Heather Humphreys (Cavan-Monaghan, Fine Gael) | Oireachtas source

I move amendment No. 1:

In page 5, line 21, to delete "Section 15(b)and section 51come into operation" and substitute "Section 15(b)comes into operation".

I will speak generally to the total contributions approach and then to each amendment in the group individually to explain what it means.

The Pensions Commission recommended the full transition to a total contributions approach only and the abolition of the yearly average approach to be implemented as soon as possible, with a transition period of ten years. It also recommended that the current interim total contributions approach should become the definitive total contributions approach. In other words, 40 years, or 2,080 contributions, are required to qualify for a maximum rate of State contributory pension.

The total contributions approach includes provision for ten years of PRSI credits and 20 years of home-caring periods, but with a cap of 20 years of combined PRSI credits and of home caring. The total contributions approach involves a fairer and more transparent system, with the person's lifetime contribution more closely reflected in the benefit received. This approach will eliminate the anomalies inherent in the current yearly average system, whereby, for example, a person who joins the social insurance scheme at 55 may get a full pension whereas a person who has worked on and off for 39 years since school may get only a 90% pension. During the ten-year transition period, a person's pension will be calculated using two methods, and the person will be granted a pension using the higher of the two calculations. The first method will use the full total contributions approach, TCA, whereby a person will require 40 full years of reckonable contributions to receive a full pension. The second method will, in the first year of operation, calculate what a person's pension would be under the existing yearly average approach. The pension rate of payment will then combine 90% of the yearly average rate with 10% of the TCA rate. The proportion accounted for by the yearly average rate will then reduce by 10% over each of the subsequent ten years until the pension calculation is fully based on the TCA method only. The first year of phasing out will begin in January 2025, but it is important that these measures be enacted now so people are fully aware of the changes.

Amendment 1 is a technical amendment and is consequential to the later amendment to section 51, which introduces the actuarial rates for State pensions – contributory – for each of the deferred pension ages of 67, 68, 69 and 70. As a result of their insertion, this removes the need for a commencement order in respect of section 51.

Amendments Nos. 10 and 11 entail a substitution of line 10. It is a technical change to allow for the insertion of a new definition for the yearly average approach.

Amendments Nos. 13, 14 and 15 are technical amendments to include references to the new section 6D, which sets out the ten-year transitional arrangements for the total contributions approach.

Amendment No. 16 is quite long. It sets out the substantive and consequential changes required to the Act to provide for the ten-year phased transition to the total contributions approach, or the aggregate contributions approach, as it is called in the Act. The effect of the consequential amendments is to provide for the calculation of the contributory State pension under both the existing yearly average approach and the alternative yearly average approach.

Amendment No. 19 is another technical amendment, to reflect that the Bill will now contain provisions to provide for the transition to the total contributions method of calculation of the State contributory pension. This amendment changes the Title of the Bill to refer to this feature.

The matter is a bit complicated, to be honest. I will be happy to take questions. If the members want me to go through the information again, I will be happy to do so. I will give a quick overview. Basically, one of the key recommendations of the Pensions Commission was the transition to the total contributions approach. This entails a fairer system for calculating a person's pension. It takes account of the total number of contributions a person has made over his or her lifetime. You get your pension based on the total number of contributions. The yearly averaging approach has given rise to anomalies, whereby a person who works from the age of 55 to 66 could get a full State pension while a person who started working at 17 or 18 and was away for a few years, thereby not having the full amount, or who worked for, say, 39 years on and off, qualifies for a reduced pension. That is unfair. For that reason, and in line with the recommendations of the Pensions Commission, the Government has agreed, as part of a package of pension reforms, that the yearly averaging approach for calculating State pensions will be phased out over ten years. The phasing out will not start until January 2025. I am sorry but it is quite complicated.