Deputy Dempsey has shown some skills in the past couple of days of which I was not apprised heretofore, but I will certainly bear them in mind for the future.
The subject matter of the Labour Party's motion has been at the heart of public sector pensions increase policy for a considerable amount of time. The Opposition Deputies should know that. It did not suddenly emerge as an issue when this Government took office. It was a live issue during the period of office of the previous Government but that Government did not take any action on it. To put it in a nutshell, the question at issue is how to apply to pensioners the restructuring deals negotiated under the Programme for Competitiveness and Work. Those restructuring deals vary widely in their nature and give rise to great complexity when it comes to deciding how they should be applied to pensioners who retired before the various deals came into effect.
I will set the issue in the wider context of public service pension costs generally, both the current costs and, in particular, the greatly increased costs which will emerge in the medium to long term. I refer also to the work of the Commission on Public Service Pensions which submitted an interim report to me recently. I intend to publish that report in the near future. It is to present its final report by the end of next year and I look forward very much to receiving it. The commission was established by my predecessor, Deputy Ruairí Quinn, against a background of growing concern generally about the emerging costs of existing public service pension terms, a problem which was likely to become even more difficult if concessions were made to the growing clamour for substantial improvements in those terms from a variety of public service groups.
On the emerging cost of public service pensions, I note the Commission on Public Service Pensions is undertaking its own actuarial assessment of public service occupational pension schemes. All the evidence indicates the projected increase in costs over the coming decades will be at least of the order indicated in earlier preliminary studies. The likelihood is that, expressed in constant price terms, the cost of public service occupational pensions will increase from £540 million in 1995 to £2.2 billion in 2025 and to £2.6 billion in 2045. This represents a fourfold increase over a 30 year period. These projections are made in constant 1995 price terms and I assume there will be no improvement in public service pensions terms over this period. In addition, if one were to assume a higher level of pay increase than is assumed in the projections, there would be a markedly different outcome. For example, if it were assumed that average pay levels would increase by 5.2 per cent annually and prices by 2.7 per cent annually — as happened between 1987 and 1995 — the bill in the year 2025 would be £2.9 billion in constant price terms. This would represent a multiple of over five times the 1995 bill.
While one can argue about the precision of demographic forecasts and projections, this growth in Exchequer pension costs is not in doubt and the factors underlying it are quite clear. The primary cause is the major increase in recruitment in the public service which took place in the late 1970s, which will lead to increased retirements in 20 to 30 years' time. The two other contributing factors identified by the commission are increasing life expectancy and the greater number of female public servants who will qualify for pension benefits in the future. These factors will mean that on average a pension will be paid over a longer period, and so will increase overall pension liabilities.
The unfavourable cost outlook for public service pensions will materialise at a time when the general ageing of the population is placing ever growing demands upon the State's resources, particularly in the form of Social Welfare pensions and health care costs. As regards the former, an actuarial review of social welfare pensions similar to the study being carried out on public service pensions was launched recently by my colleague, the Minister for Social, Community and Family Affairs, Deputy Dermot Ahern. The review estimates that total pension payments by his Department will increase from £1.7 billion currently to £3.2 billion in 2026 and £4.3 billion in 2046, on the basis that pensions are increased in line with inflation. If increased in line with earnings, the bill would rise to £5.6 billion in 2026 and £11.3 billion in 2046.
The questions which must be asked when considering this evolving cost scenario are: can we afford the expected increase in pensions expenditure over the years ahead, and what must we do to manage and prepare for this growth in costs? As regards the first question, it is necessary to relate the growth in costs to measures which will grow in line with economic activity. Making some broad assumptions about GNP growth, the commission has shown that expenditure on public service occupational pensions will increase from 1.6 per cent of GNP in 1995 to 2.3 per cent of GNP in 2025, before moving to 1.8 per cent in 2045. By way of comparison, expenditure on social welfare pensions will increase from 4.8 per cent of GNP in 1996 to 5.9 per cent of GNP in 2026 and 7.9 per cent in 2046, assuming rates of payment are increased in line with earnings. As a percentage of the public service pay bill, pensions expenditure will increase from a level of 11.5 per cent of pay in 1995 to 30 per cent of pay in 2025. It will then reduce to 26 per cent of pay in 2045.
As regards preparation for and management of the expected growth in costs, there are two aspects to this: the actual benefits provided by the pension schemes, and financial management and control arrangements.
Turning to pension terms, it must be acknowledged that public servants have accrued pension entitlements on the basis of existing terms and these obligations cannot be set aside or ignored. It is also conceivable that some changes to pension scheme terms may be inevitable to take account of changes in operational needs and terms of employment and to reflect possible developments in EU and national legislation and case law. The priority must be that additional pension scheme improvements are not introduced which would impose significant extra pension liabilities.
Against this background, the Commission on Public Service Pensions is carrying out the first independent examination of public service occupational pension schemes and their financing arrangements since the foundation of the State. Members are drawn from the pensions industry, Government Departments, trade unions and employers. It is to present its report to Government next year.
The interim report which I have recently received from the commission gives an outline of its work to date and comments on a number of issues coming within its terms of reference. Commenting on the cost figures, the commission notes that the gross cost of public service pensions will undergo rapid escalation during the period 2005 to 2025. While discounting the more alarming suggestions of a pensions "time-bomb", the commission adds that an increase in the future pension costs of public servants of the magnitude indicated must give serious grounds for concern. The increase in cost will impact not alone on the fiscal position but on the competitiveness of the economy as a whole. We can all agree that, given the prospect of a fourfold increase in the Exchequer pensions bill in coming decades, we cannot afford to adopt a liberal approach on this front with a consequential negative impact on the economy generally.
Regarding pension terms, the commission states that a major change in pension terms could cause a significant escalation in pension costs well beyond the figures outlined in its report. By their nature, changes to pension terms can often be effected at little or no short-term cost. The commission warns that, while the effect of such changes might be modest in the short term, regard must be had to the long-term effects and the possibility that specific arrangements made in respect of one group of employees might trigger similar demands in respect of others.
The commission's remit includes the question of whether public service occupational scheme terms remain appropriate having regard to changes in the working environment and conditions of employment of public servants and evolving operational requirements. It must be acknowledged that public service pension schemes have remained fundamentally unchanged since the last century. The system of occupational pension provision in place derives from the arrangements put in place to meet the needs of British civil servants in their old age. These were formalised in legislation during the 19th century and have remained unchanged since apart from some significant improvements in the last 30 years, for example, the introduction of a contributory scheme for spouses and children of public servants. I look forward to receiving definitive views from the commission on these matters.
To broaden the picture, Ireland is not alone in facing the effects of demographic ageing and the ever-increasing cost of pensions under both national pension systems and the pension systems for public servants. Other European countries have had to face similar problems. Many have introduced changes to pension terms with the aim, at least in part, of controlling the inevitable growth in costs. For example, the commission has noted that there is a tendency abroad to increase retirement ages for public servants. We are at an earlier point in the demographic cycle compared with these countries and should be well placed to take the necessary action to help contain the emerging costs.
How to manage and prepare for the anticipated growth in public service pension costs will also require an examination of the most appropriate mechanism for meeting pensions expenditure. The traditional approach, followed by most European countries, is "pay-as-you-go" in which the cost of pensions is met from current revenues. Having regard to the escalation in costs in the years ahead, it is reasonable to ask whether advance funding might be a better alternative.
It is often said in support of funding that the "pay-as-you-go" system fails to recognise the long-term cost of an improvement in pension terms or an increase in coverage. The focus is on benefits rather than costs. The commission reviews the advantages and disadvantages of both approaches. It has highlighted the costs of funding public service pensions which would be substantial. It has been estimated that a fund of the order of £15 billion would be needed to meet the public service pension liabilities accrued to date with an annual contribution of around £700 million to pay for future service.
The establishment of a fund would require "double" contributions from the Exchequer from the outset — it would be meeting on a "pay-as-you-go" basis the costs of the current generation of pensioners while meeting on a funded basis the accruing liability in respect of staff currently serving. A possible alternative to establishing a fund capable of meeting all liabilities would be to set up a partial fund to which pension contributions made by public servants could be lodged. Other possibilities which may be examined include funding certain components of pension schemes while continuing to meet the cost of the other components on a "pay-as-you-go" basis.
The commission has noted a number of practical and budgetary difficulties that would arise if funding, or even partial funding, were introduced and indicated that the matter will be examined further in its final report. It suggests that there should be regular actuarial reviews of public service occupational pension schemes and proposed changes to pension scheme terms. If formal funding is not introduced it is considered that there is a need to put in place a system which can clearly and quickly identify existing pension liabilities and the impact on these liabilities of increases in numbers or improvements in terms.
The strategic management initiative has, as one of its objectives, the development of better financial systems. The commission has indicated that a more transparent system of recording pension costs and liabilities would help contribute to an improved awareness among public service managers, employees and trade unions of the true value and cost of public service pensions and the cost impact of changes in pension terms. These suggestions will have to be given careful consideration.
I turn now to the question of pension increases in the context of restructuring deals negotiated under the Programme for Competitiveness and Work, a matter of immediate concern to public service pensioners. It is useful to recap on the development of “pensions parity” in the public service. The principle of parity of pensions was agreed in 1969. In 1984, it was announced in the budget that general pay increases would apply to pensioners with effect from the date of the increases. The 1986 budget extended full pension parity to special increases with effect from 1 July 1986. During the past decade parity has been applied on the basis that pensioners would continue to have their pensions related to the salaries they would have had if they had continued to serve.
The restructuring deals negotiated under the PCW do not fit comfortably within the traditional pattern of special pay increases. In most cases, they were negotiated under option A of the restructuring clause. This requires "changes in structures, work practices or other conditions of service" and "must have regard to the need for flexibility and change and the contribution to be made by employees to such change and must result in savings and an improved quality of public service". As an alternative, option B allows a single cost increasing claim for an amount not exceeding 3 per cent of the basic pay cost which would "take into account the need for efficiency, flexibility and change and the contribution to be made by employees to such change". While option B increases could readily be accommodated within the parameters of the old special increases and, therefore, passed on to pensioners, option A commits serving and future staff to deliver genuine productivity and flexibility which would not have been delivered by pensioners. This clearly begs the question as to the appropriateness of applying such increases to people who have already left the service.
Furthermore the various option A deals differ widely in their structure as a result of which, if traditional parity applied, the impact on public service pension groups would vary substantially. For example, many of the deals concentrated increases on the payscale whereas others concentrated some or much of the increases on non-scale improvements. Consequently if parity, as traditionally operated were applied, some pensioners would get increases of the order of 15 per cent plus while many others would get 7 per cent or 8 per cent only. At the other end of the scale, a substantial number would benefit only from a 1 per cent increase in salary already paid with effect from 1 April 1994 while many others would get nothing because their deal did not involve a pay increase.
This may sound very esoteric and complex but it should be immediately obvious to Members that, if traditional parity applied in this instance, as proposed in the Labour Party motion, Garda pensioners would get no benefit whatsoever and teacher pensioners would get nothing more than the 1 per cent increase they have already received. Is this what is intended?
