Dáil Éireann Debate, Wednesday - 1 May 2024
182. Deputy Darren O'Rourke asked the Minister for Social Protection if she is aware of the anomaly that some people with less contributions are receiving greater State pensions due to the method of calculation (details supplied); if she has assessed this anomaly; if she intends to address it, perhaps by moving away from the ‘first date of contribution’ criteria; and if she will make a statement on the matter. [19616/24]
View answerThe Yearly Average method of calculating State Pension (Contributory) payment rates has been used since the introduction of the contributory Old Age Pension (now State Pension (Contributory)) in 1961. Under the Yearly Average approach, anomalies can arise because of the date of entry into insurable employment. A late date of entry into insurable employment can result in an unusually low divisor, and consequently a higher yearly average than would be representative of the number of contributions. Alternately, an early date of entry into insurable employment can result in high divisor, and consequently a lower yearly average if that person has a low contribution rate.
To this end, the National Pensions Framework (2010) proposed that the current Yearly Average system, be replaced with a ‘Total Contributions Approach’ (TCA), which would make the level of pension directly proportionate to the number of social insurance contributions made by a person over his or her working life, with significant pension credits granted to people who have taken time out of the workplace to perform caring duties. An interim TCA was introduced in 2018 that allowed all those who reached State Pension Age from September 2012 to be assessed under both the existing Yearly Average method and the new TCA method, with the person receiving the 'better of' the two rates.
The Pensions Commission was established in November 2020 to examine the sustainability of the State Pension system and the Social Insurance Fund, in fulfilment of a Programme for Government commitment. The Commission’s Report has unambiguously established that the current State Pension system is not sustainable into the future and that changes are needed and set out a wide range of recommendations in this regard - including the full transition to the TCA model and the phasing out of the Yearly Average approach.
Following on from the Pensions Commission's recommendations, a number of State pension reforms were enacted in the Social Welfare (Miscellaneous Provisions) Act 2023 on the 14th December 2023, which represent the biggest ever structural reform of the Irish State pension system.
Among these reforms, the 2023 Act introduced a ten-year phased transition from the Yearly Average method of calculation of State Pension (Contributory) to TCA as the sole method of calculation. TCA is a fairer and more transparent method for calculating the contributory pension and will remove the existing anomalies. The ten-year transitional arrangements are to avoid a ‘cliff edge’ effect. The first year of phasing-out will begin in January 2025. From 2034 the Yearly Average method of calculation will no longer be used, and all State Pension (Contributory) calculations will be done using the TCA method.
I trust this clarifies the matter for the Deputy.
