Are public sector pensions sustainable?


HEAD TO HEAD: YESThe way to tackle unfairness is not to abolish public service pensions, but to provide sustainable, properly-funded pensions for all, writes Shay Cody

THE Irish TimesHead to Head format doesn't accommodate a "yes, but" answer, which is a pity when it comes to pensions. But it's also interesting that the first time the editor has posed a question about pensions, it has focused on the public service.

Interesting because it neatly demonstrates how effectively the pensions debate has been hijacked by those in business and politics whose real objective is to shift all the cost - and all the risk - of retirement on to individual workers, rather than dealing with the real challenge of improving pension provision for all of us.

If you believed all you read about pensions in the last couple of years, you'd be forgiven for thinking that the "pensions time bomb" can be easily defused simply by abolishing public service pensions. A recent Financial Times article, which attacked so-called "pensions apartheid", was a case in point.

But apartheid ended, not by denying the vote to South African whites, but by extending it to everyone. Similarly, the fundamental pension challenge is not how to abolish public service pensions, but how to provide sustainable, properly-funded pensions with predictable benefits for all.

In the current climate, trustees and members of most pension schemes have had to address the question of sustainability, either by changing the benefit structure or through stronger funding mechanisms. The public service is no exception.

But let's look at some facts about public service pensions. First of all, public servants pay for them. For most, the price is 6.5 per cent of their gross salary. If this level of contribution were more common in the private sector, with appropriate employer contributions, many more workers would look forward to retirement with some degree of confidence. Second - and you'd be forgiven for thinking otherwise - there have been very many reforms of public service pensions in recent years, all of which have reduced the cost to taxpayers. To ignore these changes and characterise the system as "unreformed" or "unsustainable" is inaccurate and unfair.

For instance, public service pensions have been integrated with the social welfare system since 1995. This means that the pension of every public servant recruited in the last 13 years is calculated after twice the value of the personal rate social welfare pension is deducted from their salary - a substantial reduction in occupational pension costs.

For lower-paid public servants this means that a very significant part of the pension comes through the normal social welfare entitlements. The first €23,000 of salary is not reckoned for employment-based pensions; a figure that will grow to €30,000 if the Government meets its commitment to raise the basic state pension to €300 a week by 2012.

Take a special needs assistant. She starts work on a full-time salary of €24,000 and can expect to earn a maximum of €39,500 after 15 years. Only €26,000 of this maximum is now pensionable - giving her a pension of €13,000 after 40 years' service. Hardly a king's ransom! But those of us who want to reform pensions in ways that improve security in old age can take comfort from this important change, because it highlights how increases in the State old age pension can reduce the burden on defined benefit schemes that are linked to the social welfare system.

The beauty is that this works regardless of whether the scheme is in the public or private sector. It could be a platform for real reform that links increased affordability for employers (and staff) and improved pension security through defined benefit schemes.

Another significant reform was introduced in 2004 and affects all public servants recruited since. Before then, most public servants had a minimum pension age of 60. Since then, the minimum pension age has increased to 65. Large groups of public servants, like primary teachers and psychiatric nurses, had their minimum pension age increased even further, from 55 to 65. The Commission on Public Service Pensions estimated that this change represented an annual saving of 2 per cent of pension costs.

On top of these and other reforms, the Public Service Benchmarking Body has now factored the value of pensions into its findings when making recommendations on public service pay. In other words, public servants are foregoing pay increases in recognition of the cost of pensions to their employers. For most, this amounts to 12 per cent of salary, on top of the 6.5 per cent cash contribution they make in each pay cheque.

The fact that life expectancy is improving all the time should be good news. But the prospect of a long retirement in poverty is very, very scary. It won't get less frightening by attacking those who have decent contributory (public or private sector) pensions, or by abandoning the objective of decent and predictable pensions for all.

• Shay Cody is deputy general secretary of Impact trade union

NOA scheme in which public sector pensions can cost up to 10 per cent of a department's entire budget has to be radically changed, writes Charles Larkin

RECESSIONS ALWAYS make people think about where their taxes go. There are several items that weigh heavily on the public purse - and mind - and the payment of the civil and public services is one of the most expensive. The future of public sector pensions must be evaluated in the context of wider public expenditure and the looming pensions crunch.

Should pensions to the public sector be cut? Yes, but not for short-term political gains, and not in a recession-driven bid to reallocate money from one part of a public sector devoid of cost-benefit-analysis to another.

More importantly, public sector pensions (and public pensions generally) should be moved from the current expenditure budget into a funded scheme. This policy would create a sovereign wealth fund for Ireland larger than the current National Pension Reserve Fund and available for investment purposes.

Pensions are expensive and public sector pensions are especially expensive. If current trends continue the cost of public sector pensions will rise from 1.6 per cent of GNP in 2007 to 2.4 per cent by 2027, reaching 3 per cent by 2050.

These projected figures are constantly rising and must be seen in the context of the larger stresses placed on the exchequer by social welfare pensions, which are projected to increase by 6.5 percentage points of GDP over the next 40 years. Ireland, as both the European Commission and the International Monetary Fund have noted, is the most fiscally vulnerable country in the EU on the basis of pensions and old-age dependency.

They have noted, too, that this problem looms despite the fact that Ireland's social welfare pension is not very generous by European standards.

Why is this happening? Largely because public sector pensions, and social welfare pensions in general, are based on a pay-as-you-go system, meaning that current tax income pays for pension expenditure. Without a sufficiently large fund to pay these pensions, the exchequer will face significant budget deficits which must be closed by cuts in other parts of public expenditure, higher taxes, or a reduction in benefits to pensioners. For example: at present more than 10 per cent of current expenditure under the heading of "Department of Education and Science" in the budget is paid into primary and secondary teacher pensions. This is set to increase, so that more money will have to go into this department just to pay pensions and keep other spending constant. Alternatively, all other departmental spending will have to be cut in real terms to fund prior pension commitments. The difficult expenditure decisions of meeting pensions liabilities is also a problem for the universities.

Public sector pensions also raise issues of equity. Only 51 per cent of the Irish working population have pensions beyond standard social welfare old age benefits. Only 17 per cent of private sector employees enjoy defined benefit pensions, and theirs are less generous than those provided to workers in the public sector. Public sector employees are in plum positions with a generous retirement lump sum of one-and-a-half times final pay and a pension of 50 per cent of final pay for life.

This benefit has been improved by the application of "full parity". Full parity is defined by the Green Paper on Pensions in the following terms: "increases paid to serving staff . . . passed on to pensions . . . effective from the same date as the increases being paid to serving staff." This is not only expensive but also violates the general principles of value for money.

The judicious application of cost of living adjustments cannot be begrudged to any pensioner but providing additional pension benefits to a retired member of the civil service based on a productivity agreement (ie components of benchmarking) is without justification or parallel in the private sector.

The cost is clear in the actuarial valuation of public sector pensions. Fergal O'Brien has shown that to purchase a civil servant's pension on the open market would cost 31 per cent of annual pay for a pre-1995 hire, 26 per cent for a 1995-2004 hire and 23 per cent for a post-2004 hire, reflecting changes in terms and legislation.

Public sector pensions should be cut, but how? First, eliminate "full parity". Second, be serious about the National Pension Reserve Fund. Build it up sufficiently to cover public sector pensions, creating an Irish sovereign investment fund similar to the fonds de réserve pour les retraitesin France. Finally, take into account the market value of public sector pensions in the partnership and benchmarking processes, something that has been ignored until the most recent partnership agreement.

• Charles Larkin is a member of the Swan Group and the Department of Economics, Trinity College Dublin. The Swan Group is an interdisciplinary research group funded by the FBD Trust.