Saturday 20 July 2019

Semi-states are staring into €3.6bn pension shortfall

The semi-state sector has a combined pension fund deficit of more than €3.6bn – almost twice what the Government will hack from our economy in tax rises and spending cuts in October's Budget

Aer Lingus and Dublin Airport Authority have been told to pay more into a workers' pension scheme
Aer Lingus and Dublin Airport Authority have been told to pay more into a workers' pension scheme

Dan White

LAST week the expert panel set up to resolve the €780m deficit in the Irish Aviation Superannuation Scheme (IASS) – which pays the pensions of former Aer Lingus and DAA staff – published its report.

It was not happy reading, recommending that Aer Lingus contribute a further €146.7m to the IASS and the Dublin Airport Authority (DAA) €57.3m.

The publication of the expert panel report highlighted once again the huge pension fund deficits at some of the major semi-states, both commercial and non-commercial.

Based on the €780m deficit at the IASS and the figures contained in the most recent published accounts of the other semi-states the combined pension fund deficit now stands at a towering €3.65bn.

Despite all of the publicity surrounding the IASS, the biggest single pension fund deficit exists not at one of the large commercial semi-states but at Forfas, the organisation that oversees the industrial development bodies IDA Ireland and Enterprise Ireland.

At the end of December 2012 there was a pension deficit of €1.187bn at Forfas – almost a third of the total semi-state pension hole. On closer examination the situation becomes even more intriguing.

While there is a pension deficit of almost €1.2bn at Forfas it turns out that there is no pension fund. Instead, the Forfas balance includes a "deferred funding asset" of €1.187m – basically an IOU from the Government promising to pay the future pensions of IDA Ireland and Enterprise Ireland staff.

Each year the Government votes Forfas the funds needed to meet its pension costs, about €40m in 2014. In practice, if not in precise legal form, the Forfas pension scheme is of the pay-as-you-go variety rather than a conventional pension scheme paid for through a fund financed by a combination of employer and employee contributions.

Legislation currently going through the Oireachtas will re-absorb Forfas back into Department of Enterprise and Employment, which will effectively give legal form to the current de facto situation.

That is not the case with the commercial semi-states including the ESB, DAA, CIE, Coillte, Bord na Mona, RTE and BGE. AIB (99.8 per cent state-owned) and Aer Lingus (100 per cent state-owned up to 2006 and in which the Government still has a 25 per cent stake) also fall into this group. All of these companies have pension fund deficits.

The ESB had a combined pension deficit of €876m, €766m at the ESB Group and a further €110m at its NIE subsidiary, at the end of December 2013.

According to an ESB spokesperson: "The €766m you refer to in the annual accounts does not refer to a pension deficit. It refers to commitments made by the company to make future payments to the ESB pension scheme over a scheduled period of time. The largest component relates to an agreement reached in 2010 to address an ongoing actuarial deficit of €2bn that existed in the scheme at that time.

"At that time, the company and staff reached agreement to introduce a series of measures to resolve the deficit.

"The 2010 agreement resolved the €2bn ongoing actuarial deficit in the scheme and since 2010 there has been no ongoing actuarial deficit in the ESB scheme (that is, the actuary believes that the scheme can meet its obligations on an ongoing basis)."

While this may well be the case, the 2013 ESB annual report specifically uses the term "deficit" to refer to the €110m shortfall at NIE while describing the €766m gap at the ESB Group as a "liability".

What is indisputable is that the health of the ESB pension fund remains a serious bone of contention at the firm. The ESB came within a week of strike action last December in a row over pensions.

The pensions issue is equally contentious at other semi-states and former semi-states. Aer Lingus, which had previously promised to inject €110m into the IASS, seems to have set its face against upping its contribution to the €146.7m recommended by the expert panel. Will the State, which owned all of Aer Lingus up to 2006 and still has a 25pc shareholding in the airline, end up by picking up the tab?

The response to the report from the DAA, which is still 100pc state-owned, has been far more measured.

"DAA will review the report in detail and revert to the expert panel as appropriate," said the company in a statement.

"It remains a priority for DAA to resolve the long-standing, complex issues that have impacted the IASS pension scheme and to establish new, soundly-based pension arrangements for the benefit of all DAA employees."

While most of the semi-state pension funds may be in rag order at least the obligation to publish details of their pension arrangements in their annual reports means that there is a degree of transparency.

This is almost totally lacking in the case of the pay-as-you-go pensions paid to most former civil servants, teachers, guards, nurses, etc.

The potential unfunded liabilities being piled up by the State to meet future pensions to its former employees are truly frightening.

A 2009 report by the State's spending watchdog, the Comptroller & Auditor General, calculated that the State was on the hook for €108bn of unfunded public service pension liabilities at the end of 2008. Bringing this liability onto the Government balance sheet would instantly increase the national debt by more than 50pc. When seen in this context, the IASS deficit hardly amounts to a rounding error.

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