PUBLIC SERVICE pension reform has been under official consideration since 1996, when a commission was set up to review how the system operated. Since then, despite acceptance by government in 2000 of the commission’s report, progress has been limited. In the December budget, Minister for Finance Brian Lenihan announced some major initiatives to reduce the soaring cost of public service pensions which are funded from tax revenue and will cost more than €2 billion in 2010.
One significant change under consideration is breaking the indexation link between public service pay and pensions. Pension increases for those in retirement are indexed currently to the earnings of those in the public service grades that they previously held. This has meant pay increases to public servants under the benchmarking process have been reflected in matching pension increases for retirees. Pay parity for pension purposes is unknown in the private sector and has greatly raised the cost of the public service pension bill. Few countries in the world could afford such a generous system. Ireland no longer can.
In his budget statement, Mr Lenihan implicitly accepted that when he announced the Government review of pension arrangements. He suggested that future public service pension increases could be linked to changes in the cost of living. However, the Government said last week that the status quo on pension indexation would remain until December 2014. This means that for the lifetime of the Croke Park agreement on public sector pay and reform, a key aspect of pension reform would be suspended. Many will see this apparent U-turn as an attempt to win voting support for the pay accord. And some have suggested that its postponement may save money, as pension increases linked to earnings may involve little cost if wages are frozen for much of the period, while pension payments indexed to prices at a time of rising inflation could prove more expensive.
The Government insists it remains committed in principle to this aspect of the pension review. However, it is difficult to justify the delay or understand why an administration nominally committed to necessary and long overdue reform, should change its mind so quickly on the timetable for its introduction. Earlier this year, Mr Lenihan presided over another remarkable volte face when, in response to lobbying, he reduced the pay cuts imposed on high-ranking civil servants in the budget. Mr Lenihan has achieved much in his current role but for the sake of credibility and equity, he must not waver.