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News : Irish Economy Last Updated: Apr 29, 2011 - 7:31 AM


Surreal Ireland: Real annual cost of Irish public staff pensions at €5.1bn; Cost of added year for judges at 62% of salary
By Michael Hennigan, Founder and Editor of Finfacts
Apr 28, 2011 - 6:59 AM

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In addition, it is estimated that the accrued liability in respect of State pension arising from the entitlements of public servants who pay full rate PRSI was €12.7bn at 31 December 2009 giving a total of €129.1bn - - 94% of Gross National Product Source: C&AG.

Surreal Ireland: The real annual cost of Irish public staff pensions is at about €5.1bn (including an annual actuarial accrual) and the cost of an additional year for judges is 62% of salary net of personal contributions.

In the public sector there are 2.5 workers for each pensioner and in the 2009 report of the Comptroller and Auditor General (C&AG), published last September, he estimated the accrued total pension liability at  €129.1bn - -  94% of Gross National Product.

In the private sector, only about half the workforce have an occupational pension with a contribution from an employer; most funds are in the red and the defined benefit scheme where there is a guaranteed payout, is being phased out. Even with reasonable investment returns, funding levels of about 10% in unguaranteed defined contribution schemes are simply inadequate.

Returns (after inflation) from managed pension funds are in the red for the past 10 years and the situation is unlikely to change soon.

The Central Statistics Office (CSO) reported this month (pdf) that while there is blanket coverage in the public sector, the number of self-employed workers with a pension fell sharply - -  from 47% in early 2008 to just 36% towards the end of 2009. 

Apart from the tax relief, many private sector workers will find that their pension pays very little when they retire.

The CSO say that while half of all workers expected an occupational or personal pension to be their main source of income when they retired, according to a survey in 2005, the figure had fallen to 41% at the end of 2009.

The percentage who expect to rely mostly on the State pension for their retirement income rose to over a quarter (26%) in the April survey compared to a fifth in late 2005.

The State pension is about 30% of the average industrial wage.

The chart above excludes about 42,000 staff at State commercial companies. 

The C&AG estimated that one additional year in respect of Constitutional, Ministerial and Judicial Office-Holders has a net cost of 61.8% of salary. He estimated that the cost of a new entrant in 2009, net of the additional pension contribution, was 19.1%.

In last December's Budget, it was announced that while the link with current earnings would not be touched, a new system would apply to new recruits. 

The Department of Finance said in its Analysis of Exchequer Pay and Pensions Bill 2005 - 2010 report, published last July, that the net Irish public sector Pay and Pensions bill was projected to increase by 16% in 2010 to €15.09bn - - a decrease of 8.4% over the 2009 figure of €16.47bn. While pay increased 11% in the period 20015-2010, the pensions bill has risen by 66% since 2005 while pensioner numbers have increased by 31,000 or 43% to 103,400.

Pensions now account for 12.9% of the total Pay and Pension Pay bill, up from 9% in 2005. Overall, the pensions bill has increased from €1.35bn in 2005 to €2.23bn in 2010 representing a 65.6% increase over the period (pay in contrast rose by 10.8%). The pensions bill has increased by 35% since 2008. This is mainly attributable to an increase in retirements in 2009 including those under the Incentivised Scheme for Early Retirement.

The Department of Finance's July 2010 analysis excluded local authorities and in The National Recovery Plan 2010-2014, the cost of pensions in 2010 was €2.7bn and the public pay bill was €16bn.

The C&AG estimated an overall additional pensions funding cost of 15.1% which on a €16bn paybill amounts to €2.4bn. Adding the annual pensions payout bill of €2.7bn gives a total of $5.1bn - -  equivalent to over 33% of the paybill and 15% of expected 2011 tax revenues.

Responsibility for the pension funds of State agencies like FÁS and public bodies such as the universities was assumed by the State in 2009.

The taxpayer ended up with a €1bn bill to bailout the pension funds. Deficits were partly the result of the widespread practice of adding pension years as if it was a free lunch option.

The deficit in the funds of the old universities was €630m led by Trinity College at €315m.

The C&AG said additional years have become a feature of pension awards in universities. By way of example, in UCD 78% of staff retiring between October 2007 and September 2008 had years added to their service for pension purposes. These 42 employees had an average of 4.2 years added to their pensionable service and their average salary on retirement was €74,434.

Similar provisions apply in other universities - - Trinity College stated that since 1972, on the basis of custom and practice the award of added years has become a legitimate de facto entitlement under its Master Pension Scheme and that Scheme members were advised that they had been granted added years.

The cost implications of public service pensions, both in the shorter and longer terms, was an area of concern highlighted by the Bord Snip report on public spending in 2009.

The report said public servants are generally entitled to retire on a full defined benefit pension (calculated at half of the average annual salary over the final three years of service), after 40 years’ service, together with a lump sum of up to one-and-a-half times the final salary. Employees may retire after reaching the age of 60 (the compulsory retirement age is 65), with pro rata reductions for those with fewer than 40 years’ service, although those retiring between the ages of 50 and 60 incur an ‘actuarial reduction’ to reflect the longer retirement period. (The key benefit of the recently-introduced Incentivised Scheme for Early Retirement is that it eliminates the actuarial reduction for this age group.) After retirement, it has been the practice to index pension rates in line with earnings, which carries a very high actuarial cost and is not generally available in the private sector.

In addition to the basic public service pension system, BS noted the existence of a range of accelerated / ‘added years’ arrangements across various areas of the public service. These accelerated arrangements are more costly to the Exchequer, and their existence and budgetary implications do not appear to be widely known or appreciated by the general public. For example, Gardaí are free to retire on full pension at the age of 50 (an effective 10 years’ added service on the assumption of an entry age of 20); some engineers, who might enter the public service at the age of 35, would accrue full pension entitlements at age 65 (again an effective 10 added years); teachers with 35 years service are eligible to retire from age 55 on; some hospital consultants may be entitled to up to 10 added years of service; and a High Court judge, who might typically be appointed to the bench at 50 years of age, is entitled to full pension at age 65 (an effective 25 added years).

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