules allow, members who would not otherwise qualify for a full pension may have a facility to make AVCs to provide for additional benefits either within the scheme or in a separate scheme. In the civil service scheme there is provision for purchasing of additional years of service within the scheme, and a number of unions operate separate AVC schemes for their members. In the private sector, almost all schemes in large firms make provision for payment of AVCs. Nearly 55% of AVCs are paid to schemes separate to the main pension scheme. Virtually all of these are defined contribution schemes.

8.18 Professional, Technical and Specialist Added Years

8.18.1 Under an ad hoc scheme applying to established civil servants appointed through the Civil Service Commission, added years are given to professional, technical, and specialist civil servants where the required minimum qualifications and/or experience for the job would have precluded appointment before 25 years of age. This enhancement of benefits is provided without cost to civil servants in relevant professional posts.

8.19 Financial Arrangements

8.19.1 The civil service scheme is financed on a pay-as-you-go basis out of current government revenues. Schemes in large firms have advance funding, in accordance with the requirements of the Pensions Act, with varying types of funding arrangements. The firm's contribution towards the cost of the pension scheme will be paid into the pension fund.

8.19.2 Death-in-service benefits offered by large firms are covered by a contract with an insurance company in 54% of schemes, paid out of the fund in 33% of schemes, and partly self-insured, partly covered by insurance in 12% of schemes.

8.20 Evaluation of Pension Arrangements in the Civil Service compared with the Private Sector

8.20.1 The ESRI report concludes with an evaluation of pension arrangements in the civil service compared with the private sector. It suggests that an overview of how pension arrangements in the two sectors compare can be provided by evaluating the schemes with reference to a number of characteristics for which there are significant differences between the civil service and private sector schemes run by large firms. The perspective adopted is that of the scheme member. The primary question which is asked, therefore, in making the comparison is: how does a particular feature of the civil service schemes compare with what is generally available in a large private sector scheme for the average member who wants a secure retirement income which will maintain its purchasing power for as long as he or she lives? The report presents its findings under five headings, detailed below.

8.20.2 Coverage: Virtually all full-time permanent employees in the civil service are covered by an occupational pension scheme whereas in large firms only just over two-thirds of employees belong to an occupational scheme. Since the civil service has only a small number of temporary or part-time employees it is not possible to compare coverage of these groups in the civil service with coverage in the private sector.

8.20.3 Normal Pensionable Age: Established civil servants can retire from age 60 onwards and non-established staff can retire at age 65. Since established staff account for almost 95% of employees in the civil service the overwhelming majority of civil servants are eligible to retire at age 60. In large firms in the private sector the majority of members of occupational pension schemes are not eligible to retire until age 65.

8.20.4 Acceptance of Transfer Values: While almost all schemes run by large firms and both civil service schemes accept transfer values the public service Transfer Scheme allows civil servants to transfer their pension entitlement without penalty within a large network of public service organisations. It is not so easy for employees in large firms to transfer their accrued pension rights within the private sector and when they do so they run the risk of having a smaller pension at the end of their working lives than would be the case for civil service employees who change jobs within the public sector.

8.20.5 Level of Benefits: There is little difference between the rates at which pension benefits are accrued in the civil service and in large firms. Thus, the level of benefits on retirement will be similar. In the case of death in service benefits most large schemes in the private sector provide a lump sum benefit which is greater (in some cases by a significant amount) than that provided by the civil service scheme. On the other hand a significant number of large schemes in the private sector do not provide pensions for dependants (this cover was offered to all civil servants) and the higher lump sums may be an attempt to compensate for this. Insufficient information is available to compare benefits payable on death after retirement.

8.20.6 Indexation of Benefits: The civil service schemes index their pension benefits in line with pay increases in the grade held prior to retirement while most of the schemes run by large firms which provide increases in pension benefits limit the increases to the annual increase in the Consumer Price Index or a lesser amount. Over the long-term, therefore, civil servants have far better protection against the risk of inflation than is generally available in schemes run by large firms for private sector employees.