Public servants should be required to contribute towards the cost of funding benefits, writes Brendan McGinty.
Those working in the private sector will know that pensions are getting more expensive. We are living longer and there is an expectation that retirement incomes will reflect the dramatic rise in pay over recent years.
At the same time, however, returns on investment have been modest and the financial rules governing pension funds have become more onerous. Employers are left facing a dilemma as to how best to provide for their employees and protect their business at the same time.
This has led many private sector employers to make changes to their pension plans to ensure funds remain solvent and continue to offer security to employees and pensioners.
In stark contrast, public sector pensions remain unreformed, fully paid for by the public purse. The cost of these has rocketed, yet most public servants are unaware of the value of their pension scheme and the massive increased financial investment needed by government to maintain it.
In traditional defined benefit pensions, the investment risk lies fully with the employer. For some employers, this burden is so great that it undermines the financial viability of the business.
In light of the range of changes that have affected pension provision, it is not reasonable to expect employers to act as underwriter of any given level of benefit, in all circumstances, regardless of the consequences. A more equitable share of the risks, and the rewards, of long-term pension investment is needed.
This shift has already happened in a number of cases in the private sector, with the introduction of defined contribution schemes and various hybrid pension models, whereby risk is shared by the employer and employee.
The public sector has, however, yet to make the necessary changes to ensure adequate provision for future pensions needs. This is despite that fact that the exchequer is already facing an intolerable financial burden, with the number of public service pensioners increasing and the numbers currently employed in the public service also rising.
The current situation where pensions, based on the final salary, are unfunded and paid directly out of revenue is simply not sustainable.
Minister for Finance Brian Cowen has disclosed that the cost of deferred pension liabilities of those working in the public service is €45 billion, compared to €25 billion 10 years ago. At the same time, Ireland's national debt currently stands at €37 billion. The scale of these liabilities could even prove to be underestimated; a recent UK study has shown that public sector pension liabilities there are double the official government estimates.
Clearly, there is an urgent need to take measures to put a limit on public sector pension liabilities. Failure to act will ultimately lead to a crisis in public finances in the not too distant future.
One of the most significant advantages of a public sector pension is that retirement benefits are linked directly to the salary scale of the pensioner's former role.
This "pay parity" means public sector workers can expect to benefit from much higher pension increases upon retirement than members of a defined benefit (DB) scheme in the private sector, where pensions are generally indexed at a rate less than full inflation. This benefit is almost unique in international terms, and its value will increase further as life expectancy increases
Research available to the Irish Business and Employers' Confederation indicates that the market value of the employer contribution for an average public sector pension is 25 per cent of salary. This means that if a public sector worker was to take up employment in the private sector, their employer would have to contribute 25 per cent of their salary to a DB scheme in order to provide them with the same level of benefits.
This compares to an average 11.5 per cent employer contribution in the private sector, where a pension scheme is in place. The average public sector pension is therefore worth 13.5 per cent of salary more than the average private sector pension.
To address the looming problem of how to fund public sector pensions, it is fair that all public servants should be required to contribute towards the cost of funding "pay parity" benefits.
The Government should set a contribution rate cap beyond which employees would have to fund on an equal basis any outstanding unfunded liabilities. The alternative is for the taxpayer to pick up the increasingly large tab. The Government should also move quickly to complete and publish an actuarial analysis of the unfunded pension liabilities for public sector employees. Public sector workers should be aware of the value of their pensions, and payslips should record the indicative value of pension contribution rates. The value of the benefits public servants enjoy needs to be fully appreciated.
This information must also inform the work of the Government's benchmarking process which seeks to compare the remuneration enjoyed by public sector workers to those in the private sector. The benchmarking body will report later this year.
The premium that public sector employees enjoy from their pensions must be explicitly accounted for in the body's remuneration comparisons, and the value the body places on this premium fully detailed. The taxpayer is entitled to nothing less.
Brendan McGinty is director of Industrial Relations and Human Resource Services with Ibec.