Tuesday 15 October 2019

The timebomb that is public sector pensions is still ticking away

Michael Noonan has taken from the private sector – but can colleague Brendan Howlin afford to give to public servants?
Michael Noonan has taken from the private sector – but can colleague Brendan Howlin afford to give to public servants?
Richard Curran

Richard Curran

Driving past the Blackrock Clinic in South Dublin recently I noticed a billboard-style advertisement at the entrance saying it had job vacancies for health professionals.

Why would one of the leading private hospitals in the country place an ad like that at the entrance to its driveway, I thought? One reason is that nurses who work in the public hospital system enjoy unrivalled job benefits in relation to security, pension, time off, etc.

Another reason is that the moratorium on public sector appointments which lasted several years hooked the public sector health system on using private agencies to plug holes in the heavily-burdened system.

So private sector employers face stiff competition from the public sector and the agencies in attracting staff.

This doesn't fit very well with the narrative we hear every week about the need to restore the pay of public sector employees who are struggling.

As the Government enters talks with public sector unions about pay and pensions, some real context to those discussions is badly needed.

Restoring public sector pay, implies bringing it back to where it was. This means taking it back to levels reached after two benchmarking processes, 2002 and 2007, which were deeply flawed and financially disastrous.

Many allowances were not considered part of core pay back in the benchmarking process.

But when Brendan Howlin tried to get rid of them a few years ago, they were considered core pay.

The 2007 benchmarking report said: "The security of tenure of state jobs may be seen as having less value at present than in previous periods of high unemployment."

Within three years, over 300,000 private sector jobs were gone.

The unions enter these new public sector pay talks this week with an armoury of demands. Abolishing the 7.5pc pension levy on public servants is a key one.

Undoubtedly the public sector is now deeply divided between those who got in before the crash under the old pension system and those who joined more recently who enjoy a very different employment experience.

There is no use telling teachers on short-hour contracts that they are financially pampered, or telling part-time lecturers with no real job security and very modest wages, that they are part of a working elite. However, the difference between these "pension haves and have-nots" within the public system is vast. We simply cannot afford to restore and then maintain the pension provisions of the "haves" at a time when private sector pensions are being decimated.

Just 15pc of private sector defined benefit schemes wound up delivering 100pc coverage. Many are insolvent and the carnage in pension provision has become sharply contrasted with the pension payouts to many in the public sector. Bear in mind Michael Noonan has also grabbed €2.2bn from private sector pension pots in the last four years.

When the crash started in 2008 the public sector pension bill was €1.6bn that year. This year it is targeted to hit €2.8bn. Education pensions will cost €1.1bn this year. Garda pensions will cost €309m. Health pensions will cost €499m. Incredibly, army pensions this year are set to cost €220m or almost half a billion over just two years.

The government has done some very good work in containing the pensions bill into the future. But it isn't enough.

Over the next 70 years the bill is expected to be around €98bn, instead of the €116bn estimated back in 2009. Changes for new starters and new rules about when retirees can start receiving their pension, have helped achieve that.

Another €16bn could be saved by linking future pension increases to rises in the cost of living instead of pay rises to whoever is doing that persons job now.

How bonkers is it that a civil servant who retired in 2005 could receive a pension today that is not two thirds of his final salary, but two-thirds of the salary of the guy doing the job today?

The Government has to make the temporary moratorium on this insanity into something permanent. The unions probably realise this, but will want something substantial in return. Making concessions on pensions can be hugely expensive into the future.

Public servants are shown to live longer on average than their private sector counterparts.

A government report found that a public service female now aged 60, will on average live to age 90. Pensions have a very long reach. As recently as 2013, the exchequer was still paying a pension to the child of an Irish Civil War veteran.

Irresponsible decisions by the last Fianna Fail governments let the public sector pay and pensions bill get out of control. Temporary crisis measures introduced by this government have pulled that back somewhat. The question now is what measures remain in place indefinitely?

Whether the public sector pension bill is €98bn or €82bn in the coming decades is irrelevant if we don't have a plan as to where the money is going to come from. Right now, we don't. Public sector pensions are paid out of general government funding. Charlie McCreevy's National Pension Reserve Fund was set up to build a fund to cover this bill in the future.

It was raided to bail out the banks. The €6.9bn not used to bail out banks is now being used to invest in Irish businesses. However, if you take that €6.9bn, and the book value of the remaining stakes in the banks, including a valuation of over €11bn on AIB, the fund today is not that far short of where it was before the crisis. There is still over €20bn of assets in there.

What is the plan for that money? There isn't one. Public expenditure minister Brendan Howlin has talked about the possibility of setting up a new fund to cover the future cost of pensions. It is definitely needed. But wouldn't it be ironic for the same government to set up a new fund, just after it had diverted €6.9bn away from future pension provision and into funding SMEs?

A new fund would provide a focus and a plan. But the exchequer is still borrowing money every week to keep the lights on. So we would end up borrowing money today to fund future pension provision. This is high risk, especially when you are about to start awarding public sector pay increases.

Because public sector pensions are defined benefit and linked to pay, a pay increase today jacks up the cost of the pensions bill for decades to come.

It seems fitting that the State should set the standard as an employer in this country. Working for the state should be as good an experience in terms of pay and conditions as you will find.

When it comes to pensions however, the public sector/private sector gap is just too wide.

We shouldn't sign up to 70 years of pension payments we can't afford.

Indo Business

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

Don't Miss