PUBLIC SERVICE pensions will cost more than €2 billion this year. These defined-benefit schemes, paid for out of tax revenue and based on final salary at retirement age, are unfunded and the annual budget makes no financial provision for their future cost. The Comptroller and Auditor General estimates that liabilities of €108 billion had accrued by 2008.
By contrast in the private sector, companies with defined-benefit schemes must disclose the value of their pension assets and liabilities and must meet a funding standard. Most private schemes have deficits which they will struggle to reduce or eliminate without a sustained recovery in financial markets. This means employers will have to pay more into company pension funds, as will their employees, and a reduction in pension benefits is also likely to be necessary.
Minister for Finance Brian Lenihan announced a number of new pension reform initiatives in the budget designed to reduce the future cost of public-service pensions. As life expectancy increases, pension costs will rise sharply. By 2050, public pension spending in Ireland is set to double. In October, the European Commission considered the sustainability of Ireland’s public finances to be at “high risk”, partly because of the size of the structural deficit in the exchequer finances and partly because of the large age-related spending pressures in future years.
The pension levy introduced last March has meant public servants now pay more for the generous pension and other benefits they enjoy: high-quality final salary pensions and conditions of secure employment. Mr Lenihan’s proposed pension scheme for new recruits to the public service is intended to make pension provision less expensive for taxpayers, by introducing arrangements closer to private-sector norms and by raising the minimum pension age. In the proposed scheme, pension entitlement will be based on “career average” earnings rather than final salary.
The Government has yet to decide whether to use the consumer price index (CPI) as the basis for post-retirement increases for both existing and future public service pensioners. At present, pension adjustments for retirees are based on pay parity with existing public service workers. In present economic circumstances, such pay indexation is neither justifiable nor sustainable; not least when the cost is largely borne by private sector workers, many of whom find their pension schemes in deficit and at risk of being wound up.