Public sector pension entitlements represent a major liability payable by the State to its employees. The entitlements arise under what are known as defined benefit schemes, that is, schemes that fix the benefit payable. This is in contrast with defined contribution schemes that fix the contribution of employers and employees but where the benefit payable ultimately depends on the result of investment of those contributions.
To manage the State budget, it is important for it to be in a position to quantify the extent of the pension liability and to plan the resourcing of State organisations and programmes in the light of all costs associated with employment, including pension costs. Specifically to do so, the State would need to know the extent of the current liability or, in simple terms, how much the State would be prepared to pay somebody in today's money to assume its current pension liabilities; how much of a year's national production or GNP would have to be devoted to meeting the current liabilities and how many years' tax revenue does the liability represent; how much of it in terms of future GNP would be taken up with meeting pension outflows over the next 50 years; by what proportion of salary does the pension entitlement of different types of public servants increase in a single year; and how much is the State committing on top of salary when it recruits a new entrant to the public service.
It was these questions we set out to answer, but before I give the results I need to emphasise two points. First, the liability we report only refers to public servants and certain employees in the voluntary hospital sector. It does not examine the liability arising under the State pension paid by the Department of Social and Family Affairs. Second, we are reporting the value of future pension payments in terms of today's money. However, in practice, the value of future money by reference to current money is constantly changing, and consequently, all liability estimates of the present value of those future payments will vary from day to day depending on the discount rate used which, in turn, is based on the cost of State borrowing.
Over a longer period the figures are also affected by the extent to which pension increases will exceed price inflation and the longevity of pensioners, which, as the report points out, has been increasing. The key assumptions used in the report are set out in the appendices.
The examination concluded the following. At 31 December 2008 and in the conditions then prevailing, the State had a net liability of €101 billion for pensions that had been earned to date after taking account of the value of any related funds. This liability represented an estimated 65% of the GNP of 2008 and at current revenue yields it would represent about three times the tax take of 2009. The gross cash outflows will rise from 1.6% of GNP to 3.6% in 50 years' time. However, when contributions including the new pension related deduction are set against the annual outflows, the net outflows will rise from 0.5% of GNP to 1.8% in the same period.
It costs approximately one fifth in salary terms to meet pension obligations in respect of a typical public servant but an increasing amount of this cost will, in future, be contributed by the employee with the net cost being on average 9%. Within this overall average there are wide variations by sector. Most of these are down to the fact that some sectors earn pensions over a shorter working life, specifically the security sector — gardaí, prison officers and Defence Forces personnel. An alternative way of looking at this is to consider what would need to be set aside to fund the pension of a typical new entrant in each sector. Again, this varies considerably depending upon the time over which the entitlements accrue or, in other words, the working life of the employee. Funding the cost of pensions of teachers and civil servants would cost between 20% and 25% of remuneration with the contribution necessary to meet the benefits in the case of the security sector being considerably higher. Of course, these gross contribution estimates would be offset by contributions and the net cost is outlined in detail in the report. The new pension related deduction will have a considerable impact on funding going forward and will contribute between 7% and 9% of pensionable salary toward the overall pension cost.
The pensions bill is the biggest financial liability of the State. This makes it important that the underlying substantiating information and vouching is readily available. In this respect, the audit concluded that there is clearly a need to address the quality of the data held by State bodies on the pension entitlements of employees and pensioners. To get comprehensive estimates it was necessary to scale up from the available data to a projection for all those serving and on pensions. The fact that it was necessary to do so highlights the need to capture information electronically for all employees and pensioners so that up-to-date information can be available to decision makers. While cases put into payment are reviewed at the stage a pension is granted, it is important to have readily accessible information on commitments and accrued liabilities on an ongoing basis. In addition, moving on to the development of a computerised pensions administration system will really only be feasible when accurate and validated data are available to populate it.
There are a variety of accounting bases and policies employed in the reporting of pension costs. The financial statements of most State-sponsored bodies take account of the full pension costs in the year in which they are earned and record liabilities, including preserved pension liabilities. In contrast, appropriation accounts and the accounts of health agencies, including the HSE, record costs at the point of payment and there is no accounting for the associated accumulated liabilities. Neither the deferred liabilities nor the pension costs of staff are shown in the accounts of vocational education committees and institutes of technology. Overall, there is a lack of consistency in the accounting practice with the depth and nature of reporting depending on the applicability of technical rules and a lack of comprehensive information such that the overall State liability, which is the important aspect to be managed, is not readily available. A cost effective solution should be sought in this regard.
Issues to be resolved in pursuing consistency come down to whether pension accounting is best done at central level or in the accounts of each individual State body. Currently, most State bodies are obliged to have an actuarial assessment of their pension liability and funding to comply with financial reporting standards promulgated by the accounting profession. While this gives the true pension costs for those organisations that apply the standard, it gives rise to costs for each body in having actuarial reviews carried out and there can also be variation in the assumptions used by the individual bodies for valuation purposes.
Ultimately, however, the biggest challenge facing the State is pension funding. The current policy is based largely on meeting obligations as they arise. The case for setting aside funding for future pensions other than for smoothing the outflows has not been found by most other governments to be a compellable one. In general, as one will read in the report, most of the arguments that are put forward for pre-funding relate to transparency and information completeness, which matters could be addressed by adjustments to reporting and accounting practices rather than funding. There would also be increased administration costs associated with the management of funds if they were set aside.
A fundamental change in the composition of the National Pensions Reserve Fund and in the value of its assets has occurred since January 2008. The fund value reduced in 2008 by over 30% due to the drop in investment values as a result of the financial crisis. However, it has recovered again in 2009. The State also directed it to make certain investments as part of the banking stabilisation measures. These investments represented 36% of the fund's value at 30 June 2009. The realisable value of these investments, which are recorded at historic cost in its books, is primarily dependent upon the outcome of the State's banking stabilisation measures and the return to sustainable business models based on adequate capitalisation and funding on the part of the banks.
Vote 7, which also falls to be considered today, records the cost of pension payments to retired civil servants and prison officers, which amounted to €334 million in 2008, a sum that was partly offset by contributions of €83 million. The cost of pension payments to other public servants such as teachers, gardaí and Defence Forces personnel are met from separate voted funds.