Reform of the funded state pensions system foresees a planned single-career average pension fund for all employees, writes Pádraig Floyd
The Irish public service pension system is to experience unprecedented change from February 2012 when it moves to what the government believes will be a more sustainable model.
While the UK government has battled the unions over the future of public sector pensions, 15 years of work has prepared the ground for a new age for Irish retirement provision. The changes are not before time.
The number of public sector pensioners has risen by 40% since 2006, fuelled by the generous incentives to take early retirement since 2009. The cost of this provision has doubled over the same period to €2.9bn and is expected to hit between €5bn and €6bn by the middle of the century. The reforms are expected to shave €1.8bn from that bill in 2055.
The Irish public service pension system is deeply entrenched. It predates the modern Irish state as it is based upon the UK's Superannuation Acts of 1834 and 1919 - and covers many groups including the civil service, local authorities, Garda Síochána (Irish police force), permanent defence forces, the heath service, education and non-commercial state bodies. With the exception of the latter, it is a largely unfunded system, operated on a pay-as-you-go (PAYG) principle.
Notionally, a single scheme under the auspices of the department of finance, in reality, like any legacy structure - particularly one trying to be all things to all men - there are anomalies between the different services.
The basic structure was generous in general defined benefit (DB) terms. Under the old scheme, members could look forward to a one-eightieth scheme with a maximum 40-year membership and a tax-free lump sum worth three-eightieths of their final salary on retirement. Pension indexation was linked to the pay scale of current officers (parity pay), so as that as a particular rank saw increases to their salaries, so the pensions increased at the same rate. Death benefits were around one year's salary and widow and orphan pension options available.
Things are different under the new scheme. Future members will receive a benefit calculated on a career average basis and indexation will be linked to the consumer price index (CPI).
A maximum retirement age will be introduced, and the normal retirement age will continue to move in line with the state pension, set to increase to 68.
Those worst hit whenever final salary benefits are removed are those at the top of organisations, who see - or engineer - increases to salary levels in their last years of work.
The highest earners in this case will include future presidents, members of the Irish parliament, judges and senior civil servants. These groups will also be expected to contribute to their scheme to the tune of 13%. Currently, politicians pay 6.5% and judges only 4% for a spouse and child benefit.
The reformists emphasise that while there will be losers at executive level, the impact on the majority of members will be minimal and they may even find career average a better deal.
Far from consensus
Public sector unions have not taken kindly to the changes to their members' benefits and they also argue that there are special cases to be considered.
The police have a faster accrual rate and are still expected to retire earlier than normal retirement age. Senior police officers may find they are more disadvantaged than some other careers as every police officer must start at the lowest rank. There are no dispensations or graduate fast-track schemes and allowances such as for rent that used to be granted, will no longer be pensionable.
The Garda Representative Association (GRA) will continue to lobby the government, says a spokesman, to try "to improve the legislation before it is enshrined in law".
There may be little time left, but they are not alone. ASTI, the union representing secondary school teachers, believes the new scheme is unfair for teachers as there is little opportunity for progression in a flat management structure.
ASTI general secretary, Pat King, has claimed the rules will mean teachers will be forced to join a scheme which they will pay more in to than they will receive in benefit and is considering a lawsuit.
"The [legislation] means that teachers will not only fully fund their own pensions, but will end up over-subscribing," says King. "This is nonsensical and has to be open to legal challenge."
The union claims an independent report by the actuarial firm Trident shows a teacher beginning service at age 25 can expect to see their pension reduced by one-third (the lump sum by 20%) under the new regime, while working for an additional three years.
There are also those who feel the government is not going far enough, fast enough. After all, these changes won't even come into effect until new entrants draw their pensions in the second half of the century.
"It will take a long time to filter through and does not deal with the issues for the scheme liabilities - around €116bn - that are completely unfunded," says Jerry Moriarty, policy director at the Irish Association of Pension Funds.
He accepts there are a lot of small pensions in the scheme but senior civil servants and politicians will accrue €100,000 and more.
"If you had to secure an annuity for a politician, it would cost €5 to €8m," says Moriarty. "That is unsustainable."
Many operating in the private sector feel the public sector needs to ‘get real' and if they want to understand sharing the pain, they should walk a mile in their shoes.
The vast majority of private sector DB schemes are closed to new entrants and
many have ceased accrual. Around 90% of them are in deficit on a technical basis.
The rules governing funding levels were relaxed during the recession, but the regulator, the Pensions Board, is still revising them, although they were due out before the end of 2011.
"The regulator is trying to avoid a funding proposal that goes wrong from an investment point of view as the funding reserves will mean greater amounts need to be held against the allocation," says Kevin Bailey, business development consultant, IFG Ireland, the corporate pensions and administration advisory company. "It is estimated to add 10% to minimum funding levels and 90% of schemes are already not meeting those standards."
The regulator will be nervous of poorly funded schemes. Ireland has no section 75 debt on the employer, as in the UK, so an employer can walk away from an underfunded scheme. With no safety net such as the Pension Protection Fund in the UK, that is a considerable political and social as well as financial danger.
However, in addition, section 50 of the Pensions Act 1990, allows employers to recalculate benefits that have already been accrued - with the agreement of the regulator - and it may prove the Pensions Board is more open to negotiation on how to stabilise these schemes.
"People are looking to reduce future pension costs and future accruals, making discretionary increases rather than statutory ones," says Bailey. "We may see more examples where schemes try to remove pensions increases as these add massive costs to schemes on a technical basis."
For instance, Bank of Ireland employees voted for a cap on future pensions in 2010.
Private sector schemes have also faced a 0.6% pensions levy as part of the economic recovery programme. This will hit members hard, particularly those in DC schemes who will - rightly - see this as an additional tax.
The public sector has already felt the government's hand in its pocket. New entrants to the public sector will see pay cuts of around 10% and many professions have already accepted reduced salaries in recent years.
February will also see a new pensions calculation that will reassess all pensions in the public service scheme.
This increases the existing reduction proposed by the government's National Recovery Plan and agreed under the Croke Park Agreement, which cemented the changes between government and unions until the end of 2014.
The GRA has calculated this will increase the reduction on a typical police service pension by an additional 40%.
The simple truth is that under the current economic conditions, neither private nor public sector DB pensions are sustainable in their current form.
Some believe that if the regulator sanctions the reduction of benefits already accrued, it may be hard for the government to resist making further changes to the public schemes in 2015. It will also offer them a blueprint.
Whether that will happen is difficult to see. Despite creating a commission to investigate public pensions in 1996, it is unlikely any changes would have been made without insistence from the IMF.