Politicians don’t understand pension values

30 April, 2010

I recall that an actuary once calculated that the capital value of the extremely generous pension benefits that Bertie Ahern was entitled to was €7 million.  The figure was particularly relevant at the time because the Government has just introduced a cap of €5 million for the private sector as the maximum value that could be funded out of tax-relieved contributions.  So that’s one law for the super-rich Bertie, a different law for the merely adequately rich private sector punter.

People who work in the public sector don’t seem to understand the huge capital value attaching to an index-linked defined-benefit pension, and the impact on that capital value of moving retirement age down even a few years.  I suspect this ignorance was a factor in the Richie Boucher pension fiasco recently: Finance Minister Lenihan signed off on a deal allowing Boucher to retire at 55, never dreaming that the real financial impact of this was €1.5 million.  Our leader (sic) Brian Cowen compounded matters by trying to deceive the Dáil and the public about what was really happening in the Boucher pension saga.

Same with the Roddy Molloy pension enhancement.  Molloy resigned from Fás after Tánaiste Mary Coughlan sweetened the exit package by adding five years to his pensionable service, and this outrageous gift was rubber stamped by Finance Minister Brian Lenihan.  All hell broke loose (and rightly so) when it transpired that the value of this gift to the disgraced Molloy was €1.4 million.  

Politicians just don’t seem to understand what the real cost of public sector pensions is.  But not only politicians; almost all public sector employees are blissfully unaware of what a pot of gold awaits them. 

I suggest that every public servant should be given an annual statement showing (a) the projected actuarial value of his/her accrued pension at normal retirement date, as a capital sum, together with (b) a statement of the effective contribution rate needed to generate that capital sum, as a percentage of salary.  This would show just how valuable their pension benefits really are compared to the modest contribution they are asked to make, and might help get their thinking straight.

I would go further: all politicians’ pensions should be put onto a defined contribution basis immediately, with (say) a contribution of no more than 10% of salary made annually.  Maybe then they would have a bit more empathy with private sector workers, and would be more careful in signing off on pension increments to rich bankers and dodgy semi-state directors.

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