Mr. Ciarán Lawler:

I thank the committee for the invitation to speak. We have provided members with some briefing material in advance of the meeting, which I hope they found useful and informative. The issue of benchmarking and indexation of social welfare payments has been a topic of discussion for many years. It stretches back to the Commission on Social Welfare in 1986, through to the national pensions policy initiative in 1998 and the Final Report of the Social Welfare Benchmarking and Indexation Group in 2001, which was established under the Programme for Prosperity and Fairness. More recently, the focus has been on State pension payments. A Roadmap for Pensions Reform 2018-2023 proposed a benchmark of 34% of average earnings as a rate of payment with future increases linked to the consumer price index and wage levels. The Roadmap for Social Inclusion 2020-2025 presented a defined approach to benchmarking and indexation of pensions, known as the smoothed earnings approach. This is the approach that has been considered and endorsed by the Commission on Pensions and, along with other commission recommendations, will be considered by the Government in the weeks ahead.

As the committee is fully aware, the rate of State pension each year is decided as part of the budgetary process. The introduction of a system of benchmarking or indexation can help to alleviate some of the difficulties inherent in that process. I will highlight a few of them. First, with no explicit link between pension rates and earnings, the real value of pensions relative to market-based earnings can deviate from year to year. Similarly, with no link to prices, the real value of pension rates can lead ahead of, or lag behind, changes in prices. Second, the uncertainties created by the current process, given the scale of spending on pensions, make public expenditure planning and budgeting across all of Government uncertain. It is worth noting the Department of Social Protection is now the highest spending Government Department and pension expenditure will comprise approximately 40% of the Department’s entire budget in 2022. Third, workers planning retirement arrangements face significant uncertainty with regard to the real value of the State pension at retirement, which impacts upon their ability to make appropriate private pension arrangements.

A number of approaches could be taken to indexing pensions, some of which witnesses have outlined to the committee over the past number of meetings. While not exhaustive, these include indexing to rises in prices; indexing to rises in earnings; indexing to a certain percentage increase each year; or indexing to the higher of a number of indicators. Again, there can be difficulties with each of these approaches. For example, linking to prices only would risk pensions falling behind average incomes in society generally, linking to earnings only may lead to the real value of the pension falling during periods of high inflation, and increasing to a set percentage each year does not take account of either earnings or prices and, while it guarantees certainty to pensioners, does not take account of developments in the wider economy. Finally, linking to the higher of a number of indicators leads to a ratchet effect whereby the rate, over time, will exceed all of the indicators chosen and outstrip both earnings and prices. As noted by the Commission on Pensions, this can lead to fiscal sustainability issues and has been a recent subject of controversy in the United Kingdom, which has adopted a triple-lock approach.

The smoothed earnings approach endorsed by the Commission on Pensions seeks to overcome this by smoothing pension increases over time, anchoring to a particular benchmark such as a percentage of earnings, but indexing the pension rate to prices during periods where inflation outstrips earnings. In subsequent years, when the value of the benchmark exceeds a prices-adjusted rate of pension, it is again tied to the benchmark. In effect, over time this anchors the pension rate to the benchmark level over the medium term.

Ireland is an outlier in not having a benchmarking or indexation mechanism for State pensions. Throughout Europe and beyond, governments have adopted approaches to calculating state pension increases that rely on earnings or prices indicators – or a mix of both – to determine annual pension rates. Having said that, to adopt this approach would be a fundamental shift in how budgetary planning decisions are made. In this regard, as outlined in the Roadmap for Social Inclusion, the approach could be overseen by an independent, expert body and could operate in a similar manner to the Low Pay Commission by making annual recommendations to the Government. The body could also periodically review the effectiveness of the approach.

In the time permitted, we hope to give the committee an insight into current thinking around the benchmarking and indexation approach under consideration. I thank the Chairman. My colleagues and I are happy to respond to any questions members may have.