Special Report 68:  Central Government Pensions   Summary

Summary of Findings

Public service pension schemes cover over 300,000 staff and more than 100,000 existing pensioners, and their dependents. These schemes usually have two components - a main superannuation scheme and an associated contributory spouses’ and children’s scheme. Most public service pension schemes are defined benefit schemes under which benefits payable are based on the level of final salary at the date of retirement with post retirement increases being awarded in line with pay increases with the consent of the Minister for Finance.

For the purposes of the examination pension consultants were engaged to estimate the

  • accrued public service pensions liability in respect of public service staff 
  • pension cash flow projections over the next 50 years 
  • the cost of providing superannuation benefits for the various categories of public sector employees in terms of their payroll costs.

The examination also looked at the administrative, funding and accounting arrangements for pensions of public servants.

Recent Developments

Under the Financial Emergency Measures in the Public Interest Act, 2009 the Government introduced a pensions related deduction with effect from 1 March 2009 for public service staff. The deduction is charged on all income, including non-pensionable remuneration.

The Financial Measures (Miscellaneous Provisions) Act, 2009 was passed in June 2009 to provide for the transfer to the National Pensions Reserve Fund (NPRF) of €1.7 billion of the assets held by some State Sponsored Bodies and universities, together with liabilities which were valued at €3 billion at 31 December 2008. It is proposed that the assets transferred will be managed by the NPRF and that the liabilities will be met in future on a pay-as-you-go basis.

Scope of Examination

The scope of the examination encompassed pension schemes of civil servants and public servants in the Health Sector, the Education Sector, the Garda Síochána, the Defence Forces, the Prison Service and in non-commercial State Sponsored Bodies. While Local Government pensions do not fall within the detailed scope of the examination an estimate of the accrued pensions liability of local authority staff, based on relativities derived from the Report of the Commission on Public Service Pensions (2000), has been made in order to project the overall pension liability of the State at 31 December 2008.

Cost of Pensions

At 31 December 2008, estimated pension liabilities of €108 billion had accrued. A small number of State Sponsored Bodies and five universities operate funded schemes which were valued at approximately €1.9 billion at 31 December 2008 including the €1.7 billion to be transferred to the NPRF. After taking account of the assets held in the funded schemes and €5.4 billion of assets held in the NPRF, it is estimated that the net present value of the accrued pension liabilities at the end of 2008 amounted to €101 billion.

While the liability of €101 billion is a measure of the cost that has accrued to date, it is also useful to examine the likely cash flows that will occur. Gross outflows in the period 2009 to 2058 were estimated at €367 billion. When standard staff pension contributions and the recently introduced pensions related deduction are taken into account net outflows over the 50 year period are estimated at €157 billion in 2008 prices.

Currently, net public service pension payments absorb 0.5% of GNP and as a result of the projected increase in the number of pensioners it will be necessary to devote 1.8% of GNP to meet the net cost of pension payments by 2058.

Overall, the examination found that, based on the cost of one year’s additional service, the pension provision for an average public servant will cost around 9% of pay after account is taken of contributions made including the new pension related deduction introduced in 2009. The gross cost is on average 20% under this method. The examination also found that there are wide variations by sector largely due to the fact that full pensions can be earned over a relatively shorter working life in certain areas of the public service.

Funding of Pensions

There are two broad choices for the Government in funding pensions. The first is to set funds aside and invest them in order to meet future pension liabilities or, alternatively, to meet future payments out of the revenue of future years on a pay-as-you-go basis. Most public service occupational pension schemes are financed on a pay-as-you-go basis, with the annual cost of pensions being met from current revenue in the year of payment.

A middle way is to even out the burden of future liabilities by the creation of a pensions reserve fund which can smooth out the impact on future taxation by setting a long-term sustainable pension charge target. The National Pensions Reserve Fund is based on this approach. The Fund was established on a statutory basis in 2001 to set aside and invest 1% of GNP annually until at least 2055. No money can be drawn down from the Fund until 2025 and drawdowns can continue until 2055. At 31 December 2008 the Fund was valued at €16.1 billion.

Accounting for Pensions

From an accounting viewpoint, there are two bases of accounting employed in the public sector. The pension costs of Departments and Offices, Institutes of Technology and Vocational Education Committees, are reported at the point of payment while costs in the case of most State Bodies and universities are reported as they accrue.

A drawback of recognising pension costs only when they are paid is that the financial statements do not capture the true cost of pensions and are inadequate to signal the long-term cost of recruitment decisions or decisions that extend scheme coverage or improve pension terms. The wider introduction of an accruals basis of accounting would bring greater cost transparency and make explicit the true financial impact of resourcing decisions.

Whole of Government Pension Cost

The Commission on Public Service Pensions recommended that actuarial reviews of public service pension schemes and projections of public service pension outflows should be carried out by the Department of Finance on a three-year cyclical basis. Regular reviews have not been undertaken but are carried out from time to time. Actuarial reviews and projections of public service pension outflows should be carried out on a regular basis which would ensure that the State is aware of the cost impact of pensions and the timing of pension outflows. The Department of Finance has stated that it intends to include an estimate of the accrued liability for the whole public service in the Finance Accounts with effect from the accounting year 2008.

It is important that steps are put in place to prepare the ground for mandatory compilation of estimates of the liabilities of unfunded pension schemes which will be introduced under EU regulations in five years time.

Pension Data

The quality of data obtained for this examination varied considerably between sectors and between agencies within a sector. Data was not always complete and the main deficiencies were the failure to maintain full employment records in electronic format on preserved pensions, pensionable allowances, added years and employment status.

The Commission on Public Service Pensions recommended the development of a specialised, computerised pensions administration system capable of sharing data between the major public service employers. This has not yet been implemented.