The Aer Lingus Pensions Issue...

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The Aer Lingus Pensions Issue...

Post by gar787 »

I'm confused quite frankly,

Can someone explain, in lay-mans terms the situation with Aer Lingus and the pensions fund....

Much Appreciated,

The man who flies an airplane...must believe in the unseen
Gary Brogan,
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Pensions for beginners

Post by Biturbo »

You get old. You stop working. You try to live off your pension.

Pensions come in two flavours - Defined Contribution and Defined Benefit.

Defined Contribution is the only type anybody under the age of 40 will ever see outside of the civil service for reasons explained below. My pension is Defined Contribution. Every month my employer makes a contribution of X% of my base salary. I kick in Y% and get a tax break on it. These pension contributions are invested in a unit-linked fund run (poorly) by a life assurance company. When I turn 65 and retire, I can access that fund - take a lump sum of a certain amount to spend on drugs and fast women, but the rest has to be properly invested in providing me with a stream of income until I finally shuffle off (Life companies sell expensive and poor value annuities for that very purpose).

When I retire, I leave my employment and my employer has no further obligations. If the fund scraped together isn't enough to keep me for the rest of my days in the style to which I have become accustomed - tough, I'll have to make some lifestyle adjustments. That's why I make sure Y% above is a very big number.

Defined Benefit is a completely different kettle of fish. Under such a scheme, your pension isn't a given sum of money which may or may not be adequate, but rather an entitlement to receive a particular income stream (stereotypically 2/3 of final salary). This means you don't have to worry about adequacy - your employer is on the hook instead to fund a particular standard of living.

Note that the entitlement is a percentage of final salary on the day you retire - not what you're earning now. To figure out what money needs to be set aside now to pay for this future liability, actuaries will make an estimate of a) how long you are likely to live after retirement, b) what sort of salary raises you can expect between now and that date c) how much it will cost to purchase an annuity with those characteristics on that date, and d) what sort of returns will be earned on money set aside
now to make such a purchase on that future date.

When you've gotten all of that information, you can work out mathematically how much it would cost now to purchase these income streams using these assumptions.

Two points to note - firstly, the assumptions are all highly objective and not necessarily achievable in reality, however the future is a long way off when you've a young workforce. Secondly, the number is always way bigger than anybody on a Defined Contribution scheme has scraped together.

Multi-year payment flows to fund a Defined Benefit scheme are complicated guesswork and so are prone to fudging in terms of current year required funding. Which is fine as long as your scheme is open to new young members keeping the average age down and average retirement date a long ways into the future. Close off your scheme and chickens come home to roost with increasing frequency - as the average retirement age draws closer, more and more of the guesswork drops out of the system and the true picture becomes unavoidably clear. Typically, it's not a pretty one, hence the interest companies have of closing them down and reducing benefits before the cost of the pension scheme exceeds the value of the company itself.

In the public sector of course bankruptcy isn't an issue, which is why defined benefit schemes still survive there.

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