Actuarial reviews are rarely the most exciting documents. But one figure jumped out of the review of the public sector pension schemes published last week by Minister for Public Expenditure Paschal Donohoe. It is that if the rules were changed in relation to the pension arrangements applying to those who joined the public sector before 2013 – so that their future pension increases were based on inflation, rather than to the increases applying to the job they retired from – then, on reasonable assumptions, the total State liability for all public sector pensions would drop by 20 per cent. It is part of a story of the generous pensions enjoyed by this group – both those already retired and the 200,000 still at work.
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They are, on average, significantly better than pensions available to the generally younger post-2013 entrants and also to the vast bulk of employees in the private sector.
While public sector pensions operate on a pay-as-you go basis, an earlier actuarial review undertaken for the department calculated that a notional employer contribution of 29 per cent of salary would be required to fund the pension of a pre-2013 public servant. These pensions generally entitle public sector employees with full service to a pension equivalent to 50 per cent of salary and a lump sum of one-and-a-half times’ their salary, though how this is calculated depends on which of the public sector schemes the person is on.
1. The numbers
The report covered 365,000 public servants – this broadly includes the Civil Service, the health and education sectors, local authorities and the non-commercial State bodies. In addition, there are about 192,000 retired public servants already in receipt of pensions. There is also a smaller group of so-called deferred pensioners – those who have left the public service but not yet reached retirement age for whom there is no exact count available, though in cost terms they are estimated to comprise about one-tenth of the active group.
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The biggest groupings of active employees are health (142,000), education, (117,000), the Civil Service (46,000) and local authorities (31,000).
It estimated that the total liability to the State in relation to public sector pensions was €176 billion in 2022 – a long-term bill that will accrue over 70 years, though still an important financial issue for the State. This was an increase from €150 billion in 2018. The rising bill reflects the rising size of the public sector but also small changes in estimates of the average level of inflation and wage increases in the years ahead. Public sector pensions are paid out of the general spending pot each year – at a cost of about €4.3 billion this year, for example.
There have been a series of reforms to public sector pensions over the years and the official study shows clearly that the pensions of longer established public servants are much more costly for the State – and thus of much greater benefit to the older employees. The reforms have been paid for largely by younger employees, though their pensions still compare well with the private sector.
In a recent blog on the issue, TCD economist Barra Roantree said the figures are striking as they show “how much of the burden of the reduction in public sector pension costs has been borne by younger public sector employees rather than older or retired public sector employees”. It is another example of loading the cost of policy change on younger – and future – generations, he said.
Two figures underline this. One, as mentioned above, is that if the group of public servants hired before 2013 were to see pension payments linked to inflation, rather than expected wage increases, the overall liabilities to the State would fall by just under one-fifth.
The second key figure is an estimate that the changes brought in via the so-called Single Scheme, a new arrangement for pensions introduced for those who entered the public service after 2013, will eventually cut the cost of public sector pensions by 25 per cent. The two key reforms here are basing pension increases on inflation rather that on wage increases and also basing pension payments on career-average earnings, rather than earnings in the immediate period before someone retires.
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2. The pensions – why are longer established employees doing better?
Public sector pensions have been subject to a series of reforms over the years since 1995, making them less generous in a number of respects, including how they are calculated, the contribution from the employee, the age of retirement and how the lump sum on retirement and the pension are calculated.
The biggest changes were in 2013, when the Single Scheme was introduced. Still, given their older age and the fact that many are already retired – as well as the terms of their pensions – just under €100 billion of the total outstanding liability, or 57 per cent of the total, refers to pre-1995 entrants to the public service.
Pensions for pre-1995 entrants are particularly generous. The first major change in pensions was in that year – for those joining after Apil 5th, 1995, the State Contributory pension was integrated into their entitlements. Also, for civil servants, a pension contribution was introduced then for the first time (some other groups such as teachers had already been making a contribution). The next big reform was in 2004, when the retirement age for entrants was raised from 60 to 65 years of age. Then in 2013, the Single Scheme was introduced, cutting benefits and also increasing contributions for those joining after that date. For those on this scheme, both the pensionable salary and the size of the lump sum depend on career-average earnings, rather than on pay in the last three years, as is the case for those hired earlier.
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A report by the Parliamentary Budget Office in 2018 outlined how, due to this, entitlements differed between pre- and post-2013 entrants. For someone who joined as an administrative officer and left as a principal officer, the pre-2013 employee would retire on a €52,254 pension and receive a lump sum of €156,671. The post-2013 public servant would get a pension of €43,419 and a lump sum of €129,304.
In general, the pre-2013 public servant would also have seen a higher level of annual pension increase, with pay outstripping inflation. There was a reversal here in the recent inflation surge, with retirees from the Single Scheme group receiving an inflation-matching 8.2 per cent rise in 2022.
The amount public servants contribute towards their salary has generally risen over the years – with a notable increase in the wake of the financial crisis via a special pension-related deduction subsequently replaced with an Additional Superannuation Contribution (ASC) under 2017 legislation. Cuts to pensions in payments were also made during that period. The ASC became payable in 2019 in addition to existing contributions. Newer public servants will face paying the ASC throughout their remaining years, in addition to normal contributions. But contributions have increased across the board.
3. What might be done about it?
Nothing is likely to be done, given the flush current state of the exchequer, the pay talks under way – where union negotiations will seek a continuation of current arrangements – and the political flak which would surely follow reforms.
In his blog, Roantree made two suggestions on areas that could be examined. One is that consideration is given to changing the basis on which pre-2013 pensions are increased each year. The practice is that these pensions are raised in line with pay increases and an agreement to continue this is generally included as parts of the successive agreements. Bar another public finance crisis – perhaps even if there is one – this is unlikely to change.
The second suggestion was to change the tax treatment of pension lump sums, so that more are caught in the tax net. As Roantree points out, this would largely affect better-off public servants with bigger pension pots. Broadly, at the moment, the first €200,000 of a pension lump sum is tax free and the amount up to €500,000 is taxed only at the standard 20 per cent rate. There are some restrictions – for example the tax-free amount cannot exceed one and a half times’ annual salary. The Commission on Tax and Welfare called for a “meaningful reduction” in this tax-free entitlement, which would impact higher earners in the private as well as the public sector. Like some other controversial recommendations of the commission, there is no sign of this being taken up in the short-term.
