I have done some work on that since this House discussed the matter and when the debate started. The original thinking on a national income related pension scheme which exists in a number of other EC countries was published during the period when Frank Cluskey was Parliamentary Secretary for Social Welfare and was the effective Minister for Social Welfare in that Department, the Tánaiste at that time, Brendan Corish, being effectively Minister for Health. The work that they did, which emerged in a Green Paper, was subsequently consolidated and expanded upon by Deputy Haughey, when he was Minister for Health and Social Welfare.
In 1976 and 1978 two substantial documents were published which provided a framework in which a national income related pension would be contemplated. If I may use a political analogy, we are talking about a confederal system of pension funding rather than a unitary State system, because you have the base level of the State non-contributory pension scheme, to which everybody is entitled. Then you have a category of people who are entitled to a contributory pension if they have the stamps. Senator Hillery referred to the anomaly that has emerged in the representations made to the Ombudsman for that category or group of people who are, in fact, fixed in time. The problem will not continue after 1987 — because they are a legacy from the past. I have made personal representations to the Minister for Health and Social Welfare to have that anomaly removed provided we can cost it again and know what it is.
I have described the two kinds of State pensions that we have, the flat non-contributory and the contributory. That is at one end of the scale. At the other end of the scale you have the best positioned people pensionwise, the public service and the public sector pensioners who have an index linked or inflation linked pension which is not effectively funded in full by their contributions and for which there is no separate, independent pension fund. All of the civil service pensions and the local authority pensions are paid out of current account receipts, which is probably the most inefficient and economically wasteful way of providing for pensions. They are very costly relative to the dependency ratio that we have in our society. In between that you have large established companies. Guinness would be the prototype of them. There are other large private companies of more modern vintage like Cement Roadstone and others who have substantial pension schemes of one kind or another.
The thinking, as I understand it, is that the guaranteed flat floor level of the non-contributory pension would become the basic building block unit to which people could add elements of company pensions or could make additional contributions. The norm is that you would get two-thirds of your average salary for the last five years of your working life and that that, somehow or other, would be index linked to take you through, on average, the ten years or so that people live after the age 65. You have the floor of the State pension scheme plus whatever company pension you have had contributed to plus the possibility of being able to contribute extra stamps if you wanted to make provision for an additional pension. Work and consultation has gone on with the pension institutions here, the largest of which is the Irish Pensions Trust which organises most of the pensions in Irish industry or certainly acts as a consultant. The thinking is that people would have the possibility in a manner similar to the way in which, although not exactly the same, people can take out insurance cover within the VHI. You have a choice of deciding what level of cover or what level of comfort and what level of financial provision you want to make for yourself and you contribute accordingly within a range but that range provides a basic floor below which you are definitely going to get treatment. You do not have to be in the VHI. There is a national scheme that falls in below that.
Designing something like that and getting it to integrate with existing contributions and getting credit for existing contributions is apparently where the technical difficulty is. The cost of pensions is something that is now a considerable worry. I would say that for those of us who will be involved in political life over the next ten years, and certainly who will be involved in political life by the year 2000, the way in which the balance of payments and foreign borrowing has dominated political concerns today the major political economic problem facing our society will undoubtedly be the pensions crisis which is going to confront this country and indeed every other country in the EC within a period of 15 to 16 years. You can simply take the level of people who are currently in the public service, take their age and extrapolate it to a pensionable period and make an assumption about their life expectancy. There is a downstream commitment of payment that the working population, which will be a declining or a static working population if all of the objectives, as distinct from political projections, are to be taken into account. That is going to be an enormous task facing us as a political society. We have an obligation to meet and answer it.
I have read a number of articles on this and I have talked to a number of pension consultants about it. It is an enormously complex, difficult area and its complexity and the fear about the downstream effects of it has brought a certain degree of reluctance to the people who are attempting to design a national income related pension scheme. We had discussions in Cabinet on the matter when the national plan was being formulated and I am aware that the Minister for Health and Social Welfare is particularly committed to it. What is not decided is the level. There are two outstanding issues essentially, assuming that people can top up their contributions beyond a certain floor level. This would also provide for the self-employed who are excluded entirely from the present system, other than for the non-contributory pension.
There are two outstanding issues. The first is what percentage of average economic income should the pension represent — should it be two-thirds of the average over three years or five years and what kind of provision can you and should you make for indexation? There are in our society categories of people who have the misfortune to have grown old on fixed pensions at a time of high inflation. They have become increasingly impoverished with every month. The most devastating sight is people whose standard of living and standard of expectation has actually gone down perceptively in their lifetime at a time when they really should not have to worry, the age of 69 through to 85. There are widows and people who are very vulnerable in that regard.
I do not want to turn this Committee Stage into an extended discussion on pensions but the question was raised in a general sense and in a very constructive spirit. We are going to try to deal with it. We have the capacity to deal with it, but there are new factors on the horizon that, quite frankly, frighten people about the implications of a national income related pension, and therefore it has to be looked at very carefully.
This amendment has been useful in focusing attention on the rights of workers who lose their pension entitlements. This House will recognise that it is not equitable or reasonable to think that a fund that is contributed to exclusively by employers — and it is my commitment to equity and justice rather than my commitment to employers that enables me to make this particular argument — a fund that is exclusively funded by employers should not be used as the source for maintaining a pension fund in perpetua for people who might live for 15, 20 or 30 years after the insolvency of a particular firm. Everybody in the pension field recognises that pensions must combine a joint contribution element on both sides.
I want to stress that this fund, the name of which has been changed from the redundancy fund to the redundancy and insolvent employers' fund, is a fund that is exclusively funded by employers. The effect of the Fianna Fáil amendment, in equity terms, would be to oblige employers exclusively to fund pensions without reference to any kind of employee contributions. I do not think it is on equitable terms. In addition to that, there is the cost of it. In the United Kingdom the average arrears they have been dealing with are two weeks of pay plus holiday money and some sick pay etc. up to a maximum of £211. If for argument sake we call that four weeks at the maximum and it becomes £800 odd, call it £1,000 in round terms — that is the once-off commitment payment — and we scaled the contributions at a level to meet that kind of maximum payment, the cost of meeting a pension at the average industrial wage which is £7,500 or £8,000 at two-thirds of that level or one-third of that level for a period of ten years — you are talking about something that is running from a maximum contribution of £1,000 and I am using figurative figures so to speak, could over a period of ten years, extend to £40,000 if you accept that £4,000 would be the kind of pension that somebody on £7,500 might get and that they would on average be continuing on for ten years after their period of retirement.
That is the relative scale of the problem if you accept it on the basis upon which I rested my figures. For that reason it simply is not possible to contemplate that this fund could be utilised to maintain ongoing commitments. It should come out of a broader fund. In Germany, for example, companies are required — in, for example, the metal industry sector or in the construction industry sector — to be participants in that industry's pension fund. If an individual company defaults, indeed it works somewhat similarly in the CIF pension fund at the moment, that industry as a sub-unit of the total economy picks up the tabs for defaulters within its own industry and continues on the main contribution.
In the construction industry here, because the nature of the contracting business is such that companies frequently have a much shorter life span than an established manufacturing company, that necessity is clearly more evident. In Germany, in manufacturing industry you have a fund contributed by both the employers and the employees in a particular subsector and if one company goes into insolvency then the ongoing pension entitlement is picked up by the rest of that group in the association. Something along that model is the route we are going to have to travel in relation to insolvency pensions.
I apologise for going on at such length. I do appreciate the concern the Opposition have and the legitimacy of the argument which we will have to address, and we are going to have to do it and we are committed to doing it. It is for the Opposition to ensure that we meet that commitment within the framework of the national plan.
Senator Hillery raised the point that the most vulnerable person would be somebody who is on the age of 60 and about to retire and who suddenly finds that the pension commitment has gone because of insolvency. That is obviously the case in Castle Brand which is going to be a point of particular anguish. Let us consider the case of a properly run pension fund, as distinct from the current account system that some companies have, administered by an insurance company or by somebody like the Irish Pensions Trust and of somebody who needed 35 years' contributions or whatever is the minimum threshold and who was making contributions to their employer for that fund. However, the employer, as appears to have been the case in Castle Brand, was effectively misappropriating or misusing that fund or using the contributions for a reason other than that intended, as has been the case with PRSI and VAT where companies in difficulty have been using that cash as a form of working capital. If workers have had money deducted from their salary as a contribution to a pension fund and that money has not been paid into the pension fund then this fund will back date and validate contributions for the previous 12 months. That will protect those who might otherwise not have qualified for either a full pension or a substantial pension. That is as far, quite frankly, as we can go. We looked at the possibility of extending the cover beyond 12 months but the lack of statistics prevented us from going much further. The only thing we have been able to say is: "We will cover and indemnify pension contributions for 12 months that were deducted from the employee but were not paid into the fund."
I have given a reasonably comprehensive reply to the pension fund issue, which was the issue raised by Senator Hillery in general terms. The commitment is there. I intend that it should be met and I expect the Opposition will remind us if we do not meet it and constantly keep us on our toes to do so. It is in all our interests. There is the future problem that confronts all of us and will probably confront the kids in the gallery more in real terms than it will many of the people in this Chamber. It is the major political problem on the economic agenda facing this country. We are going to have to devise the most efficient and smartest way of dealing with it. In the context of insolvency we have gone as far as we can.