IRELAND - Ireland could reduce its budget deficit by introducing a combination of “major reforms” to public sector pensions, according to the OECD. These could include moving new entrants to a defined contribution (DC) scheme rather than adding them to existing defined benefit plans.
In its latest Economic Survey of Ireland, the Organisation for Economic Cooperation and Development (OECD) said research in 2008 showed that public sector pensions were estimated to be worth 12% more in salary than the private sector equivalent.
It suggested that public sector pensions “should be overhauled in the light of private sector arrangements”.
Despite the introduction of the Pension Levy in March, which deducts an average of 7.5% from the salaries of public sector workers, the OECD said public service pay costs and pensions should have a further role in meeting Ireland’s target of achieving around €5bn in savings in both 2010 and 2011 - equivalent to almost 3% of GDP.
The report stated a combination of major reforms “should include ending the pay-parity link for public sector pensions, where public servants are guaranteed pensions based on the ongoing salary of the job they held”.
In addition, the OECD argued pension liabilities should be considered when making decisions on staff costs, while a “fundamental repositioning of the public service pension for new entrants should be considered, moving away from DB provision to a DC with a state guarantee of certain minimum investment returns”.
The report also highlighted the importance of the National Pension Reserve Fund (NPRF) in increasing government saving for the future, despite the poor returns it achieved in 2008.
The OECD claimed “it is important that [the NPRF] is retained” and noted while there “may be a case for temporarily suspending payments into the fund after 2011, because of the need to reduce gross debt, the underlying ageing problems remain and are even more binding given the overall increase in debt”.
That said, the body also warned the “strategy of using public sector leverage, relying on high-return equities and other risky assets to meet ageing costs, now appears more difficult to achieve in the light of falls in equity values. Measures to reform the pension system discussed in the previous survey will need to play a larger and more urgent role in addressing long-term pressures”. These included linking state retirement age to longevity, and capping pension tax incentives. (See earlier IPE article: IBEC calls for ‘radical’ public pension reforms)
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