I thank the Chairman and the committee for the opportunity to present for its consideration the 2010 Supplementary Estimate for Vote 37 - Army Pensions, which is for a net sum of €9.5million. I am accompanied by my officials.
The Army Pensions Vote makes provision for retired pay, pensions, compensation, allowances and gratuities payable to or in respect of members of the Defence Forces. The original Estimate provided a net sum of €202.5 million to cover a total of almost 11,200 pensioners comprising some 8,960 retired members of the Defence Forces, some 1,760 spouses and children of deceased members and 380 spouses of deceased veterans of the War of Independence. However, the numbers of Defence Forces pensioners has increased during the past year.
Subhead B is the main subhead of the pensions Vote and covers expenditure on all superannuation benefits for former members of the Defence Forces and their dependants. It accounts for over 95% of all Army pensions expenditure and is largely demand-led. The original provision of €198 million in this subhead will be inadequate to meet all requirements and the gross shortfall is estimated at €10 million. This will be reduced to €9.5 million net when expected savings in subheads C, D, E and F are taken into account.
The shortfall arises from higher than anticipated numbers leaving the Permanent Defence Force during 2010. In that regard, the number of military pensioners under subhead B was 10,329 at the end of last year and the current figure is 10,483. This continues the underlying upward trend over the last few years in the number of military personnel leaving with entitlement to pension and retirement gratuity. This is reflective of the situation across the public service during 2009 and again in 2010, where higher levels of retirements continue to occur than previously was the case. In addition, most Defence Forces retirees continue to be in the "long service" category and therefore entitled to maximum retirement benefits. Overall, the provision in Subhead B was insufficient for what transpired in 2010.
I refer now to the issue of public service pension reform and, in particular, to the latest concerns at the long-term cost projections of public service pensions over the next 50 years. The committee will be aware that the process of public service pension reform has in fact been ongoing for some years. A 2004 reform package followed from the recommendations of the independent Commission on Public Service Pensions. Major changes to the pension terms of new entrants were introduced from 1 April 2004. These were essentially age-related reforms including the raising of the minimum pension age to 65 for most new entrants recruited from April 2004 onwards. Those changes will undoubtedly help contribute to the achievement of a more secure financial basis for public service pension schemes in the medium to long-term.
The 2004 reforms brought military pension arrangements more into line with those applying to other public service groups. This involved a move away from a system of the payment of pension benefits immediately on retirement and after relatively short periods of service, regardless of age. Arising from those changes, post-April 2004 Defence Forces personnel have a minimum pension age of 50 in the case of new-entrant officers and enlisted personnel. In other words, pension and lump sum will not ordinarily be payable immediately on retirement unless the person serves to age 50. Benefits will be preserved in the case of personnel retiring before age 50. These were fundamental changes in military pension arrangements. The removal in 2004 of the compulsory retirement age in most public service areas was not applied to the Defence Forces.
This general approach was in recognition of the particular operational and manpower policy requirements of the Defence Forces, which are widely acknowledged - by the pensions commission among others - as being different from all other public service groups. Key elements in that regard include the need for military personnel to maintain their levels of fitness for operational readiness at home and overseas, the maintenance of an appropriate age profile among military ranks and the dual requirement for regular turnover of personnel while also achieving the necessary balance in retaining experience and expertise, particularly at officer and NCO level.
The Defence Forces therefore require the ongoing application of specific terms and conditions of employment that support its operational and manpower policy objectives. This includes compulsory retirement ages that are considerably earlier than the public service norm of 60-65 and the capping of service in the case of the junior enlisted ranks. The committee will appreciate that the unique nature of military service requires the continued application of such provisions.
When formulating its recommended pension scheme terms for future military personnel, the pensions commission recognised the different and unique manpower policy objectives of the Defence Forces compared to all other public service groups. The commission also concluded that pension scheme design should be capable of supporting this policy.
Accordingly, based on the commission's recommendations, the agreed superannuation arrangements for post-April 2004 military personnel also include provision for fast accrual pension terms. This currently allows the accrual of full pension over a shorter period than the norm, in general over 30 years compared with 40 years usually. The concept of fast accrual is a key support of military manpower policy and operational requirements. Taken together, fast accrual and lower minimum pension age complement and support the military manpower objectives I have outlined, while also recognising the shorter career span of military personnel as a result of earlier compulsory retirement ages.
As indicated in the 2010 budget and the national pensions frameworkpublished in March, the Government has already embarked on the next stage of the pension reform process. The committee will, of course, be aware that the pensions debate applies to the overall State pensions bill including social welfare pensions. In the budget of 2010,my colleague, the Minister for Finance, drew attention to the very substantial current pension bill as well as the projected growth in our overall bill in the period to 2050.
Exchequer spending on public service pensions will be over €2 billion in 2010, while the State's overall pensions bill is expected to rise from about 5% to 13% of GDP by 2050. Two thirds of this increase in spending will go on social welfare pensions and the remainder on public service pensions. As the Minister for Finance said in his 2010 Budget Statement: "Cost increases on this scale cannot be ignored by a responsible Government determined to secure our economic future". Against that background, the committee will be aware that the Government has decided to introduce a new single pension scheme for all future new entrants joining the public service after 2010. As indicated in its national pensions framework:
The introduction of a single pension scheme will provide a standard, consistent and efficient structure for the future management and control of public service pensions. The aim is that, in time, all civil and public servants will have the same basic scheme, with an appropriate accommodation made for whatever particular terms and conditions might be required in exceptional areas, such as An Garda Síochána and the Defence Forces. The scheme will have a benefit structure aimed at providing adequate and fair pensions for public servants, while also safeguarding long-term Exchequer sustainability. The new scheme will bring public service pension terms more in line with private sector norms.
The main provisions of this new scheme will include the following: pensions for all new entrant public servants will be based on "career average" earnings rather than final salary as currently applies; for most public service groups the minimum pension age under the new scheme will be raised from 65 to 66; in tandem with the raising of the minimum pension age, maximum retirement age for the generality of post-2010 public servants will be fixed at age 70.
These represent further significant reform measures. Certain other aspects, including employee contribution rate and pension accrual rate, will be considered by Government in finalising the relevant legislation for the new scheme. As indicated in the National Pensions Strategy, the special service groups such as the Defence Forces "will retain early retirement ages which reflect operational needs and will continue to be paid their pensions at these early retirement ages where this is currently the position". This means the current minimum pension age of 50 will continue to apply to post-2010 new entrant military personnel. Defence Forces retirement ages or upper service limits - as the case may be - will also continue to be determined in accordance with military manpower policy and operational considerations. This approach is consistent with the stated views of the pensions commission.
As I mentioned, fast accrual terms are a key element of the pension arrangements of special service groups such as the Defence Forces. I support the retention of the concept of fast accrual pension terms for military personnel, given its importance to the maintenance of the most effective human resource capability in the Defence Forces. The specific pension accrual rate to apply to groups such as the Defence Forces will be carefully considered in the formulation of the new scheme. In the context of the normal representative machinery, there have been consultations on the new single scheme with the Defence Forces associations, PDFORRA and RACO. This has included discussions with the Department of Finance and at bilaterals with Defence management at departmental and military levels. I am aware that a key concern for the associations, as articulated in those discussions and their submissions on the matter, is the retention of fast accrual pension terms for post-2010 military personnel. Further discussions with the associations are scheduled to take place next week. I do not wish to pre-empt the possible outcome of these discussions or deliberations on the details of the new scheme that remain to be decided by the Government. The committee will appreciate that I cannot therefore comment on such matters in any great detail at this point.
I commend this Supplementary Estimate to the select committee.