I move: "That the Bill be now read a Second Time."
Since coming into office, the Government has already shown that it is committed to reform. We are determined to change critical aspects of Government and public administration with the long-term interests of the taxpayer and the citizen in mind. In this context, I propose a Bill which provides for far-reaching reform of public service pensions. The Bill's principal purpose is to introduce a new single pension scheme for all new entrants to the public service. The new scheme is a commitment under the EU-IMF programme of financial support for Ireland.
The Bill aims to strike a balance between public service workers and the taxpayer. It will ensure that public service workers continue to have access to good pensions and a reasonable standard of living in retirement, while the Exchequer benefits from greater control over the associated costs and the future burden on taxpayers is reduced. Deputies would agree that the current model of public service pension provision is clearly not tenable in the long-term — a television programme this week highlighted that challenge. Getting these decisions correct now is essential to make the system work in the future. Government and the Oireachtas itself must decide how public service pensions should be provided.
As the House will know, there are significant increases forecasted in public service pension costs owing to the growing number of public service pensioners and rapidly increasing life expectancy. Improved life expectancy has placed us in the welcome situation whereby Irish people now expect to enjoy longer, healthier retirements. However, these social benefits bring with them costs to the individual, to public service employers and to the Exchequer.
The statistics are clear and compelling. Over the next ten years in Ireland, the number of people over the age of 65 years is expected to increase by approximately 50%. When the State pension was first introduced 100 years ago, the average male life expectancy at birth was almost ten years lower than the pension age. It is only since the early 1960s that men have had an average life expectancy at birth beyond the State pension age. How things have changed. Now life expectancy at birth is 75 years for a male and 80 years for a female. For a man born in 1945 and therefore turning 66 and qualifying for the State pension this year, his life expectancy at birth was 67 and his life expectancy today is 81. A woman of the same age would expect to live to 85. Some public servants who have worked for 30 years are drawing a pension for as long as or even longer than the period they worked. Attempting to sustain this into the future is simply not practicable.
These demographic effects will place an increasing strain on our public finances. Demographic projections suggest there will be only two people of working age to every person aged 65 or over by the middle of the century, compared with six people of working age to every person aged 65 or over today. The smaller proportion of our population that will be working will be bearing a greater burden in aging costs such as health care, welfare and pensions. We must take steps now to deal with these looming costs. Older people have made their contribution and we must accept our responsibility in the social contract. However, we must be sensible and realistic about the burden which the present and future working population can bear in this context. I must be clear in what we offer people who are coming to work in the public service.
The issues surrounding long-term pension policy and the pressing problems of pension schemes, both public and private, in the here and now are complex. Retirement ages, actuarial valuations, funding standards and so on are confusing and often incomprehensible to many. Public service pensions operate on a pay-as-you-go unfunded basis. The reality is that, to pay for public service pensions, financing must increase from the State, the public servant or the taxpayer.
In 1997, expenditure on public service pensions was 1.5% of GNP. By 2027 it is expected to account for 3% of GNP and approximately 3.5% by 2050. Long-term projections are notoriously difficult to make with complete certainty, but the core point remains valid: the costs of public service pensions have doubled in the past decade and will, relative to the country's output, double again in the medium term. It is important and fair that the pension scheme be adjusted to take account of these looming costs.
There have been some changes in the area of public service pensions in recent years: Since 1995 all established civil servants and public servants are subject to full PRSI, thus giving them an entitlement to State social insurance pensions. Integration of contributions and benefits apply as part of these arrangements, that is, the occupational pension is reduced by the amount of the State pension. In 2004 the pension age for new entrants to the public service was increased from 60 to 65 years. In 2009, there was the introduction, in the Financial Emergency Measures in the Public Interest Act, of the pension-related deduction, more commonly known as the public service pension levy and with effect from 1 January this year public service pensions were reduced on foot of the public service pension reduction legislated for in the Financial Emergency Measures in the Public Interest Act 2010.
The new single scheme was developed having regard to these reforms and in the light of a number of reports including the extensive and fundamental work of the Commission on Public Service Pensions, established by the Minister for Education and Skills, Deputy Quinn, when he was Minister for Finance, which reported in 2000 as well as the national pensions review, published in 2005. The Green Paper on pensions was published in September 2007 with the aim of promoting adequate pension provision in a sustainable, modern and flexible manner. An extensive public consultation process followed on from the publication of these important reports. This has served to underline the difficulties we face in achieving consensus and understanding in this area.
The Green Paper was followed by the national pensions framework which waspublished in March 2010 and included the public service single scheme among its objectives. The range of reforms recommended included raising the minimum public service pension age; increasing the rate of pension contributions; modifying the earnings-linking of pensions; adjustment or abolition of fast accrual terms; and moving to the calculation of pensions on the basis of what is known as career average earnings. The inclusion of these reforms in the Bill before us serves to underline the importance for the Government of taking decisive action. This will help to ensure that when Ireland emerges from the current difficulties, public pensions policy will be on a sound footing.
Responsible government requires that we resist any temptation to delay and, as Minister for Public Expenditure and Reform, it is my job to promote sustainable policies for all areas of public spending. It is unusual to have a horizon of 40 years when grounding sensible policy, but we need to take a long-term view. It is important to be unequivocal about these matters. Ireland has an opportunity, owing to its relatively young population and current positive dependency ratios, to use the time afforded to establish a sustainable system in the longer term. We must grasp that opportunity.
The Government values public servants and is committed to providing them with good quality pension arrangements. Such arrangements will continue to be a defining feature of employment in the public service and one of the attractions of becoming a public servant. While there has been significant reform of public service pensions following the work of the Commission on Public Service Pensions, the process of modernising and restructuring the system must continue in the light of demographic and budgetary realities which pose a future risk to the Exchequer. Equally, we need to provide certainty that people will have a sustainable pension into the future.
The changes I am proposing will make the public service pensions system simpler, more transparent, fairer and better able to deal with the changes we know are coming and thereby assist us to remain sustainable in the long term. Making these changes is not easy or straightforward. Dealing with the fundamental challenges posed to our pension and benefits system as a result of rising life expectancy and other ageing pressures, while ensuring productivity and value for money for taxpayers, requires difficult choices to be faced.
The most important feature of the single scheme is that pensions will be based on career average pay, not final salary as is the case at present. Pensions based on career average earnings will be fairer and more equitable to the majority of members that do not enjoy high salary growth rewarded by way of final salary schemes. Deputies opposite will be acutely aware of the anomalies and unfairness shown up recently by a final year salary determining an ongoing pension thereafter. Using career average pay means that public servants will each year accrue a specific amount towards their pension and lump sum. For most public servants, this will be one eightieth and three eightieths, respectively. In other words, one eightieth of their annual pension will be placed in a fund for a pension, while three eightieths will be the calculation for the lump sum. This is a notional sum, as there will not be a fund. These "referable amounts" will be calculated annually and up-rated each year by reference to the consumer price index and the total accrued will be aggregated to produce a person's pension and lump sum on retirement. This is a significant change from the current position where the pension is based on final salary on retirement.
There are two other major cost reducing changes from existing terms. The first is the increase in pension age to 66 years and its linking with the State pension age which will increase to 67 in 2021 and 68 in 2028. As new public servants pay full PRSI and their State pension forms part of their final pension entitlement, it is important that the State pension, in terms of the years of entitlement, be linked with the pension regime operating in the public service. The second is the indexation of post-retirement pension increases to the CPI instead of pay. Once a public servant retires on his or her career average pension, further increases will be linked with the consumer price index, rather than the holder of the job last held on retirement.
The new scheme will apply to new entrants in all areas of the public service. This will include the Civil Service, the education sector, the health sector, local authorities, the Garda Síochána, the Defence Forces, non-commercial State bodies and other regulatory or similar bodies. For certain public servants such as qualifying and designated officeholders, including the Taoiseach and the President, the Judiciary, Oireachtas Members and those who must retire earlier than other public servants such as gardaí, Permanent Defence Force members, prison officers and firefighters, higher accrual rates will apply. To mirror this, higher contributions will also apply.
With regard to the recent teachers' unions' claims that scheme members will contribute more than they will receive in benefits, all of the concerns, comments and proposals outlined to date by the unions, including the Trident report which the teachers' unions commissioned, were borne in mind in the consideration and drafting of the new scheme. There was a lengthy and detailed engagement with the public service unions last year, including those representing teachers. These discussions, at the unions' request, were brought under the auspices of the Labour Relations Commission which made recommendations concerning the CPI linkage and the integration formula to be used in the scheme. These recommendations are reflected in the legislation and there are to be further discussions with the public service unions on other technical issues. On foot of this, the public service committee of congress is not opposing the scheme. I welcome this and look forward to further useful discussions with congress on these matters.
The Trident report assumes that the pension related deduction, commonly called the public service pension levy, is a pension contribution. This is mistaken and the law could not be clearer. Section 7(2) of the Financial Emergency Measures in the Public Interest Act 2009 states:
"(2) A deduction under section 2 is not a pension contribution for the purposes of the Pensions Act 1990".
The pension levy contribution is a misnomer. It was called that by the previous Government, but it is a levy on pay. I hope it will not be a permanent feature, as I said to the unions when I met them. In my judgment, it is a mistake for unions to characterise it as a pension contribution because the fear will be at a future date that it will be subsumed into the calculation of pension contributions. Under the auspices of the Financial Measures in the Public Interest Act 2009, it is not, by definition, a permanent measure. I hope it will not be a permanent measure, but, obviously for the foreseeable future, it is required.
Contrary to the teachers' unions' claims, the new scheme has an employers' contribution. The Trident report estimates this contribution at 4.9%. The Comptroller and Auditor General recently estimated the annual pension cost for serving teachers at 22.4%. The new scheme will reduce this figure by approximately one third. The employee contribution continues to be 6.5%: 3% on pensionable pay and 3.5% on net pensionable pay, that is, reduced for social welfare integration. This gives a net contribution of 4.9%, according to the Comptroller and Auditor General, leaving approximately a 10% employer contribution. Therefore, there will be a significant continuing Exchequer contribution to public sector pensions.
There are a number of other issues I want to bring to the attention of the House. The new scheme makes no provision for enhanced pension arrangements for senior new entrant appointees such as Secretaries General and non-commercial State body chief executives. Such persons will be treated the same as other public servants, with pension accruing relative to pay and annual accrued amounts indexed to the CPI and aggregated to produce a pension and lump sum on retirement. The amount of anomalies that some opposition Deputies have rightly identified in recent times and which I have discovered that have built up, particularly in the last couple of decades, is striking. We need to restore fairness to the system, but one should be conscious that it is very difficult to unravel an existing system. In this way, pension will be a function of pay and a higher salary will mean a higher pension proportionate to one's lifetime earnings. This in-built pension-pay proportionality will not be accompanied by special pension enhancements such as added years.
One question that may be posed is why not simply apply the scheme to serving public servants also. Some outside the public service have asked this question. I see a distinction between offering someone a public service position with single scheme membership and changing the pension terms for someone who took up their public service employment under clearly defined and understood terms and conditions. A new entrant can decide whether to take the job on the terms offered, a serving person does not have that option. Many of us will know public servants who stayed in the public service because of the pension provision. It may not be unlawful, but it would be unfair and unjust to people who have worked for many decades on the basis of an agreed outcome in pension terms to then expect that we could arbitrarily change this at the end, or near the end, of their career.
As Deputies are aware, it has been necessary owing to the financial emergency facing the country to legislate in the public interest for the pension-related deduction, a cut in public service pay and the reduction in public service pensions which will be further reduced, reflecting the reduced pay rates, for those retiring after February next. These measures were taken to meet fiscal targets: the pension-related deduction is expected to realise savings of about €900 million this year, an extraordinary sum of money. The tiered reduction in all public service pensions above €12,000 per annum introduced this year has cut pensions, on average, by about 4% and will save about €100 million in a full year. It may not, however, be legally straightforward to reduce accrued pension benefits by adjusting their terms, particularly where benefits have been accrued and contributed to for many years.
To avoid a destabilising rate of retirements in 2011 and to manage the cost of retirements in 2011 and 2012, it was decided that the grace period during which pre-cut pay rates would be used to calculate pension on retirement would be extended to the end of February 2012. This means that those retiring after February 2012 will see a pension reduction of 7% on average, as their final salary pensions will be calculated on the reduced pay level. The pension reduction outlined will not apply to those retiring after that date.
To those who call for the single scheme terms to be applied to the future service of serving public servants, this has not been agreed by the Government, nor is it part of the EU-IMF programme. Given the retrenchment in the public service, I do not consider that this is the time for such a change. We must concentrate on the reform tasks before us, to which we are committed and on which we must deliver. There is no change in the position in relation to the public service agreement or the associated clarifications concerning the indexation of public service pensions. In other words, the Croke Park agreement is not affected by this proposal.
There is an enabling provision in the Bill which would allow me, as Minister, to make an order to apply a CPI link to public service pensions should this be decided in the future. As is well known, there will have to be discussions about this issue under the agreement and if these should lead to a decision to make this change, I will have the necessary legislative powers without having to come back to the House with further legislation. The enabling provision should not be used to create an expectation that it will be unilaterally implemented; discussions will not be pre-empted in any way. This approach is entirely in keeping with both the letter and the spirit of the agreement. Of course, any changes would not, and could not, be implemented during the current agreement in accordance with the clarifications we have given.
I will now outline the main provisions of the Bill. The Bill's principal purpose is to provide for a new single pension scheme for all new entrants to the public service. The new scheme is the subject of a commitment in the EU-IMF programme. Part 3 of the Bill includes the necessary legislative amendments required to allow a reduction in pay rates for public servants and officeholders, including members of the Government and new members of the Judiciary, whose pay rates are determined in legislation.
The Bill is in four Parts, of which Part 1 is preliminary and general. Part 2 deals with public service pensions, with five chapters: (i) preliminary and general, Part 2; (ii) single scheme; (iii) pre-existing public service pension schemes; (iv) provisions applicable to all public service pension schemes and (v) consequential amendments, Part 2. Part 3 deals with the remuneration of judges and other officeholders, while Part 4 deals with the amendment of Acts relating to financial emergency measures in the public interest.
Part 1 contains standard provisions providing for the Short Title of the Bill, commencement, the repeal of legislation and expenses, and defines "Minister" as being the Minister for Public Expenditure and Reform.
Part 2 is the most substantial element of the Bill and deals with all aspects of the new scheme to which I have referred. It deals with public service pensions. The sections in chapter 1 — preliminary and general — define the terms to be used in the Bill and the scheme. "Public servants" are defined as officeholders or employees of public service bodies. The President, Members of either House of the Oireachtas, qualifying officeholders such as Ministers, the Attorney General, the Ceann Comhairle, Ministers of State, the Leas-Cheann Comhairle, the Cathaoirleach, the Leas-Chathairleach, the Leader of Seanad Éireann, members of the Judiciary and other designated officeholders are covered by the provisions of the Bill. "Public service body" is defined as meaning the Civil Service, An Garda Síochána, the Permanent Defence Force, local authorities, the Health Service Executive, the Central Bank of Ireland, educational institutions and non-commercial State bodies where a public service pension scheme is in place or applies, or may be made. The CPI is defined as being the consumer price index, all items. Owing to the legal position of the Central Bank as part of the euro system, the new scheme will apply only with the agreement of the Governor. This is explicitly set out in the Bill. Chapter 1 also gives the Minister power to introduce, by regulation, the administrative measures necessary for the operation of the new scheme as defined in the Bill.
Chapter 2 provides for the establishment of the single scheme and sets out the age-related and other criteria for membership. Persons, other than those seconded or absent on leave with or without pay from a public service body, who become public servants on or after the operative date will be members of the new scheme. It is not proposed to bring the commercial State body sector within the ambit of the Bill. Accordingly, a schedule of excluded bodies is proposed. Owing to the historical evolution of pension systems in commercial State bodies, a separate system has grown up and their market-oriented ethos means it is not considered feasible for their staff to be included in this measure.
Chapter 2 also defines "new entrants" to the scheme. It provides that, from the operative date, for a six month holding period, someone who was at one time a public servant, on returning to be a pensionable public servant, will be regarded as a single scheme member and will not be able to claim pre-single scheme pension terms.
Chapter 2 also provides for a public servant to retire at the age of 66 years or the age at which the person would, from time to time, become eligible for the State pension. The proposed new retirement age of 70 years, at the latest, is also specified in this chapter, with exceptions made for elected officeholders and certain uniformed public servants.
Chapter 2 sets out the provisions concerning pension contributions. For most scheme members, these will be integrated with the social insurance system. This implies 3% of pensionable remuneration and 3.5% of net pensionable remuneration. The chapter also provides that all contributions charged under the new scheme shall be paid directly to the Exchequer.
Chapter 2 sets out the terms and conditions which will apply under the career-average system in the new scheme. It stipulates that members of the scheme will earn money amounts which accrue to their pension and lump sum benefits annually.
The earned "referable amount" is calculated as a fixed percentage of actual pensionable earnings. In this way, the accumulation of future pension benefits will reflect a person's evolving actual pay over the course of a career, while at the same time ensuring that the real value of those pensionable earnings is protected through indexation to the consumer price index.
For almost all scheme members, the money amounts earned will be integrated with the social insurance system. The integration formula applicable to the vast majority of new-entrant public servants includes an accrual rate of 0.58% up to earnings of €45,000 — a figure recommended by the Labour Relations Commission that represents 3.74 times the value of the State contributory pension — which provides for some occupational accrual in addition to that being provided by the State pension until pay exceeds this figure. These are not simple calculations. How they were arrived at is beyond my mathematical comprehension. That said, the LRC recommendations have been accepted. The pension accrual rate above the aforementioned threshold is 1.25% of the scheme member's pensionable remuneration. The lump sum accrues at the rate of 3.75% of the scheme member's pensionable remuneration.
For certain public servants, including the President, qualifying and designated officeholders, the Judiciary, Oireachtas Members and those who must retire earlier than other public servants, such as gardaí, Permanent Defence Force members, prison officers and firefighters, higher accrual rates and contributions apply.
Provision is made in this chapter for a pension to be paid to a surviving spouse or civil partner of a deceased member and, where applicable, eligible children, and sets out the rates, terms and conditions attaching thereto. These include cessation on cohabitation or marriage, a standing scheme rule which is in line with social welfare rules and practice, with which the scheme is integrated.
I do not have time to discuss all aspects of the Bill. Part 3 deals with changes to the pay for new members of the Judiciary and certain other officeholders.
Importantly, the amendment of section 46 of the Courts (Supplemental Provisions) Act 1961 provides for revised salary rates for members of the Judiciary appointed after this Bill is enacted. The revised rates reflect the pay reductions and pension related deduction applied to other public servants in addition to the 10% reduction applied at the beginning of 2011 to new public servants appointed to public service entry grades.
Article 35.5 of the Constitution provides that: "The remuneration of a judge shall not be reduced during his continuance in office." The Government has published the text of a proposed referendum to amend this provision. If passed, implementing legislation will be passed to apply revised pay rates to serving and future members of the Judiciary to ensure comparable treatment between members of the Judiciary and other public servants.
The Presidential Establishment Act 1938 is amended to provide that the new person elected to the Office of President will have an annual salary of €249,014. The current rate is €325,507.
This is complex, wide-ranging legislation. I will be happy to provide any detailed briefing any Member in Opposition or on this side of the House requires for the sake of clarification. The meat of our debate will be dealt with on Committee Stage when we go through the legislation line by line. I am happy to commend the Bill to the House.