Sunday 8 December 2019

Put guaranteed public sector pensions back on negotiating table

Pensions' Authority chairman David Begg Photo: Damien Eagers
Pensions' Authority chairman David Begg Photo: Damien Eagers
Martina Devlin

Martina Devlin

Here's something we need to talk about honestly. There is a danger that public sector pensions will bring this country to the brink of financial ruin again - not in the space of decades but within a handful of years.

Public pensions are a perk enjoyed by some 18pc of the workforce, paid from the taxes of the other 82pc - who can only goggle at those guaranteed income levels after retirement. Meanwhile, many private schemes are floundering or closing down, with promised benefits turning to pie in the sky for workers who contributed to them in good faith.

The public service pension obligation is an oppressive and unmanageable burden on the State. It's a bill poised to keep growing, with life expectancies increasing. The Government should grasp this bull by the horns now, rather than wait for the inevitable blood, sweat and tears.

At least pension benefits are calculated now on career averages, rather than final salary, as was the case pre-2012. But such steps, while useful, are insufficient. Unless radical reform happens soon, a crisis is inevitable.

I have a possible solution. Why not tax public pensions as a benefit in kind? After all, public servants pay an average of just 7pc towards the pension, a contribution which comes nowhere close to reflecting market value.

Company cars are taxed as a benefit in kind, because undeniably they are a perk, so why exempt pension schemes? Pensions are not a form of deferred salary - they are closer in spirit to a whopping bonus.

The pension levy has yielded savings of more than €900,00 per annum since its introduction in 2009. But it could raise considerably more if the Government stopped viewing public pensions as a relatively unimportant fringe extra. Benefit-in-kind tax would help to offset the pensions' steep cost to the Exchequer.

Of course, politicians are beneficiaries of public pensions, with a vested interest in resisting reform. But they ought to have an equally compelling interest in helping the State to remain solvent.

Siptu has authorised unions to begin balloting on December 1 for industrial action on pay, with statements from Liberty Hall citing the need to recover lost ground. Every time this 'pay restoration' phrase is aired - and the latest version is 'faster pay restoration' - I'd like to hear discussion about public pensions, too. That 7pc levy is a measly contribution.

Let's consider the private sector. The cost of buying a private pension has surged in the past eight years, due to falling interest rates and longer life expectancies. In 2006, it cost just under €167,000 to fund a modest annual pension payment of €10,000. In 2016, that accelerated to almost €278,000 - a 67pc increase.

Now, weigh up the cost of funding a public servant's pension of, say, €30,000 a year. Based on the figures just cited, the price tag stands at €834,000. A €40,000 annual pension costs €1.1m for just one public servant. Start dealing in multiples of public servants, and the State rapidly finds itself with obligations running into billions of euro.

The conclusion is inescapable that such pension arrangements aren't to Ireland's advantage. This is only working for one sector of the population.

Elsewhere, the pensions time bomb is ticking at an ear-shattering pitch for the 600,000 private sector workers on defined benefit pensions, as contributors face losing out on expected payments.

Deficits in the pension funds of our largest companies and semi-states have rocketed, with more schemes at risk of shutting down, according to research from LCP Ireland consultants published this week. Almost a third of defined benefit schemes have closed in the past decade.

In August, Pensions' Authority chairman David Begg (pictured below) warned that the average private sector worker only has enough in his or her pension pot to give an annual income of €3,000 on top of the State contributory pension.

Yet at least they have something to supplement the State pension. Just four in 10 private sector workers save towards a pension, according to the Government's 'Fuller Working Lives' report. Not because they can't be bothered but because they can't afford to do it, presumably.

Private sector workers do qualify for tax relief on contributions, of course. And while such tax offsets incentivise, it cannot compare with what the public sector receives. A guaranteed, risk-free public pension is a huge plus for any employee. It is subject neither to the vagaries of yields in the bond market, nor vulnerable to being summarily reduced.

Most people paying into a private pension simply don't know how much income they'll receive on retirement. But promised benefits for public pensions must be paid regardless of the State's finances.

I'm not trying to attack the public sector, which provides valuable services on which the public relies. But it's paid employment, not a gift to the nation. And little mention is made of the total package - only wages are cited.

Granted, public sector workers made sacrifices during the collapse. Most suffered two reductions in earnings since 2009 and some experienced three. But they kept their jobs. And those pensions.

Austerity wasn't applied solely because of the banks' behaviour, reckless and greedy though they were. Two-thirds of our national debt went on public spending (it encompasses pensions, as well as pay and social welfare), while one-third bailed out the banks.

So prudence and the national interest require public pension reform to be put on the table. Let's get the discussion started, and if recipients believed they ought to retain these pensions as compensation for their work, then let's air the defence. But let's consider, too, the State's ability to meet its obligations, including what - or who - might be sacrificed in the process.

We are constantly told - as we were during the boom - about the need to attract and retain a skilled public sector workforce, offering pay rates competitive with elsewhere in the economy. But pensions continue to be downplayed as a lucrative part of the sector's terms and conditions.

If pay restoration is agreed, pension reform should be the price that's paid for it. Even if there are costs associated with pension restructuring, the process should begin at once.

This issue has 'urgent' stamped in giant letters all over it.

Irish Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss