Since coming into Office, this Government has already shown that it is committed to reform. We are determined to change crucial aspects of Government and public administration with the long term interests of the taxpayer and the citizen in mind.
In this context, I am today proposing this 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 these associated costs and the future burden on taxpayers is reduced.
Deputies would agree with me that the current model of public service pension provision is clearly not tenable in the long-term. Getting these decisions correct now is essential in order 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 forecast in public service pension costs due 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. But 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 about 50%.
When the State pension was first introduced a hundred years ago, the average male life expectancy at birth was almost ten years lower than the pension age. In fact, 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, his life expectancy today is over 81. A woman of the same age would expect to live to 85.
We have a situation now where some public servants who have worked for thirty years are drawing a pension for as long as that or even longer. Attempting to sustain this into the future is simply not sensible or practicable.
These demographic effects will place an increasing strain on our public finances. Demographic projections suggest that there will be only two people of working age to every person aged 65 or over by the middle of the century, compared to 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 ageing costs such as healthcare, welfare and pensions. We must take steps now to deal with these 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.
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 incomprehensible to many.
Public service pensions operate on a pay-as-you-go unfunded basis. The reality is that, for public service pensions to be paid for, financing must increase either from the State, the public servant or the taxpayer.
In 1997, expenditure on public service pensions was some 1½% of GNP. By 2027 it is expected to account for 3% of GNP and around 3½% by 2050. Of course, 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 last decade and will, relative to the country’s output, double again in the medium term. It is both important and fair that the pension scheme be adjusted to take account of this cost.
There have of course been some changes in the area of public service pensions in the past number of 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 foundational work of the Commission on Public Service Pensions, established by my colleague Ruairi 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 publication; 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 published in March 2010 which included the public service single scheme amongst its objectives.
The range of reforms recommended include:
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 “career average” earnings.
The inclusion of these reforms in the Bill before you today serves to underline the importance for this Government of taking decisive action.
This will help ensure that, when Ireland emerges from the current difficulties, our public pension policy is on a sound footing. Responsible Government requires that we resist any temptation to delay and, as the Minister for Public Expenditure and Reform, it is my job to promote sustainable policies for all areas of public spending.
It is important to be unequivocal about these things. Ireland has an opportunity, because of its relatively young population and currently positive dependency ratios, to use the time thus afforded to establish a sustainable system in the longer term and this we must do.
This 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. 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 light of demographic and budgetary realities which pose a future risk to the Exchequer.
The changes I am proposing will make the public service pension system simpler, more transparent, fairer, and better able to deal with the changes that we know are coming and thereby assisting us to remain sustainable over 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, whilst ensuring productivity and value for money for all of us as 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 at present. Pensions based on career average earnings will be fairer and more equitable to the majority of members that do not have high salary growth rewarded by way of final salary schemes.
Career average means that public servants will each year accrue a specific amount towards their pension and lump sum. For most public servants this will be 1/80th and 3/80ths respectively. There will not be a fund, these “referable amounts” will be calculated annually and up-rated each year by reference to the CPI 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’ at retirement.
The other
two major cost-reducing changes from existing terms are:
· the increase in the pension age to 66 and its linking to the state pension age which will increase to 67 in 2021 and 68 in 2028, and
· the indexation of post-retirement pension increases to the CPI instead of pay.
The new scheme will apply to new entrants in all areas of the public service. This will include the Civil Service, Education sector, Health sector, Local Authorities, Gardaí, Defence Forces, non-commercial State bodies and other regulatory or similar bodies.
For certain public servants: qualifying and designated Office holders, 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 and higher contributions apply.
With regard to the recent teaching union claims that the scheme members will contribute more than they receive in benefits, I would firstly point out that 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 some 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 discussion.
The Trident Report assumes that the pension-related deduction (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.”
Contrary to the teaching unions’ claims, the new scheme has an employers’ contribution. The Trident Report itself estimates this at 4.9%. The C&AG recently estimated the annual pension cost for serving teachers to be 22.4%. The new scheme will reduce that by approximately one-third. The employee contribution continues to be 6.5% (3% on pensionable pay and 3.5% on net pensionable pay (i.e. reduced for social welfare integration)). This nets to 4.9%, according to the C&AG, leaving approximately a 10% employer contribution.
There are a number of other issues I want to bring to the attention of the House, a Cheann Comhairle.
The new scheme makes no provision for any enhanced pension arrangements for senior new-entrant appointees such as Secretary Generals 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 with annual accrued amounts indexed to the CPI and aggregated to produce a pension and lump sum at retirement.
In this way, pension will be a function of pay, and higher salary will mean a higher pension, proportionate to one’s time earning that salary. 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 this scheme to serving public servants also? I would like to make it clear I see a clear 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 or not to take the job on the terms offered, a serving person does not have that option.
As Deputies are aware, it has been necessary due 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 year.
These measures were taken to meet fiscal targets: the pension-related deduction, “the public service pension levy”, is expected to realise savings of about €900m in 2011; and 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 €100m 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 over many years.
To avoid a destabilising rate of retirements in 2011 and to manage the cost of retirements over 2011 and 2012, it was decided that the “Grace period” under which pre-cut pay rates would be used to calculate pension on retirement would be extended to end- 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 above will not apply to those retiring after that date.
On those who call for the single scheme terms to be applied to the future service of serving public servants, I would say this has not been agreed by Government nor is it part of the EU-IMF Programme. I do not consider, given the retrenchment already going on in the public service, 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.
I would like to take this opportunity to make clear that there is no change of any kind in the position in relation to the Public Service Agreement or the associated clarifications concerning the indexation of public service pensions.
There is an “enabling” provision in the Bill which would allow me to make an order to apply a CPI link to public service pensions should this be decided. As is well known, there are to be discussions about the issue under the Agreement and, if these should lead to a decision to make this change, I will have the necessary powers without having to seek approval for further primary 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. I believe this approach is entirely in keeping with both the letter and the spirit of the Agreement. And, of course, any changes would not be implemented during the present Agreement in accordance with the clarifications.
And now, a Cheann Comhairle/Leas Cheann Comhairle, I will outline the main provisions contained in 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 a commitment under the EU-IMF Programme of Financial Support for Ireland.
The Bill also includes, in Part 3, the necessary legislative amendments required to allow a reduction in pay rates for public servants and Office-holders, including Members of the Government and new members of the Judiciary, whose pay rates are determined in legislation.
The Bill is in 4 Parts:
Part 1 – Preliminary and General.
Part 2 – Public Service Pensions (with 5 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
(v) Consequential Amendments (Part 2)
Part 3 – Remuneration of Judges and Other Office Holders
Part 4 – 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 provisions, repeals of legislation and for 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.
Part 2 – Public Service Pensions
Chapter 1 – Preliminary and General – Part 2
The Sections in Chapter 1 define the terms to be used in the Bill and the Scheme. “Public servants” are defined as office holders or employees of public service bodies. The President, Members of either House of the Oireachtas, qualifying Office holders such as Ministers, the Attorney-General, the Ceann Comhairle and Ministers of State, Leas Cheann Comhairle, Cathaoirleach, Leas-Chathairleach and Leader of Seanad Éireann, the Judiciary and other designated Office holders are covered by the provisions of the Bill.
“Public service body” is defined as meaning the Civil Service, the Garda Síochána, the Permanent Defence Force, local authorities, Health Service Executive, the Central Bank of Ireland,
educational institutions and the non-commercial state bodies where a public service pension scheme exists or applies or may be made. The CPI is defined as being the Consumer Prices (All Items) Index.
Owing to the legal position of the Central Bank as part of the Eurosystem, the new Scheme will apply only with the agreement of the Governor – this is explicitly set out in the Bill.
This Chapter 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 – Single Scheme - Establishment and membership of Scheme, etc
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 who are 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 and, accordingly, a schedule of excluded bodies is proposed. Due 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 the new scheme.
This Chapter also defines “new entrants” to the Scheme. It provides, from the operative date, for a 6-month ‘holding period’ outside of public service employment beyond which someone who was at one time a public servant and who, on returning to be a pensionable public servant, would be regarded as a single scheme member and could not claim pre-single scheme pension terms.
The Chapter also provides for a public servant to retire at the age of 66 or the age to which the person would, from time to time, become eligible for the State pension. The proposed new retirement age of 70, at the latest, is also specified in this Chapter with exceptions made for elected Office holders and certain uniformed public servants.
Contributions by members of the Scheme, etc.
Chapter 2 sets out the provisions concerning pension contributions For most Scheme members these will be integrated with the Social Insurance System, i.e. 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.
Calculation of benefits and circumstances for payments under the Scheme
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 are protected through indexation to the CPI.
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 which represents 3.74 times the value of the State pension (Contributory)), which provides for some occupational accrual in addition to that being provided by the State pension until pay exceeds this figure. The pension accrual rate above this 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: the President, qualifying and designated Office holders, 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 higher 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.
The Chapter also provides for the payment of benefits in the case of cost neutral early retirement (from age 55), retirement on medical grounds and death in service.
Pension and other adjustments
Chapter 2 also provides that the post-retirement pension increases under the new Scheme will be based on the CPI and gives the Minister discretion over the timing of paying pension increases due under the Scheme.
Review of Scheme, etc.
Chapter 2 provides that the Minister may from time to time cause to be carried out a review, an actuarial review or an actuarial review and revaluation of the Scheme and, on foot of same, to revise, by order, the rate of contribution to the Scheme.
Other Provisions
Chapter 2 provides for a number of technical matters also, including the repayment of pensions overpaid and other matters including the treatment of simultaneous employment in more than one public service position under the Scheme.
Chapter 3 - Pre existing public service Pension Schemes
Chapter 3 includes an “enabling” provision to allow the Minister to make an order to apply a CPI-link to existing public service pensions.
Chapter 4 - Provisions applicable to all public service Pension Schemes
Chapter 4 requires those in receipt of a public service pension under the new or existing Schemes to give such information as is necessary for the proper operation of the scheme concerned. It also provides for the use of Personal Public Service Number (PPSN) as a unique identifier to record relevant details under the Scheme.
Chapter 4 also provides that pension abatement should apply whenever a retired public servant is rehired in the public service, regardless of the sector of the public service into which the person is rehired. At present, contractual or sectoral abatement provisions generally apply but this provision extends the principle to all.
It also imposes a cap of 40 years on the qualifying pensionable service accrued in different schemes.
Chapter 5 – Consequential Amendments (Part 2)
Chapter 5 sets out consequential amendments to ensure existing superannuation provisions do not apply to members of the Single Scheme.
Part 3
Remuneration of Judicial and other Office Holders
This part of the Bill deals with changes to the pay for new members of the Judiciary and certain other Officeholders.
The amendment of section 46 of the Courts (Supplemental Provisions) Act 1961 provides for revised salary rates for members of the Judiciary appointed after the Bill is enacted. The revised rates reflect the pay reductions and pension related deduction applied to other public servants, as well as 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 that referendum is 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 p.a).
There are also consequential amendments to the Ombudsman Act 1980 and the Planning and Development Act 2000 to provide that the salary of the next person appointed as Ombudsman or as Chairman of An Bord Pleanála will no longer be linked to that of a High Court Judge as is currently the case.
Clearly there is a Referendum happening with regard to Judicial Pay and I do not want to pre-empt this. Therefore Part 3 is subject to a commencement order being made. It may be necessary to bring forward amendments to the Bill to reflect the outcome of the Referendum in due course.
Part 4
Amendment of Acts relating to Financial Emergency Measures in the Public Interest
This Part contains amendments to the Financial Emergency Measures in the Public Interest Acts passed in 2009 and 2010.
The Financial Emergency Measures in the Public Interest (No. 2) Act reduced the rate of pay for public
servants, including Members of the Government and other Office holders. The Bill amends section 2 of that Act to reduce the pay for the Taoiseach, the Tánaiste and Ministers and to apply commensurate reductions to other Office holders.
The Schedule sets out a list of Bodies that are not covered by the measures introduced in Part 2 of the Bill.
Conclusion
This is a complex and wide-ranging piece of legislation. I would advise the House that I am considering a small number of minor drafting and technical Committee Stage amendments, for example, the definition of fully insured for Social Welfare purposes may need to be tightened up.
I look forward to hearing the views of the House here on second stage today and tomorrow and to considering amendments and suggestions put forward by Deputies in what I trust will be a productive and useful Committee Stage debate.
The major initiative which this reform of public service pension provision represents, together with the other measures in this Bill should, I believe, be recognised by this House as being careful, reasonable and equitable.
The new scheme will be more easily administered, it will be more transparent in terms of its costs and this will mean it is more clearly accounted for in our national accounts.
It will produce timely and significant savings for the Exchequer in mid-century when our dependency ratios are likely to have declined, this will help to control future public service retirement costs to help restore the outlook for our public finances.
And, finally, it will show our determination to provide properly and fairly for a secure retirement for former public servants.
A Cheann Comhairle/Leas Cheann Comhairle, I hereby commend this Bill to the House.