Brendan Howlin (Wexford, Labour)

I am very glad to be back in Seanad Éireann.

Since coming into office, this Government has repeatedly shown that it is committed to reform. We are determined to change crucial aspects of Government and public administration, with the long-term interests of the public in mind. In this context, I am today proposing this Bill, which provides for far-reaching reforms of public service pensions. The Bill's principal purpose is to introduce a new, single pension scheme for all new entrants to the public service. This is a major reform and a far-reaching application which will deliver reduced spending and significant efficiencies, while retaining decent, defined-benefit pensions for those who work in the public service.

As Senators will know, the new scheme is a commitment under the agreed EU-IMF programme of financial support for Ireland. The Bill aims to strike a balance between the reasonable need for the Government and the State, as the employer, to provide decent pensions for public service workers and the need to recognise that the cost of these pensions must be sustainable. The Bill will ensure that public service workers continue to have to access to good pensions and a reasonable standard of living in retirement, while the Exchequer benefits from greater control over the associated costs of providing these pensions and the future burden on tax payers is reduced.

Now that all of the Dáil Stages of the Bill are complete, the general landscape of what is being proposed is clear. Therefore, I would like to take a step back and elaborate on the general policy behind the Bill and the scheme, as is usual in a Second Stage presentation.

I want to underscore the magnitude and the nature of this change. This is a very important and major reform of our public service superannuation provisions. It is a single scheme for all new public servants and, in the years to come, will grow in size until in time it covers all of the public service which currently employs some 300,000 people.

Senators will agree with me that the current model of public service pension provision is clearly not tenable in the longer term. Getting these decisions correct is essential to make the system work in the future. The Government and the Oireachtas must decide how public service pensions should be provided. As we know, there are significant increases forecast in public service pension costs owing to the growing number of public service pensioners and rapidly increasing life expectancy. Improved life expectancy has placed us in the welcome situation where Irish people now expect to enjoy longer and healthier retirements. These social benefits bring with them costs to the individual, public service employers and the Exchequer.

The statistics are clear and compelling. In the next ten years the number of people over the age of 65 years is expected to increase by about 50%. We have a situation where some public servants who have worked for 30 years are drawing a pension for as long as that or even longer after retirement. Attempting to sustain this into the future is simply not possible or practicable. Demographic projections suggest there will be only two people of working age for every person aged 65 years or over by the middle of the century compared to six people of working age for every person aged 65 years or over today. We must be sensible and realistic about, as well as plan for, the burden which the current and future working population can bear in this context and the increasing strain on the public finances which could result were action not to be taken. When we recruit new people into the public service, we must ensure they have a certainty there will be provision for them when they retire.

Public service pensions operate on a pay-as-you-go unfunded basis. The reality is that, for public service pensions to be paid for, financing must increase, whether from the State, the public servant or the taxpayer. In 1997 expenditure on public service pensions was some 1.5% of gross national product, GNP. By 2027 it is expected to account for 3% of GNP and around 3.5% by 2050. Of course, long-term projections are notoriously difficult to make with complete certainty. However, the core point is valid. The costs of public service pensions have substantially increased for several years and will, relative to the country's output, double in the medium term. It is both important and fair that the pension arrangements for the public service be adjusted to take account of this cost.

There have been some changes in the area of public service pensions in the past. Since 1995 all newly recruited established civil and public servants are subject to full PRSI, accordingly giving them an entitlement to State social insurance pensions. Integration of contributions and benefits applies as part of these arrangements, that is, the occupational pension is reduced by the amount of the State pension. In 2004 the pension age for new entrants to the public service was increased from 60 years to 65. In 2009 there was the introduction in the Financial Emergency Measures in the Public Interest Act of the pension-related deduction, more commonly known as the public service pension levy. With effect from 1 January 2011, public service pensions were reduced on foot of the public service pension reduction legislated for in the Financial Emergency Measures in the Public Interest Act 2010. I added a new top rate of pension reduction last year for those on a pension in excess of €100,000.

The new single scheme was developed having regard to these important reforms and measures and in the light of several reports, including the extensive and foundational work of the Commission on Public Service Pensions established by my colleague Deputy Ruairí Quinn when he was Minister for Finance. The 2005 national pensions review, the Green Paper on Pensions from 2007 and the national pensions framework published in March 2010 all showed the need to move to situate pension provision on a sustainable, modern and flexible basis. Extensive public consultations took place during the years when these reports were being produced and they underline the difficulties faced in securing understanding, let alone consensus, in this area.

The range of reforms recommended in respect of public service pensions by these reports included raising the minimum public service pension age; increasing the rate of pension contributions; modifying the earnings-linking of pensions; adjustment or abolition of fast accrual terms; and moving to the calculation of pensions on the basis of career average earnings. All of these reforms are contained in the Bill. We have taken advice, listened to competing views and synthesised the results. My Department convened a working group consisting of relevant Departments, consulted widely - more extensively than on any other legislation with which I have been involved - negotiated with the public service unions, as well as engaging with the Labour Relations Commission which made recommendations on the scheme that the Government accepted.

The introduction and implementation of the scheme will help to ensure that, when Ireland emerges from the current difficulties, public pension policy is on a sound footing. The Government values public servants and is committed to providing them with good quality pension arrangements. Such arrangements will continue to be a defining feature of employment in the public service, a feature that attracts people into it. The changes I am proposing will make the public service pension system simpler, more transparent, fairer and better able to deal with the changes that we know are coming, thereby assisting us to remain sustainable in the long term. Making these changes is not easy or straightforward. Long discussions took place with interested parties. We had a long and detailed debate on all Stages in the other House. Dealing with the fundamental challenges posed to our pension and benefits system as a result of rising life expectancy and other aging pressures, while ensuring productivity and value for money for taxpayers, requires difficult choices to be faced and made.

The most important feature of the single scheme is that pensions will be based on career average pay, not final salary as at present. Pensions based on career average earnings will be fairer and more equitable to the majority of public service members who do not have high salary growth rewarded by way of final salary schemes. It is unfair that the current scheme means people's pensions are determined by their final salary. We all know of cases of people promoted into a job for the last year of work to determine their pension forever more. The new scheme will pay a career average salary. It will, therefore, be fairer to those who do not have meteoric rises in pay such as teachers and nurses whose career paths tend to be even, as opposed to those of Secretaries General who enter as administrative officers and end up on the top of the scale, with their pensions determined forever more by their final pay. Career average means public servants will each year accrue a specific amount towards their pension and lump sum. For most public servants, this will be one eightieth and three eightieths, respectively. There will not be a fund. These referable amounts will be calculated annually and uprated each year by reference to the consumer price index, CPI. The total accrued will be aggregated to produce a person's pension and lump sum on retirement. This is a significant change from the current position where the pension is based on final salary on retirement.

The other two major cost-reducing changes from existing terms are the increase in the pension age to 66 years and linking it with the State pension age which will increase to 67 years in 2021 and 68 years in 2028; and the indexation of post-retirement pension increases with the CPI instead of pay.

The new scheme will apply to new entrants in all areas of the public service, including the Civil Service, the education sector, the health sector, local authorities, the Garda Síochána, the Defence Forces, non-commercial State bodies and other regulatory or similar bodies. For certain public servants such as qualifying and designated officeholders, including the Taoiseach and the President, members of the Judiciary, Oireachtas Members and those who must retire earlier than other public servants such as gardaí, members of the Permanent Defence Force, prison officers and firefighters, higher accrual rates and linked higher contributions will apply.

As stated, there was lengthy and detailed engagement with the public service unions and representative associations, including those which represent teachers, by my Department. At the unions' request, these discussions were brought under the auspices of the Labour Relations Commission in 2010. The commission made recommendations concerning the CPI linkage and the integration formula to be used in the scheme and these are reflected in the legislation before the House.

There are a number of other issues I want to bring to the attention of the Seanad. The new scheme makes no provision for enhanced pension arrangements for senior new entrant appointees such as Secretaries General of Departments and the chief executives of non-commercial State bodies. Such persons will be treated in the same way as other public servants, with pension accruing relative to pay. In addition, annual accrued amounts will be indexed to the CPI and then aggregated to produce a pension and lump sum at retirement. In this way, pension will be a function of pay and higher salary will mean a higher pension proportionate to one's time earning that salary. This will not be accompanied by special pension enhancements such as added years. As Senators will be aware, the TLAC terms - so-called - which had applied since 1987 were abolished by me last year for all new entrants. A number of Secretaries General have been appointed on the basis of the new non-TLAC terms which apply.

I take the opportunity to make it clear that there is no change of any kind in the position on the public service agreement - also known as the Croke Park agreement - or the associated clarifications concerning the indexation of public service pensions. There is an enabling provision in the Bill which will allow me to make an order to apply a CPI link to public service pensions should a decision in this regard be made in the future. As is well known, there are to be discussions on this issue under the agreement. If the outcome of these discussions should lead to a decision to make the change to which I refer, I will have the powers necessary to allow me to proceed. I would not, therefore, be obliged to seek approval by way of new primary legislation. The enabling provision should not be used to create an expectation that it will be unilaterally implemented. I give a commitment to the House in this regard that the discussions will not be pre-empted in any way. This approach is entirely in keeping with both the letter and the spirit of the Croke Park agreement. Any changes would not, in accordance with the clarifications I have provided, be implemented during the period relating to the current agreement. Should I or one of my successors make the relevant order in the future, the support of both Houses would be required to implement it. Therefore, it will not be possible to proceed by way of ministerial order alone.

I will now outline the main provisions of the Bill. The Bill is in four Parts, of which Part 1 is preliminary and general. Part 2 deals with public service pensions, with five chapters: (i) preliminary and general, Part 2; (ii) single scheme; (iii) pre-existing public service pension schemes; (iv) provisions applicable to all public service pension schemes and (v) consequential amendments, Part 2. Part 3 deals with the remuneration of judges and certain court officers, while Part 4 deals with the amendment of the Financial Emergency Measures in the Public Interest Act 2010.

Part 1 contains standard provisions providing for the Short Title of the Bill, commencement, repeals of legislation and expenses and defines "Minister" as being the Minister for Public Expenditure and Reform.

Part 2 is the most substantial element of the Bill and deals with all aspects of the new scheme and public service pensions. The sections in chapter 1 - preliminary and general - define the terms to be used in the Bill and the scheme. Owing to the legal position of the Central Bank as part of the euro system, the new scheme will apply only with the agreement of the Governor of the bank. This is explicitly set out in the Bill. I have engaged in discussions with the Governor and his counterpart at the European Central Bank in order to safeguard their independence in this matter. This chapter also gives the Minister power to introduce, by regulation, the administrative measures necessary for the operation of the new scheme as defined in the Bill.

Chapter 2 provides for the establishment of the single scheme and sets out the age-related and other criteria for membership. It also provides a definition in respect of new entrants to the scheme. It further provides, from the operative date, for a six month holding period outside of public service employment beyond which someone who was at one time a public servant and who, on returning to be a pensionable public servant, would be regarded as a single scheme member and could not claim pre-single scheme pension terms. Essentially, this is a roll-over period which will ensure someone who temporarily leaves the Civil Service will not be excluded from continuing under the old terms.

Chapter 2 also provides for a public servant to retire at the age of 66 or the age at which the person would, from time to time, become eligible for the State pension. The proposed new retirement age of 70, at the latest, is also specified in this chapter, with exceptions made for elected officeholders and certain uniformed public servants. This provision attracted some debate in the Lower House. There are those who believe we should not be ageist and that we should not specify a compulsory retirement age. I am of the view 70 is a reasonable age for retirement. Most of us would at least have a target age for retirement and the matter should not simply be left open-ended. People within public administration must make general arrangements and plans. It cannot be open to someone to work for as long as he or she likes. There must be some level of planning involved. However, we can debate the matter further on the Committee and Report Stages.

Chapter 2 also sets out the provisions concerning pension contributions which will generally be integrated with the social insurance system. It further provides that all contributions charged under the new scheme shall be paid directly to the Exchequer. It goes on to stipulate that members of the scheme will earn money amounts which accrue to their pension and lump sum benefits annually. This is the core of the career average. In other words, a person will make his or her annual contribution proportionate to his or her wages. This will be updated with reference to the CPI and the person's final pension will then be determined.

The earned referable amount is calculated as a fixed percentage of actual pensionable earnings. In this way the accumulation of future pension benefits will reflect a person's evolving actual pay during the course of his or her career, while also ensuring the real value of these pensionable earnings will be protected through indexation with the CPI. The money amounts accrued will be integrated with the social insurance system. The integration formula applicable to the vast majority of new entrant public servants includes an accrual rate of 0.58% up to earnings of €45,000. This figure was recommended by the Labour Relations Commission. It represents 3.74 times the value of the contributory State pension, which provides for some occupational accrual in addition to that being provided by the State pension until pay exceeds this figure. The pension accrual rate above this threshold is 1.25%, or one eightieth, of the scheme member's pensionable remuneration. The lump sum will accrue at the rate of 3.75%, or three eightieths, of the scheme member's pensionable remuneration. I am sure that, like me, Senators find their eyes glazing over to some extent in respect of the mathematical formulations relating to this matter. All I can say is these formulations were hammered out under the auspices of the Labour Relations Commission and that all concerned were allowed to have an input into the process.

For certain public servants, including the President, qualifying and designated officeholders, members of the Judiciary, Oireachtas Members and those who must retire earlier than other public servants such as gardaí, members of the Permanent Defence Force, prison officers and firefighters, higher accrual rates and employee contributions will apply.

Provision is made in this chapter for a pension to be paid to a surviving spouse or civil partner of a deceased member and, where applicable, eligible children and sets out the rates, terms and conditions attaching thereto. These include cessation on cohabitation or marriage, a standing scheme rule which is in line with the social welfare rules and practice with which the scheme is integrated. The chapter also provides for the payment of benefits in the case of cost-neutral early retirement from age 55, retirement on medical grounds and death in service.