An Bord Snip: Public Sector Pensions

For all its amazing level of detail (farewell then, Newfoundland-Labrador Partnership p204 Vol II), there are a couple of issues where An Bord Snip Nua puts some hot potatoes on the table and then kicks to touch (to mix the metaphors). 

Public sector pay was outside its remit but it the report aims particular fire at public sector pensions noting that on an accrual basis they account for €7.7 billion of expenditure — the annual incurred costs for future pensions is over twice the cash cost of existing pensions.  As the report explains, the basic public pension is of the final salary type: pension = half of average salary in last 3 years of employment.  Calculation assumes 40 years of service but with pro-rata reductions for less than 40 years and accelerated eligibility schemes for certain groups (e.g. police and judges).   

As the report implies, the mathematics of final salary pensions are highly favourable to the recipient, whereas a defined contribution pension such as in the private sector will reflect average earnings over the career and the money with the longest time invested will reflect the earliest salary whereas the public sector pension puts all the weight on the highest salary portion of the career.  Not only that, but the pension is then earnings-linked, so rises with the earnings of people currently in the public sector.  Due to national productivity growth, earnings growth typically exceeds inflation so the real value of the pension is growing during retirement.  Again very unlike private sector pension where you’re at the mercy of financial markets over the earning and retirement cycle. 

According to the report, there already was a paper on pensions (2007) about which nothing has been done, but it asks that its options be back on the agenda: higher retirement age, higher contributions (which I suppose they’ve now done with the levy), modifying the earnings link, no accelerated eligibility schemes, and shift to career average pension calculation. 

That section of the report closes with two warning shots to the government but also to a beneficiary group –

Reforms along the lines set out above, while undoubtedly significant in terms of longer-term affordability and sustainability if applied to new entrants, will not yield any immediate savings for the public finances unless they are applied for the existing cadre of public servants and pensioners.

Finally in this regard, the Group observes that the burden of budgetary adjustment, both in terms of the measures introduced over the past year and of the measures proposed in this Report, will be borne broadly across most areas of society, with the exception of those people currently in receipt of public service pensions. Bearing in mind that such pensioners in many cases have earnings-linked pensions at present, the Group believes there is a case for the Government to consider how best to secure an appropriate contribution from this sector of society.

In their statements today, the unions are yelling about pay cuts.  One wonders if they intend to leave the latitude for reduced growth in pensions, because that’s where An Bord Snip Nua is telling the government to look.