Change in public service pensions for new recruits

The Irish Government has published legislation introducing changes to public service pensions for new entrants. It hopes to save 35% on state annual expenditure on pension schemes by 2050. Key changes mean the calculation of pensions based on ‘final salary’ will end and ‘career averaging’ will be introduced. Post-retirement pension increases will be linked to the consumer price index and the minimum public service pension age will rise to 68, with a maximum retirement age of 70.

Background

Changes in the Irish public service pension scheme were part of the structural reform proposals agreed in November 2010 with the EU/IMF in its Programme of Financial Support for Ireland (994Kb PDF). Current public servants will remain in their various current ‘final salary’ superannuation schemes and will not be affected by the new career average system, which only applies to new entrants. However since few new public servants are being recruited at the moment, due to a public sector recruitment moratorium, the effect of the new scheme in the short-term will be minimal.

Main provisions

The main provision of the new scheme is the calculation of pensions on the basis of ‘career average’ earnings, rather than on the current basis of an employee’s final salary.

Career averaging means that for a person retiring with 40 years’ service, instead of basing their pension on 40/80ths (or 50%) of their final salary, the pension will be based on 50% of the sum of 1/80th of that person’s salary in each of the 40 years they have worked, adjusted by the consumer price index, to compensate for inflation.

A statement from the Department of Public Expenditure and Reform said:

It is a fairer and more equitable system and one which is progressive in application, in that it affects the pension paid to those who have high earnings especially in late career (e.g, a civil servant promoted to top management later in their career) more than the pension for those who may have a relatively ‘flat’ career progression (e.g. nurses, teachers).

The new scheme provides for post-retirement pension increases to be linked to the consumer price index and not to pay increases. The Department of Public Expenditure and Reform says it estimates that the cost of retaining an earnings link over the past twenty years has resulted in increases of twice those which would have applied, had post-retirement pensions been linked to the consumer price index.

The minimum public service pension age will be raised initially to 66 to bring it into line with the social welfare state pension age, and it will then rise on a phased basis to 67 and 68.

The uniformed services (police, military and full-time firefighters) will retain their early retirement arrangements, which reflect operational needs, with adjustments that provide for even accrual throughout their careers. A maximum retirement age of 70 will also be set. Since 2004, there has been no maximum retirement age for most new entrants to the public service.

In addition, there will be a reduction in ‘fast accrual’ terms for judges and parliamentary members, but the new scheme provides for a doubled rate of accrual together with a doubled rate of contribution (13%) for all new entrants to these offices.

Trade union response

The changes were announced by the government following consultation with the public service unions, but no formal agreement was reached. Some changes were made to the proposals following the consultation process, for example improving the formula for integrating pensions with social welfare payments, to benefit some lower paid public servants. The government also clarified that indexing pensions to consumer prices will not happen for the duration of the Public Service Agreement 2010-2014 (324Kb PDF).

The new scheme has been strongly criticised by teachers’ unions. The primary teachers’ union, the Irish National Teachers Organisation (INTO), said the changes will force future teachers to pay more into the pension scheme than they will get out. The union accused the government of planning to walk away from its responsibility for pension provision. Sheila Nunan, General Secretary of INTO, was reported as describing the measures in the Bill as unfair, unnecessary and ‘probably unlawful’. Secondary school teachers' union the Association of Secondary Teachers Ireland (ASTI), has said it is considering challenging the measures in the courts.

Commentary

Of the €1.8 billion annual savings (in 2010 terms) – or 35% – that is eventually expected to be made in the public service pension bill from these changes, about €1 billion (55%) is expected to come from career averaging, €300 million (17%) from increases in the pension age and €500 million (28%) from changes to the indexation system for pensioners.

While the changes will have a greater effect on public servants whose salaries increase significantly over their careers, all future public servants will be on lower pensions than they would have been under the current system.

Roisin Farrelly and Colman Higgins, IRN Publishing