Thomas was 45 years old just before the application of the Memorandum reforms in 2013 (Troika). He has been working in the public sector as a school principal for the last 10 years. His annual salary in 2012 was 40.000 euros. Based on the government rules for public sector employees before the application of the Memorandum reforms, Thomas would have retired at the age of 63 years old. The first annual pension was calculated based on the following equation: First Annual pension = =50%min(1,400/12numberofyearsinservice)x(finalannualsalary)(1+g) Where, g= the expected growth rate of pensions. Based on his medical record life expectancy for Thomas is estimated at 80 years. In order to provide financing to the Republic of Cyprus, the European Union has recommended the application of several reform measures regarding the salaries and pensions of people working in the public sector. Among other things, the Memorandum reform measures included the following: - The increase of retirement age to 65 years of age. - No growth rate in salaries and pensions for a five-year period. - The reduction of 15% in annual salaries. Make the following assumptions: - Thomas will continue working in the public sector until his retirement age. - The average long-term annual interest rate is 3,6\%. - Before the application of the reform measures, the average annual increase in public sector salaries and pensions would have been 2,5% and 2% respectively. - After the end of the five-year period of no growth rate, salaries and pensions will increase at a growth rate of 2%. - Annual salaries and pensions are paid at the end of each year. - The application of the reform measures started at the beginning of 2013 (1/1/2013). - The method of calculating the first annual pension will not change after the reforms. Based on the case study information given above, answer the following questions. Requirements 1. Based on what was in force before the Memorandum, calculate the following: a. The final annual salary and the first annual pension of Thomas. b. The final annual pension of Thomas. c. The present value of Thomas's pensions at the time point of the application of the Memorandum reforms. d. The present value of Thomas's salaries at the time point of the application of the Memorandum reforms. 2. Based on the application of the Memorandum reforms, calculate the following: a. The final annual salary and the first annual pension of Thomas. b. The final annual pension of Thomas. c. The present value of Thomas's pensions at the time point of the application of the Memorandum reforms. d. The present value of Thomas's salaries at the time point of the application of the Memorandum reforms. e. The net economic benefit or loss of the Memorandum reforms for Thomas at the time point of their application in the public sector
