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Clearer accounting needed in Irish public sector pensions

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IRELAND - Accounting arrangements used for the disclosure of public sector pensions are an "inadequate basis" for reporting pension costs, according to a report by the Irish Comptroller and Auditor General (C&AG).

In his Special Report 68: Central Government Pensions, John Buckley, the comptroller and auditor general, examined the pension schemes of 300,000 staff and 100,000 existing pensioners and dependants, including civil servants and workers in the health, education and defence sectors.  

Figures from the report revealed that the accrued liability of public sector pensions was estimated at €108bn, although deficiencies in the data provided by schemes mean the true value is between €103-119bn.

And over the next 50 years, it estimates gross benefit expenditure on these pensions will rise from €2.4bn in 2009 to €14.7bn in 2058 (in 2008 terms), an increase of 500%, while contribution income including the effects of the pension related deduction, or levy, will increase by 300% from €1.7bn to €7.4bn over the same period. 

At the moment the net cost of public sector pensions in Ireland - excluding local government pensions - is equivalent to 0.5% of GNP, however the C&AG warned "it will be necessary to apply 1.8% of GNP to meet these costs by 2058".

The data highlighted that the notional contribution required to fund the full pension cost of an additional year's service by existing staff would cost an average of 20% of pay, or 9% after the offsetting of contributions and the pension levy. 

The highest costs were found in the prison officers and defence forces schemes, which have a net cost of 19.8% and 19.5% respectively, and which the C&AG attributed to the shorter period in which benefits are earned, while the health sector costs the lowest amount at a net 4.3% of pay.  

Meanwhile, the report criticised the use of Vote pension accounting, used in civil service schemes, which is based on recording payments made to pensioners and contributions from serving employees, and which can be purely cash based. 

The C&AG claimed the shortcomings associated with this approach includes a lack of accounting recognition of the long-term cost of pensions; no transparency around the affordability of employment decisions and the accumulated pension debt is "neither measured nor disclosed". 

Buckley added: "Overall, the recording of only the actual cost of pensions payments and contributions received from serving staff is an inadequate basis for the reporting of cost".

He also warned that there is a risk under the current accounting arrangements that "the true pension costs associated with increased employee numbers are masked since, in the short term, their contributions are treated as income but the pension costs associated with their employment are deferred into the future".

In conclusion Buckley added: "The wider introduction of an accruals-based approach to accounting for all public service pensions would bring greater cost transparency and make explicit the true financial impact of resourcing decisions. The department of finance's intention of including an estimate of the accrued pension liability for the whole public service in the finance accounts will go some way to enhance the information available to the Oireachtas [parliament]."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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