Calculating preserved benefit must qualify as one of the least intuitive aspects of this whole business, with the sums differing according to the type of pension scheme under consideration.
The Pensions Board provides a few illustrations to help clarify an otherwise complicated area.
Example A:
Mary's employer operates a defined-benefit scheme, where her pension benefits are fixed at 1/60th of her final salary for each year of pensionable service when she reaches age 65. The maximum length of pensionable service is 40 years.
Mary's final salary will be defined as the average salary earned in the three calendar years before retirement. Her company does not invite employees to participate in its scheme until they reach the age of 30.
Mary, who was born in September, 1955, began working with the company in July, 1980.
She continued working until December 2000, with her salary for the three years before she finished standing at €20,000, €20,500 and €21,500.
Mary's preserved benefit will be calculated as follows:
Her three final salaries will be added and then divided by three, with the total multiplied by 40, to reflect the maximum number of pensionable years under the scheme.
The total will then be divided by 60, according to defined-benefit nature of the scheme.
This leaves Mary with a figure of €13,777.78 - figure A, or her long-service benefit.
Next, she will calculate the length of her "reckonable service" under the scheme, which stands at nine years and 11 months (9.917 = figure B). Since Mary left her job before the Pensions (Amendment) Act came into application this year, her reckonable service is calculated under the old system. This means that service completed before 1991 will not be considered in the calculation.
The final step will be to calculate the period of reckonable service that Mary would have completed if she had stayed in her job until retirement - figure C. In her case, this would be 35 years.
Using the equation A x B/C, Mary will arrive at a figure of €6,888, her preserved benefit.
This means that Mary will be entitled to receive €3,904 per year when she reaches 65.
She should be aware, however, that most occupational schemes are required to revalue the preserved benefit annually until pensionable age is reached so that its real value can be preserved.
Example B:
John's company operates a defined-contribution scheme, where the benefits ultimately due will depend on the growth of the pension fund.
John's long-service benefit (figure A in the example above) is set out under the rules that govern his company's scheme.
Under the Pensions Act, John's preserved benefit must be determined on exactly the same basis.
The result is that the value of his preserved benefit, when it is paid, will equate to the value of the contributions he has accumulated.
Since individual pension schemes will vary, the illustrations above are designed to act as a guide only.
