Ms Mary Kennedy:

I thank the Chairman and members for inviting us to appear before the Joint Committee on Education and Social Protection to present the findings of the actuarial review of the SIF as of 31 December 2010. Members will have received copies of my speaking notes and copies of the report itself have also been provided to the committee. I am the principal officer for PRSI policy in the Department of Social Protection. I am accompanied by Patricia Murphy, principal officer for pensions policy, Paul Morrin, principal officer and statistician, Aideen Mooney, assistant principal for PRSI policy, as well as Joanne Roche from KPMG.

Section 10 of the Social Welfare Consolidation Act 2005 requires the Minister for Social Protection to carry out actuarial reviews of the financial condition of the SIF. The purpose of these reviews is to determine the extent to which the fund may be expected, in the longer term, to meet the demands in respect of payment of benefits and other payments, having regard in particular to the adequacy or otherwise of the contributions. The review also examines other matters the Minister considers relevant in terms of affecting the current and future financial condition of the fund. The Minister is obliged to ensure that actuarial reviews are carried out at five-year intervals. On completion of the review a report is to be provided to the Minister and laid before each House of the Oireachtas within six months.

Following a tendering process, the third actuarial review of the SIF, as of 31 December 2010, was completed by consultants KPMG in June 2012 and laid before each House of the Oireachtas on 24 August 2012. The review covers a 55-year period from 2011 to 2066 and builds on the findings of the 2000 and 2005 actuarial reviews of the fund. The scope of the 2010 review was to update the results of the 2005 review taking account of policy, economic and demographic changes, with particular reference to income and expenditure projections as well as break-even contribution rates. The review also considered the effects of various policy options, existing Government commitments and planned reforms.

The SIF is the core of the social insurance system. Social insurance, or PRSI, contributions from employers and employees are paid into the fund to finance a broad range of short- and long-term social insurance benefits for employees. A lower rate of PRSI is paid by the self-employed into the fund, which provides them with access to long-term social insurance benefits. The long-term schemes cater for retirement, survivor and maternity benefits, while the principal contingencies covered by the short-term schemes are illness, incapacity, unemployment and maternity.

The fund operates on a pay-as-you-go basis, with the Exchequer acting as the residual financier where there is a shortfall between PRSI contributions received and the cost of social insurance benefits paid. Exchequer subvention was the norm for over 40 years up to 1997. For example, in 1985 the Exchequer contribution was almost 29% of SIF expenditure. However, no Exchequer contribution was required over the period 1997 to 2009, inclusive. In 2008, the current operating balance of the SIF moved into deficit when expenditure exceeded income by €255 million. In 2010, the need for Exchequer subvention arose for the first time since 1996 as the surplus carried forward from previous years was eliminated. The Revised Estimates for the Department provide for a deficit of nearly €1.82 billion in 2012.

The report of the 2010 actuarial review projects the financial sustainability of the fund based on a set of agreed assumptions and a series of projections of the fund's income and expenditure for the period 2011-66. While the effective date for the review is 31 December 2010, the review took account of budgetary and legislative changes affecting benefit and contribution levels, particularly the range of changes provided for in the national pensions framework.

While, as stated by the consultants, long-term projections by their very nature are unlikely to be borne out in practice, the report emphasises the trends which emerge over the period. In terms of sensitivity, the results presented, when expressed as a percentage of GNP, are not particularly sensitive to alterations in macro-economic variables. The projections presented are, however, particularly sensitive to the approach used to index benefit payments by reference to either national average earnings or the consumer price index and the future population profile, which is affected by increasing life expectancy, fertility rates and migration flows.

I will now cover the findings of projected shortfalls in the review. In the absence of any action to tackle the shortfall, the excess of expenditure over income of the fund will increase significantly over the medium to long term. The provisional 2011 deficit of €1.5 billion will double to €3 billion by 2019 and will have increased to €25.7 billion by 2066. These figures refer to the projected annual deficit in the particular year in question. The figure quoted recently in the media of €324 billion refers to the sum of all annual deficits up to 2066, expressed in current terms, assuming no action is taken. Expressed as a percentage of GNP, the shortfall is projected to increase from 1.1% of GNP in 2011 to 2% in 2019. It will further increase to 6.4% of GNP in 2052 before gradually reducing to 5.7% by 2066.

In the absence of reductions in expenditure levels or increases in PRSI income beyond those planned changes to May 2012, which have been factored into the projections, significant Exchequer subvention will be required to meet ongoing expenditure requirements. Exchequer subventions will need to more than treble from 2011 levels by 2030 and increase by a factor of almost eight by 2040.

There are various drivers of changed fund outlook. The main driver of the increase in overall projected expenditure is pension related expenditure. This is attributable, to a large extent, to the projected aging of the population over the 55-year period. Another factor contributing to the projected expenditure increase is increased labour force participation with consequential increased numbers qualifying for a contributory State pension and at higher rates. This is mitigated to some extent by the 2012 changes to the qualification conditions and payment rate bands and by further changes to be incorporated under the national pensions framework outlined in the appendix.

In recent years there has been a significant increase in expenditure associated with short-term schemes. This is influenced significantly by the poor economic environment which has severely affected PRSI contribution income. In the longer term when the economy is projected to return to a more stable and typical scenario, it is anticipated that these financial pressures will dissipate owing to reduced numbers accessing these short-term schemes in the future.

In the medium to long term, pension-related expenditure is projected to become the predominant component of fund expenditure. Long-term pension-related expenditure will increase from 57% of total expenditure in 2011 to 85% in 2066. The significant increase in pension-related expenditure is attributable to Ireland's rapidly altering population structure and in particular the large increase in the over 65 year old population. The over 65 years cohort is projected to increase from 11% of the total population in 2010 to 15% in 2020 and further to 24% in 2060.

Simultaneously the pensioner support ratio is projected to decline from 5.3 workers for every individual over 65 in 2010 to 3.9 workers by 2020 and to 2.1 workers by 2060. The pensioner support ratio relates to the number of people of working age from 20 to 64 relative to those over the pension age of 65.

I will address the value for money indicators. The value-for-money findings on a range of individual scenarios are consistent with those of the 2005 actuarial review. The principal categories for which social insurance offers better value for money are: those on the lower part of the income distribution; those with shorter contribution histories; and the self-employed. For those at the higher end of the income distribution, the fund is redistributive and these individuals generally get back less than they pay in.

I thank the members of the committee for inviting us here today. My colleagues and I would be very happy to answer any questions they may have.