Friday, 13 July 2012
Public Service Pensions (Single Scheme and Other Provisions) Bill 2011: Second Stage
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.
The calculation of pensions on the basis of career average earnings is a change from the current position where the pension is based on final salary and is generally considered a fairer and more equitable system and one which is progressive in application. For example, it affects the pension paid to those who have high earnings, especially in late career. There are examples of people who in their last year or two who become a grade 8 officer in the public sector and achieve the top position for, perhaps, a year and their pension is decided pro rata. A civil servant promoted to top management late in his or her career has more than the pension for those who have a relatively flat career progression, for example, nurses and teachers.
It also provides that a change in the overall rate of pension contributions from staff will remain broadly as applies at 6.5% but will be higher for certain fast accrual occupations. The new scheme provides for post retirement pension increases to be linked to consumer priced, not pay. The expense of retaining an earnings link is estimated in the past 20 years to have resulted in increases twice those that would have applied had post retirement pensions been linked to the cost of goods in the form of the consumer price index. The reduction would not absolutely eliminate post accrual terms, those generally apply to emergency service groups such as the Garda, the Permanent Defence Forces, firefighters, the Judiciary and Oireachtas Members. The uniform services will retain their early retirement age which reflects operational needs.
For the President, Oireachtas Members, the Judiciary, the Attorney General and others who earn accelerated pension benefits the new scheme acknowledges their special circumstances by providing for a double rate of accrual together with a double rate of contribution at 13%. For all new entrants to these offices, it is proposed that the Taoiseach and President continue to receive a pension on retiring from these offices. The definition of "new entrant" will mirror that in the Public Service Superannuation (Miscellaneous Provisions) Act 2004 which will mean that anyone who is or was an Oireachtas Member prior to the enactment of the Bill retains those benefits and scheme membership if they have a break in the Oireachtas service. The scheme will help ensure that when Ireland emerges from the current difficulties, our public service pension policy is on a better long-term and more sustainable footing.
On the matter of the consumer price index, the Minister will be aware that in the context of the public service agreement, that is, the Croke Park agreement, it has agreed that there will be no change in current arrangements for the indexation of pensions for public service pensioners and serving public servants due during the life of the agreement. In the case of public service pensioners and serving staff, the draft legislation provides for the linking of post retirement pension increases for pensioners and serving staff to the consumer price index, subject to a commencement order to allow flexibility in regard to the timing of its introduction. In the current climate, given that no pay or pension increases are envisaged, it is considered wise to reflect carefully on the timing of a move to a consumer price index link. The new scheme makes no provision for any enhanced pension arrangements for senior new entrants, appointees such as Secretary Generals and non-commercial State body chief executives. Such persons will be treated the same as other public servants with pension accruing relative to pay and with annual accrued amounts indexed to the consumer price index and aggregated to produce a pension at retirement.
In regard to the banking sector I ask whether the Irish Banking Resolution Corporation, Allied Irish Bank which is State-owned, Irish Nationwide and NAMA come within the remit of the Bill.
I welcome the Minister. Senator Tom Sheahan referred to the Minister's enthusiasm. He also referred to the small man which I saw Minister bristle at as I tend to do. I have found a wonderful way to grow taller, that is, to switch to metric. I used to be only 5 ft. something, I am now 166 cm.
A part of the Bill I did not welcome was the reference to the retirement age of 70 years. I spent last night with Professor James Watson who discovered DNA in 1953 and is now 84 years of age. He spoke in Trinity College last night with much enthusiasm. I am not sure if he is still paid by Cold Spring Harbor University in New York.
Last week I spoke with Betty O'Reilly who works in Superquinn in Sutton at the bakery counter and who is celebrating her 85th birthday this week. She comes back for a few hours each week. Senator Sheahan asked about those Members of this and the other House. I passed my 70th birthday some years ago and I am happy that nobody has told me to get out. I hope my electors continue to stay.
The Minister spoke with real interest in and commitment to the Bill. I welcome the Bill as it will modernise and rationalise public sector pensions and will bring about significant savings. I note the significant change where one's pension will be based on one's average salary throughout one's career. That is welcome. I am glad action is being taken especially considering future trends. For example, the OECD expects government's expenditure on pensions to rise from 8.4% to 11.4% of GDP between 2010 and 2050. Clearly there is a problem which the Minister has explained. It is clear that spending on public sector pensions creates a need for higher taxes and increased costs for things like businesses. It restricts the money that the Government has available for investment in infrastructure, education, health and other areas. This then restricts the capacity of the economy to supply goods and skilled labour. Should we go further and implement a cap on public sector workers to bring it more in line with private sector workers? Mr. James Fitzsimons, writing in the Sunday Independent said that, "At the lower end of the pay scale, it is true that the [public] pensions are small and do not provide for a lavish lifestyle but they are ten times better than the State pensions that the rest are expected to live on. ... Public sector schemes are largely funded on a pay-as-you-go basis."
In the late 1980s when Minister for Finance, Mr. Albert Reynolds called in a number of us who were involved in different functions to attempt to do away with the pay-as-you-go system and establish a fund but never did so.
Nothing is put aside during the employees' career. Instead, the pensions are paid from tax revenue. When everyone else's pensions were affected by the global downturn, public servants claimed that theirs were not because they had no fund to be affected. The fact is that the State put nothing aside. That is what their pensions were worth: nothing. However, they will not accept this. It is not as if the rest of us would claim that they should not have any pension but things have changed. In a country where we are forced to borrow €20 billion a year to run the public service, nobody can claim their pensions are safe.
These are intriguing points to consider. An interesting example comes from Brazil where a proposal would cap the defined-benefit plans of future federal-government employees at around $2,000 - the same level as private sector workers. Those who want more would have to contribute to a separate fund. It is said that would make the system less unfair and, in the long term, considerably cheaper.
In the state of Rhode Island in the US which has a population of about 1 million. It has had to change state pensions in order that the state does not go into bankruptcy. The State Treasurer, Ms Gina Raimondo, persuaded the state legislature to overhaul the pension plan. She said, "We focused on the math...it should not be a political decision, but a financial one." The changes included suspending cost of living adjustments, delaying retirement and transferring all workers into a hybrid scheme, with a defined contribution plan, as is the norm in the private sector.
She fought to change the State's assumed return on pension investments from an unrealistic 8.25% to 7.5%, which is still very high. It was interesting to note that these changes affect current employees as well as the newly-hired state employees. The changes will save around $4 billion per year and the state has a population of 1 million people. If we are serious about pension reform, surely we should follow the example of places like Rhode Island. Such a move is blocked by the Croke Park agreement but we must consider the example.
Regarding pensions in general, we must seriously consider giving some people access to cash now rather than wait. One of the ways this could be done is by allowing people to draw down part of their private pensions or additional voluntary contributions to spend now. Could they be allowed to access 10% to 15% so they could fund small businesses or pay off debts when needed? Such a move would release €1.3 billion into the economy. This would mean pressure would be lifted from people and allow them to pay things like their mortgages. The Government recently dismissed the idea but we cannot go on forever with the current position. South Africa offers access to pension savings and research by Alexander Forbes, a consultancy, finds that 70% of members take their benefits in cash before retirement. It is also believed that allowing people early access to a portion of their pension encourages people to sign up to a pension scheme.
Australia's pension system requires compulsory enrolment in a pension scheme but members are allowed to take all of their benefit as a lump sum at the age of 55. Many people use the money to pay off debts and some spend it. They have a choice. In that case they may eat up all their savings and have to fall back on the means-tested state benefit at the age of 65. Should people not be able to access funds now if they have voluntarily paid a pension or have several pensions and need to pay the mortgage? Giving citizens access to pensions earlier frees up pension funds, allowing people to spend and stimulate the economy rather than save cash. That is what we need at the moment.
There is a misconception that people would be worse off in the future but early withdrawals might reduce other lifetime costs by virtue of them being met earlier. Such a proposal will also mean that people may be more willing to invest in pensions at an earlier age. We live in a free society and we should allow people to make choices, good or bad. It would be good for the country if people had more freedom and more independence. If people spend part of their pension they may have to fall back on living solely on the State pension. If that is so, that is so.
I welcome the Minister for Public Expenditure and Reform, Deputy Howlin. Senators Sheahan and Quinn commended the Minister for his enthusiasm. I also commend the Minister for his clarity in explaining a complex Bill in clear and accessible terms. Like others, I welcome the Bill. Everyone has welcomed the Bill even though Senator Byrne has suggested he will oppose the Bill on Second Stage. I welcome the Bill as part of the Government programme for reform of the public service. It is also timely to point out that we all welcome the positive seventh review by the troika yesterday, given that this item of legislation is one of the commitments under the programme.
I listened to the comments of Senator Thomas Byrne on taking an oppositional position on Second Stage. Is a different position to that of Fianna Fáil in the Dáil and it surprises me, given the Bill has had a long genesis over a number of Governments dating back to when Deputy Ruairí Quinn was Minister for Finance.
Senator Byrne's stated opposition is on the basis of one provision, section 47. I listened carefully to what the Minister said on section 47, making the point that the enabling provision should not be used to create an expectation that it will be unilaterally implemented and that discussions will not be pre-empted in any way. The Minister has addressed the point made by Senator Byrne on the potential impact of the provision on negotiations under the Croke Park agreement. The Minister also made clear that any changes would not be implemented during the current agreement in accordance with the clarification. It is clear under the terms of section 47 that it cannot be implemented by ministerial order alone and it requires a positive vote in both Houses of the Oireachtas. I do not see why it is necessary to oppose a whole Bill, particularly on a complex matter and one that will implement comprehensive modernising reform of the public service and public service pensions, just for the sake of that point.
I welcome the ongoing public service reform taking place in the framework of the Croke Park agreement. The Government is committed to it and I am a strong personal defender of the agreement. It brought us great stability at a time when we needed it, a time of grave economic difficulty and at a time when we see a real impediment to economic recovery in the shape of depressed domestic consumer demand. It is important to ensure stability in the public sector and in public sector pay. We have seen industrial peace as a result and immense reform. There have been unwarranted attacks on public servants and unwarranted comparisons between the public and private sectors. It is undoubtedly the case that the public sector enjoys greater security of tenure, although many of those employed part time in the public service have seen their jobs go. It must be remembered that those working part time in the education sector have seen their jobs diminish or wither away. The recruitment freeze has meant public servants have worked harder and the reforms implemented ensure greater workloads for many people, and rightly so, at a time when they are facing reductions in pay, particularly due to the pension levy. There must be a balance. It is fair that public servants must take a share of the economic hit but it is not fair to criticise the public sector without acknowledging that point. It is important to express the view that the Government values public servants and is committed to providing good quality and decent pension entitlements, even when public service pension schemes are being reformed.
The key reform in the Bill is to create a new single pension scheme for new entrants to the public sector. I listened with great interest to the speech of Senator Quinn, as did the Minister, and some of his proposals are very interesting. I refer particularly to the idea of people gaining access to cash now on foot of additional voluntary contributions. There would be serious constitutional issues in Ireland about interfering retrospectively with established or preserved rights. That is why the Bill applies specifically to future entrants.
I am pleased to see the level of consultation and planning in the Bill. The Minister expressed clearly that this has had a long genesis and the provisions have been carefully prepared. Given the demographic projections, it must be carefully worked out. Senator Sheahan referred to the ticking timebomb of dependency ratios dropping from six to two by the middle of the century. It is a very happy event that we have longer life expectancy and people living and drawing pensions for decades after retirement. However, it requires a change in public policy. I am reminded of the saying that growing old sucks but is a lot better than the alternative. It is a good news story that people will be drawing pensions for much longer but there are implications for public policy. It justifies the increase in the pension age. We had a lively debate in this House about the merit of a mandatory retirement age. Other speakers touched on the point. At a hearing on the rights of older people in the Seanad Public Consultation Committee, interesting views were expressed on potentially having an open-ended retirement age. In the Bill, the Minister has set out 70 as the maximum age and that the pension age will be increased in line with the State pension age. Senator Quinn refers to some people working well beyond that age. In the Judiciary, the age for retirement for senior judicial office holders is 72. I presume the Bill will not have an impact on that. Having examined sections 13 and 22, I am not clear whether that will still be the case after the Bill is enacted. I have had colleagues in the Law Library, for example, who continued to work into their 90s. There is an important debate to be had regarding the merits of a mandatory retirement age. However, I take the Minister's point about the importance of people being able to plan ahead with some degree of certainty.
The Minister set out clearly and comprehensively the detailed provisions on calculations and the linkage to the consumer price index. The provision that there will be no reduction where there is deflation seems fair to me. I also welcome the provision that revisions of the rate of contribution will require a positive resolution of both Houses of the Oireachtas rather then merely being subject to ministerial order. I have a particular interest in the provisions in sections 33 and 34 on pensions for surviving spouses or civil partners. It is important to note the progress we have made such that civil partners are now, just like spouses, eligible to succeed to pensions. However, I am aware of certain schemes in the public sector, known colloquially and rather pejoratively as anti-gold-digger schemes, under the terms of which a marriage or civil partnership must take place before a certain age, usually 60, if a spouse or partner is to be eligible to succeed to the pension. Will this Bill have any impact on those schemes?
The legislation includes very sensible measures in regard to abatement and aggregation. Indeed, one might well ask why these provisions are not already in place. Will the Minister confirm that it will still be possible to top up public service pensions through additional voluntary contributions? In regard to the provisions regarding aggregation, in Part 4, I am surprised at the Minister's observation that they will impact a large number of people. Senator Tom Sheahan referred to the former Fianna Fáil Ministers in respect of whom people were greatly angered to see such large lump sums being given. Will the Minister indicate the numbers affected by the provisions regarding pensions aggregation?
I thank the Minister for his comprehensive explanation of the provisions of the Bill. Apart form the stability and certainty they will provide for public servants, they will also lead to substantial savings for the State by the middle of the century. That may seem a long way off, but action must be taken now to ensure it is achieved.
I welcome the Minister, Deputy Brendan Howlin. As is so often the case, I agree with much of what my colleague, Senator Feargal Quinn, has said. It is interesting to consider a number of the recommendations by an bord snip nua in the context of what is proposed in this legislation. In a period when the total number of public servants rose by 27%, the numbers in senior management increased by 82%. That is clearly a significant aspect of the problem the Minister is seeking to address, particularly in regard to the question of final year pensions as compared with average earnings pensions. There was clearly some degree of grade inflation going on during these years.
An bord snip nua addressed, on page 7 of its report, the precise problem the Minister has described to the House, namely, that the cost to a private sector worker of purchasing these types of final year pensions would be prohibitively high. Some of the figures in this regard are astonishing. They obviously astonished the Minister since he decided to bring forward this legislation. The bord snip nua report indicted that to purchase the pension benefits for which they are currently eligible, including the earnings link, would require a contribution of 27% of annual salary in the case of a typical civil servant, 31% for a teacher entitled to retire at 55 years of age, 33% for a hospital consultant, 48% in the case of gardaí, and as high as 87% for a High Court judge. This burden simply cannot be carried forward in a situation where public pay and pensions account for 35% of all current expenditure. I understand the pensions element alone runs to 6%. In particular, the inequitable situation whereby full pensions are awarded to persons who are in post for a very short time is no longer sustainable in view of the difficulties we face. According to a statement issued by the Oireachtas on behalf of the Minister on 29 September 2011, the savings arising from these changes will amount to some €1.8 billion per year. In my view, he has allocated the savings correctly across the various possibilities. I particularly welcome the move to tackle the problem of final year pensions.
On the question of retirement age, I agree it makes sense to increase it. When he introduced the old age pension in Britain, Lloyd George could have had no notion of future costs given the majority of people at that time did not live long enough to be eligible for it. Given that life expectancy continues to increase, people are now obliged to budget for a much longer retirement. In that regard, the Minister is being conservative in the provisions he has made for an increase in retirement age. They are merely reflective of economic realities. In fact, experts predict that one quarter of people born this year will live to 100 years of age. Given so many people now remain in third level education until their mid-20s, the period in which they are net contributors to the Exchequer rather than net beneficiaries is reducing. As such, the retirement age should be kept open as an issue. I have known people who were extremely unhappy at being obliged to retire because their work meant a great deal to them. Perhaps the Minister will indicate whether he has given any consideration to introducing some type of voluntary retirement mechanism in the future.
I can envisage a situation where successor Senators in the mould of Senator Ivana Bacik will argue for the raising of the retirement age past 70 as a human rights issue. The fashions in these matters tend to change.
I support the measures the Minister is introducing in this Bill as a necessary correction to the public finances. I take this opportunity to warn against any future recurrence of the benchmarking exercise, which must surely have added hugely to the difficulties facing the State in this area. Apart from anything else, it was not at all transparent. The evidence for the increases under that scheme, which was always hotly disputed, was kept secret so that those who wondered why they had done rather badly out of it could not discover why others had done so well. I am sure benchmarking is not on the Minister's agenda in any shape or form, and it should never arise again. It was a considerable factor in the inequities that arose in public sector pay in recent years, with the largest increases generally given to the most highly paid public servants while the less well paid received only the averages under the national wage agreements.
In addition, some public sector pension funds, including those in the university sector, in the Economic and Social Research Institute, Institute of Public Administration and elsewhere, went broke and had to be rescued by the former Minister for Finance, the late Brian Lenihan. The conduct of the trustees of those funds deserves some rebuke from the Minister and the House. With practices such as added years and so on, they almost became a type of slush fund for the beneficiaries. These trustees ultimately succeeded in bankrupting their own pensions, although that does not prevent them from giving advice to the Minister on how to run the country.
As well as dealing with public pensions, we must also look at the private pensions fund industry, including its poor overall performance and the general move from defined benefit to defined contribution schemes. Although I appreciate that it is a short-term measure, there is an inequity in the imposition of a levy on private pension funds in that it imposes further costs on those who are already bearing the cost of pensions which are far better than their own. The Minister has made a sizeable contribution to addressing the difficulties with public sector pensions. I would be glad to assign him the duty of reforming private sector pensions, if he has any spare time in the coming months.
I welcome the Minister to the House. He has been lauded for his enthusiasm and clarity, to which I would add my praise for his commitment, particularly his commitment to reform. I hope he continues to listen and take on board what people are saying, while maintaining that drive for reform.
I propose to focus in my contribution on the issues of access to one's personal pension, retirement age, increments and sick pay. In general, this Bill contains a number of changes that must be made and which are essential in the current context and in view of the need to reform. Right now there are six people working for each pensioner but if we did not make changes, we would have only two people working for each pensioner and that in itself would bankrupt the State.
The change to the retirement age for public servants from a minimum of 66 years to a maximum of 70 years is good and right. In 2004, the minimum retirement age increased from 60 years to 65 years for new entrants, so it is not just because of recessionary times that we are moving in this direction. I support the system of career averaging as a means of working out a fair pension to earn at the end of one's working life.
Regarding the lump sum, is the Minister intending to tax that at any point? Obviously, we would all prefer if the lump sum was not taxed but given that so many people have just retired from the public service and that the State is in incredible trouble, perhaps it should be considered.
There are a number of unfair aspects to the Bill. I do not agree with the exemptions in the scheme for Members of the Oireachtas and others, such as the Ombudsman, county registrars and Revenue appeal commissioners, to give just a few examples. I can see why an Oireachtas Member, if he or she reached 70 in the middle of his or her term, would be exempt but why should an Oireachtas Member who is 70 or over at the start of a new term not be requested to retire?
This is the place for a debate on these questions. There are other people on the exemptions list, including the Ombudsman and Revenue appeals commissioners and the rationale behind this needs to be examined. After all, we are introducing tighter pension rules to the public service generally and, as far as possible, we should lead by example. Obviously, what I am saying would be against my own interests too, in the longer term.
In general, I agree with many of the essential reforms. I ask the Minister to answer a number of specific questions. Public service workers - be they nurses, doctors or whatever - in pre-2004 pension schemes were allowed to retire at 60 but after 2004, if they went into a different pension scheme, the retirement age was 65. What age applies there? What is the State's commitment to public service pensions in the future? In ten or 15 years' time, for example, when we might not be in government, what happens if the money is not available to pay pensions?
When will changes to TDs' and Ministers' aggregation take place? It is referred to in the written version of the Minister's speech but he did not discuss it here. Does it only apply to new entrants? If that is the case, I believe it is wrong.
Changes to TDs' and Ministers' pensions should take effect from now. This is an issue that is really annoying the public and I agree with them that it is not right.
A review of the Croke Park agreement is imminent and the issue of increments has been raised in that context. In the midst of a recession I, along with others such as CORI, believe it is immoral that increments are awarded to anyone earning over €50,000. I am glad that Oireachtas Members do not get increments and we should consider pausing the payment of increments. Research indicates that a poverty-proof wage for a family of six is €50,000.
Regarding sick pay, I wholeheartedly reject the notion that an employer should pay it.
I am simply drawing the Minister's attention to this point because he is on the economic management council and it is very important that the responsibility is shared between the employee and the employer. Perhaps this is a matter for another day.
Finally, it is important that we examine, within the confines of the Constitution, how we can help people to access their personal pension funds. It would help with indebtedness and would reduce the duty of the State to help them with their indebtedness through other schemes.
I also welcome the Minister to the House and thank him for his very clear speech. Unfortunately, I did not have the privilege of hearing it, but I have read it. The cardinal points are raising the minimum public service pension age, increasing the rate of pension contributions, modifying the earnings-linking of pensions, adjusting or abolishing fast accrual terms and moving to the calculation of pensions on the basis of "career average" earnings. Generally speaking, I approve of the Bill but I have some difficulty with section 47 because it appears to give a power of retrospection, which I am against on principle.
I take a much more pessimistic view than most of my colleagues here because everyone else in this House is a capitalist of one kind or another and I am not. It appears to me ---
Just as with the question of climate, my view is that the events we have witnessed are likely to become more frequent and more catastrophic. I find it very difficult to welcome the fact that we have been enabled to borrow significantly more money. We need a radical reappraisal of the entire system. However, we must deal with the system as we have it and one must be pragmatic. Within such limitations, the Minister, as a capitalist, is doing a reasonably good job. However, there are more extreme forms of capitalism in this House, as represented by Senator Feargal Quinn. While he is a colleague of mine, whose views I value, I do not think it is a good idea to follow the extreme, right-wing American view that citizens should be allowed to cash in their pensions, willy-nilly. That is a recipe for disaster.
However, the additional voluntary contributions, AVCs, should be accessible. That would be welcome because such payments are made voluntarily, as an attempt to gain extra years or an additional pension and there should be an element of option involved. I speak with some feeling on this because I paid AVCs over a number of years. When the crash happened, I tried to take them out but was told I was not allowed to and now they are worth virtually nothing. However, that is my problem and I am well able to cope with it. I would only recommend access to pension funds under the aforementioned terms.
The linking of pensions to the consumer price index raises the question of the index itself because a revision of the method of calculation of the consumer price index is long overdue. I do not see, for example, any reason to include the consumption of alcohol and nicotine in the calculation of the consumer price index. There are much more fundamental elements that should be considered in this and I do not see why taxpayers should support people in these habits, if they have them.
The Minister referred to the fact that more people are living longer now. They will not do the decent thing, it seems, and die in the interests of the State. It is a demographic fact that is a worry to many of us. Our pension fund has been raided and is consistently being raided. It is depleted and is depleting further all the time. The figures in this regard are even worse than some of my colleagues have suggested. The Minister said that demographic projections suggest that by the middle of the century there will be only two people of working age supporting every one person over 65, compared with six at the moment. However, that figure refers only to those of working age. It does not actually mean the people in question are working. The significant question is whether or not such people are working and producing the money needed to fund pensions.
On the issue of benchmarking, I agree with the comments of my colleagues and that is why I voted against it when it was before this House. However, being a human, I accepted whatever moneys accrued.