Portugal’s government has been given the go-ahead by Parliament to make cuts to the country’s occupational pensions system and raise the retirement age from 65 to 66, after several weeks of uncertainty.

A proposed 10% cut in public sector pensions of more than €600 a month was overruled by the country’s constitutional court last December, on the grounds it contravened the principle of trust between pensioners and the state.

Furthermore, the country’s 2014 budget, passed by Parliament on 30 December 2013, was sent to the constitutional court for review by president Anibal Cavaco Silva the day after he ratified it.

Cavaco Silva considered some of its contents, including public sector wage cuts, too harsh.

But the president has since received legal advice that the budget does not infringe the constitution.

However, the government still needed to make savings to replace those from the rejected public sector pension cuts.

Parliament has now passed changes to amend the state budget accordingly.

The changes include reducing the threshold for the extraordinary solidarity surcharge (CES) on total pension income received by retired individuals, from €1,350 to €1,000 per month.

The CES was brought in after Portugal agreed a €78bn bailout deal with the so-called troika of the European Commission, European Central Bank and the International Monetary Fund in 2011.

The CES is levied at between 3.5% and 10%, depending on income.

The government has also now introduced rates of 15% and 40% for higher income bands.

Furthermore, contributions to public sector health insurance schemes for the civil service (ADSE), armed forces (ADM) and police (SAD) are also raised from 2.5% to 3%, reducing the employer’s contribution from 1.25% to 0.75%.

A third change is the increase in pension contributions by public sector workers from 2.25% to at least 3% of salary.

Besides raising the retirement age by a year, there is also now a mechanism for building future increases into existing legislation.

The Portuguese government estimates the total amount saved by these measures will amount to €388m and ensure the state deficit is reduced to its 4% of gross domestic product (GDP) target during 2014.

The bailout deal ends this coming June, after which Portugal hopes to rely solely on the markets to finance government programmes.

However, the government said the measures would be temporary, and it would study the court’s earlier decision to find a constitutional process of making permanent cuts in the pension system, put it on a sustainable footing and reduce the public debt.

Meanwhile, there has been a change in the way the sustainability factor, which links the level of pensions to increasing life expectancy, is determined.

It was previously calculated as the ratio between life expectancy in 2006 and life expectancy in the year prior to retirement.

The reference year has now been changed to 2000, changing the new sustainability factor for 2014 from the expected 5.43% to a 12.34% reduction in starting pension.

The other main change of the legislation relates to the application of the new sustainability factor.

In future, it will not be applied to reduce the retirement pension – instead, it will be applied to increase retirement age.

For each month of work after 65 years, workers will be credited a ‘reference bonus’ of 1% of pension.

So a 65-year-old worker would have to work 12 more months to reverse the effect of the application of the new sustainability factor of 12.34%.

This way, the retirement age has been changed from 65 to 66 years as from 2014.

In future, longer life expectancy will increase the retirement age, to reach 67 years in 2029. 

Catarina Galvao, senior consultant at Towers Watson in Lisbon, said: “From the government’s point of view, this is not a win-win situation in relation to pension costs.

“The savings in pension payments they will make in 2014 with the increased retirement age will disappear in 2015 when those employees start to receive their pension, without any reduction from applying the sustainability factor.”

The government also said it would set up a working group to study the future of the pensions system and options for reform, once the constitutional court had delivered its decision.