Noel McCarthy (Cork East, Fine Gael)
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306. To ask the Minister for Employment Affairs and Social Protection further to the Parliamentary Question No. 1420 of 8 September 2025; the estimated number of anomalies under the yearly averaging method of calculating the rate of pay for the State Pension (Contributory); the different types of anomalies encountered by his Department under this system; the estimated cost to the Exchequer if these anomalies were corrected now; and if he will make a statement on the matter. [50920/25]

Dara Calleary (Mayo, Fianna Fail)
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The Yearly Average (YA) method of calculating State Pension (Contributory) payment rates has been used since the introduction of the contributory Old Age Pension (now State Pension (Contributory)) in 1961. The YA system measures the frequency rather than the number of contribution. The YA is calculated by dividing the total number of contributions accumulated during a person’s lifetime by the number of years since they made their first reckonable contribution. Under the YA approach, anomalies can arise because of the date of entry into insurable employment.

The main anomaly within the YA calculation method is that it is possible for people to start paying social insurance later in their working life and yet qualify for a pension at maximum rate. Entitlement to a full pension can in some cases be achieved from as little as 10 years of social insurance contributions.

Another anomaly arises where a person has a gap in their social insurance contribution record, possibly from periods spent caring for family or travel (which can be compounded by an early entry into the social insurance system due to work as a student). As a result, the person may qualify for a lower pension entitlement than a person with the same or fewer social insurance contributions. This occurs as their YA is calculated over the person’s entire ‘working life’. (i.e. their date of first social insurance paid to date of pension drawdown).

A number of recent reports have looked at the State Pension system and have endorsed that the YA system be replaced with a ‘Total Contributions Approach’ (TCA), which would make the level of pension directly proportionate to the number of social insurance contributions made by a person over his or her working life, with significant pension credits granted to people who have taken time out of the workplace to perform caring duties. Following on from the National Pensions Framework (2010), an interim TCA was introduced in 2018 that allowed all those who reached State Pension Age from September 2012 to be assessed under both the existing YA method and the new TCA method, with the person receiving the 'better of' the two rates.

Following on from this, the Pensions Commission, tasked with determining the sustainability of the State Pension system into the future, set out a wide range of recommendations to address future sustainability - including the full transition to the TCA model and the phasing out of the Yearly Average approach. Arising from these, a number of State pension reforms were enacted in the Social Welfare (Miscellaneous Provisions) Act 2023, which represent the biggest ever structural reform of the Irish State pension system.

Among these reforms, the 2023 Act introduced a ten-year phased transition from the YA method of calculation of State Pension (Contributory) to TCA as the sole method of calculation. The ten-year transitional arrangements are to avoid a ‘cliff edge’ effect. The first year of phasing-out began in January 2025. From 2034 the YA method of calculation will no longer be used, and all State Pension (Contributory) calculations will be done using the TCA method.

TCA is a fairer and more transparent method for calculating the contributory pension and will remove the existing anomalies. The total contributions approach resolves the anomalies arising from the YA calculation model as the year a person commenced paying social insurance contributions will no longer be a key determining factor for pension entitlement rate calculation.

Instead, the totality of social insurance contributions paid and credited will be simply added together. This is an equitable approach as pension outcomes are more in line with the total number of contributions paid and credited. The principle of higher contributory entitlements for those who contribute more frequently into the social insurance fund is central to contributory pensions around the world.

Under the TCA approach to get a maximum pension requires 2080 contributions, equivalent of 40 years, for full rate and it includes provisions for up to 10 years of PRSI credits, and up to 20 years of homecaring periods with a cap of 20 years (1040) combined PRSI credits and homecaring periods.

The Department has no plans to retrospectively look at pension rates calculated and all those who are currently in receipt of the State Pension (Contributory) qualified for their rate of payment based on the legislation in place when they qualified.

The Pensions Commissions estimated that the full move to TCA would result in annual savings to the Social Insurance Fund in the region of €440m by 2040, increasing to €2bn by 2070.

I trust this clarifies the matter for the Deputy.