Nobody in the room takes any account of the elephant
Radical action is needed to fund future pensions, but mandarins don't do radical, writes Adrian Daly
WHILE the pensions deficit at Irish airports has been capturing headlines, it ignores two Jumbos in the room. Firstly, the sustainability of public sector pensions, and secondly, the fact that over half of private sector workers have no pensions provision other than the basic State pension.
The OECD has pointed out the unequal treatment of private and public sector workers when it comes to pensions in Ireland. This is partly due to the prevalence of Defined Benefit (DB) schemes in the public sector and Defined Contribution (DC) in the private sector.
If the status quo continues then we may be facing the politically unappetising prospect of the State Pension being reduced by stealth or means-tested or tax increases so that DB schemes can continue to be provided for the public sector.
Of course, public sector workers rightly say that they have had to endure increased pensions contributions recently. The fact remains that a private sector worker would have to contribute approximately 20 per cent of annual income to receive the level of pensions payment available generally across the public sector.
The standard public sector pension is 50 per cent of final salary plus a lump sum of 1.5 times salary. The Irish Civil Service Pensions Information Centre website gives an example of the value of this. If you retired as a Principal Officer at 65 the cost would be €1.34m. i.e. a private sector worker would have to save €1.34m in his or her DC pension pot to earn the equivalent retirement income of a Principal Officer. The figure for a Higher Executive Officer is €693,000 – a considerable amount for the average employee to save over his or her lifetime.
Public sector pensions are provided on a pay-as-you-go basis i.e. the State meets the cost of these pensions out of income and other taxes. Demographics indicate that over the next few decades, proportionately there will be fewer workers supporting more retired people. As a consequence the relative cost of public sector pensions will continue to rise.
Charlie McCreevy recognised the potential problem and perceptively set up the National Pensions Reserve Fund as a means of part-funding pensions for the future. Unfortunately, due to the banking crisis, this has been raided so that there is very little left in the kitty.
It has been estimated that current State liability for future public sector pensions is of the order of €110bn, or nearly double the cost of the banking crisis bailout. To decrease this liability the Government has moved to reduce pensions for new entrants to the public sector. The Single Public Service Pension Scheme commenced with effect from January 1, 2013. But the OECD has expressed concern that changes to the system are being phased in too slowly.
It is in the interests of not only private but public sector workers that we decide on a strategy now so that we will be able to afford the State Pension into the future, increase coverage for private sector employees and have the resources to fund public sector pensions. Radical solutions are required. These can include:
* Make pension contributions mandatory for all
Not just private sector workers but public sector workers should be required to pay into a defined contribution (DC) scheme. This should be incentivised by the Government for both public and private sector workers by the equivalent of an SSIA for pensions. Something similar has been recommended by Scottish think tank Reform Scotland which goes so far as to recommend that not just public sector pension schemes but State pensions should be scrapped and replaced with individual defined contribution pots for all.
It argues that this would provide all workers with greater security and certainty as well as a sustainable solution for the country's public finances.
* Keep fund away from State interference
The fund must be managed and put beyond the reach of Government or State agencies such as the NTMA. The Government has proven itself incapable of resisting the temptation to raid pension funds as seen during the banking crisis and proven by its 'temporary' 0.6 per cent levy which was only temporary in that it was replaced with a 0.75 per cent one this year and 0.15 per cent in 2015.
* Look after Sir Humphrey
Is it a coincidence that, as a general rule, the most generous pensions are paid to politicians and civil servants who decide policy?
As evidenced by the immortal Sir Humphrey in Yes Minister, most senior civil servants are unlikely to recommend anything too radical, especially if it affects them personally. For this reason, Ireland's new equal pensions structure should be planned now, to come into force at a date in the future when it does not impact existing senior advisers.
Failure to take radical action now will have unfortunate consequences for both private and public sector employees who hope for a secure retirement in the future.
Adrian Daly is CEO and founder of Source Pensions which has offices in Dublin and London. Visit them online at www.sourcepensions.ie
Sunday Indo Business