AVCs and the Public Service David Malone Head of Operations and Communications The Pensions Authority

1. AVCs and the Public Service David Malone Head of Operations and Communications The Pensions Authority

2. Pensions AuthorityEstablished by the Pensions Act, 1990

3. Pillar 1: State pension Contributory pension of maximum of €230.30 per week = 35% of average earnings (Non-statutory political commitment to maintain at this level) Means-tested non-contributory pension of €219 per week Aim is essentially one of poverty prevention Pillar 2: Occupational pension schemes Employer sponsored DB and DC schemes Operate on a funded basis (private sector) and pay-as you go basis (public service) Pillar 3: Personal pensions Personal pension vehicles Includes Personal Retirement Savings Accounts (PRSAs) and Retirement Annuity Contracts (RACs) 75% rely on the State pension Pensions system in Ireland

5. Supplementary pension provision in Ireland (as at 31 December 2013) • Defined benefit – 572,681 members in 1,040 defined benefit schemes - 933 schemes with 189,644 members are subject to the Funding Standard - 107 schemes with 338,037 Public Service employees (full and part-time) • Defined contribution - 232,939 members in 60,192 schemes • Personal Retirement Savings Accounts (PRSAs) 206,936 PRSAs with asset value of €3.46 billion • Personal Pension Plans/Retirement Annuity Contracts (RACs) (200,000 + contracts – Irish Insurance Federation)

6. Pensions Coverage in the Irish Workforce

7. Changing Demographics

8. National Pensions Policy The recommendations include : • increasing the State pension age to 66 in 2014, 67 in 2021, 68 in 2028 • new model defined benefit pension scheme • new model scheme for public servants • introducing auto-enrolment into a pension for those aged 22 years or over and in employment from 2014

9. Why have a Pension? Life expectancy increasing – 20 plus years in retirement What kind of lifestyle do you want and how will you fund it? Current State pension = €230.30 per week 8 out of 10 people say - the State pension will not meet all their needs in retirement Pension = Income in Retirement

10. Tax relief on personal contributions Highest age at any time during the tax year Limit Under 30 15% 30-39 20% 40-49 25% 50-54 30% 55-59 35% 60 and over 40% For tax purposes limited to earnings up to a maximum of €115,000 in any year. Standard Fund Threshold - €2 million.

11. AVCs and the Public Service There are three main options open to public servants who want to ‘top up’ their retirement savings. They can: • purchase additional service credits under their occupational pension scheme, sometimes known as Purchase of Notional Service (PNS) (also referred to as ‘buying back years’) • join a nominated AVC arrangement which provides defined contribution benefits by investment through a financial institution • take out a PRSA as an AVC.

12. What is Purchase of Notional Service (PNS) Retirement benefits for most public servants are provided through a Defined Benefit (DB) pension scheme. Maximum pensionable service in this scheme is normally 40 years. Public servants who will have the maximum service allowable at retirement age cannot avail of PNS. Public servants who will have less than maximum pensionable service at retirement age can buy notional service to make up for the shortfall in their pension entitlements. • For example, if at your normal retirement age you expect to have 37 years service completed, you can use the PNS to buy the three missing years. The service bought is treated as actual service in calculating pension and lump sum entitlements at retirement. So having bought the missing years your pension will be calculated by reference to 40 years service.  There are two methods of purchasing this service. Payment may be by:  • lump sum payment, or • periodic deductions from pay.

13. PNS the pros and cons Advantages of PNS include:  • you know exactly how your pension benefit will be calculated • you know what it will cost • PNS is a defined benefit • contributions attract tax relief. Disadvantages include: • not open to those who will have full service at their normal retirement date • not open to those who will have total service of less than nine years at their normal retirement date • if you retire earlier than anticipated, you will not get the full benefit you expected • no flexibility in where the purchased service is applied, i.e., can’t make up shortfall in lump sum only • cannot turn the investment into an approved retirement fund (ARF).

14. What is an AVC Additional Voluntary Contributions (AVCs) AVCs are a defined contribution pension arrangement provided by a financial institution, usually an insurance company. The individual bears the risk in a defined contribution arrangement, as the fund available at retirement age is determined by the combination of your contributions and any investment returns on these contributions. Any estimate on the size of the fund at retirement age should be treated as just that – an estimate. Investment returns are subject to a number of factors and can rise or fall. So it is important to regularly review the performance of your fund.

15. How AVCs work in the Public Service   The policy of the Department of Finance is that there should only be one AVC scheme per Trade Union. This is to help minimise administrative costs to the State in relation to the handling of payroll deductions for staff. The contributions that you make to an AVC are subject to charges, and are invested in unit-linked funds. There is a lot of flexibility in the way that a fund provided by an AVC can be used. The fund at retirement can be: • taken as a tax free gratuity (subject to Revenue limits) • taken as a taxable lump sum • invested in an Approved Retirement Fund (ARF), • used to buy additional pension (taxable annuity) and or • used to purchase notional service under the PNS scheme Individuals can choose the rate at which to contribute to an AVC, subject to a minimum rate set by the AVC provider and the maximum rate determined by Revenue limits. Contributions to AVCs attract tax relief, subject to Revenue limits. For some who cannot avail of PNS as they will have full service at retirement they may be able to opt for an AVC to increase their retirement benefits (subject to Revenue limits).

16. AVCs the pros and cons Advantages include: • increase or decrease or stop your contributions at any time without any charge or penalty • contributions attract tax relief • you receive regular information to allow you monitor the performance of your fund • flexibility with your pension fund at retirement. Disadvantages include: • an AVC is a DC arrangement so you bear the risk of the investment performance • AVC contributions are subject to fees and charges • you won’t know what the fund will be until retirement.

17. PRSA as an AVC Public servants can make AVCs to a PRSA. There is no obligation on the employer to set up a PRSA to act as an AVC given the existence of both the PNS and AVC facilities. However, an individual can open a PRSA to provide additional retirement benefits. Advantages include: • increase or decrease or stop your contributions at any time without any charge or penalty • contributions attract tax relief • you receive regular information to allow you monitor the performance of your fund • flexibility with your pension fund at retirement. Disadvantages include: • you have to claim back your tax relief and PRSI relief yourself at the end of every tax year • the PRSA AVC is a DC arrangement so you bear the risk of the investment performance • PRSA AVC contributions are subject to fees and charges • you won’t know what the fund will be until retirement. For further information in relation to the PRSA AVC option, you should contact a PRSA provider. Details of PRSA providers are available on the Pensions Authority’s website.

18. Which option is best for me PNS or AVC? The question of which option is the best for you depends on a number of factors. • While it is possible to carry out a value for money comparison on these options, it should be kept in mind that when this is done it must involve assumptions about salary growth, investment return and the possible cost of annuity purchase. Because of these factors, the value for money comparisons are only of partial use. • Also, given that AVC and the PRSA AVC arrangements are DC, if the investment performance is different to what was expected, what appeared to be the best choice at the beginning of the arrangement may have been, in hindsight, the less attractive option, or vice versa. • It is important to carefully consider all options before making a decision to commit to either one. Given the potential seriousness of taking up either option, it is advisable to seek independent financial advice.

19. Information on PNS and AVCs • The PNS scheme is operated by public service employers (Government Departments, Local Authorities, State Agencies etc) for public service employees including teachers, nurses, Gardaí and civil and public servants. • AVCs are provided by a financial institution. • For further information: • contact your organisation’s HR unit • visit the Irish Civil Service Pensions Information Centre website on www.cspensions.gov.ie/ - This website also has an online pensions modeller which includes information on the purchase of notional service • review AVC information provided by the relevant financial institution • the Pensions Authority website.

20. Engage with your pension • Understand - what type of pension you are contributing to if you have one. Check out the booklet ‘What are my pension options?’ and visit Understanding your pension on www.pensionsauthority.ie • Review - the adequacy of your pension contributions regularly. Check if you are contributing enough to have the income you want when you retire. Use the Pensions Calculator at www.pensionsauthority.ie can help you work out the figures. • Keep an up to-date pensions file - read and check your annual pension benefit statement and or your pension scheme annual report. • Ask questions - you should ask that your pension information be explained to you in plain language and keep asking until you are happy and understand the information.

21. Engage with your pension • Charges - you should always be aware of the charges against your pension fund and have them clearly explained to you by the trustees of your pension scheme or your pension provider. Check out the checklist on ‘Investment, Risk, Fees and Charges’ and visit Understanding your pension on www.pensionsauthority.ie • Investment risk - it is important to understand how your pension savings are being invested, the type of strategy and the level of risk involved. Check out the checklist on ‘Investment, Risk, Fees and Charges’ and visit Understanding your pension on www.pensionsauthority.ie • Tax relief - the Government supports you to save for your retirement, allowing you tax relief on your pension contributions at your highest rate of tax. It is important to understand the tax relief benefits and to make sure you receive your full entitlement. Use the Pensions Calculator at www.pensionsauthority.ie to help you work out the figures.

22. Engage with your pension • Approaching retirement - it is especially important to review any investment decision taken in the years running up to retirement. On retirement you may receive a number of different choices regarding how to draw down your pension, this is something you should research well in advance. You should speak to your trustees, employer, colleagues or financial advisor. • Standardisation of State Pension Age - the qualifying age for the State pension will gradually increase over the coming years where the State Pension (Transition) at aged 65 years will no longer be paid from 1 January 2014. • This means that there will then be a standard State Pension age of 66 years for everyone. • State pension age will increase to 67 in 2021 and to 68 in 2028.

23. Pension Adjustment Orders (PAOs) • A PAO designates part of the pension benefits • to a non member spouse • or person representing a dependent child. • The Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 (“the Act”) came into force on 1 January 2011 • For further information, see - “A brief guide to the provisions of the Family Law Acts” booklet

24. Pensions information Pension calculators Free Online Trustee Training, Guidance & FAQs, E-mail alerts & Trustee supports Information booklets Pension checklists Enquiry service info@pensionsauthority.ie/ 01-6131900

25. and to finish….. Thank you for your time and attention. I hope you found my presentation interesting and of some benefit.

26. Questions & Answers