Future pay hikes passed on to retired public servants driving surge in State’s pension cost

Anticipated pay increases for public servants in the future are the key driver of the dramatic surge in the estimated costs of public service pensions over the coming years, according to a report from the Department of Public Expenditure.

At present, pay increases for public servants are also passed on to public service pensioners, though this is a matter for the minister for finance of the day, and not a legal obligation. According to the report, if public sector pensions were increased by reference to inflation, the additional cost to the State would be much smaller.

The total currently estimated liability for all public sector pensions has increased, rising from €114 billion three years ago to almost €150 billion today.

However, if the projections were based on a scenario where pensions increased in line with the consumer price index - rather than public pay increases - the bill would fall by €23 billion, to €127 billion. The findings are contained in an actuarial report on the cost of public sector pensions presented to the Cabinet on Tuesday and published afterwards.

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The report also reveals that the expected level of annual wage increases for public sector workers is almost 3.5 per cent a year. This includes future public sector pay deals but also the salary increments that many public servants receive on either an annual or less frequent basis.

For example, the 27-point incremental scale for teachers runs from €38,000 a year when they begin their career to €71,000, excluding additional allowances. By the time they reach the top of the incremental scale, the base pay will have been increased by public sector pay rounds. The Government recently negotiated a new pay deal with public servants which will see a one per cent increase in pay in each of the next two years.

The pension scheme for State employees was reformed after the last financial crisis, meaning that those taken on after 2013 have less favourable entitlements, with benefits based on average earnings over their career, rather than final salary, as is the case with those recruited earlier. Also when they retire, the annual pension increases of more recent recruits will be based on inflation rather than matching increases elsewhere in the public service.

The Department of Public Expenditure said on Wednesday there were no plans to seek new reforms to public service pension arrangements. It is understood that as part of the recent talks on the public service agreement with trade unions, Government representatives sought work practice changes and greater flexibilities but the issue of pension reforms was not raised.

Proposed changes to pension arrangements had been mooted by public service management as part of talks on previous agreements but there has been no real change since the introduction of a new pension scheme which came into effect for new staff recruited after January 2013.

The Department of Public Expenditure said there were about 330,000 full time equivalent posts in the public service. It said of these, 101,905 were members of the new scheme.

Public sector pensions remain significantly more generous than those available to the vast bulk of private sector employees, the bulk of whom now rely on defined contributions schemes, with no guarantee of a pension amount in relation to their salary.

The rising deficit indicates that the cost of providing pensions to retiring public servants will require a significant amount from current spending each year, leaving less to spend in other areas. The bill may flatten out and then fall when public servants hired since 2013 start to retire on less favourable entitlements. The annual cost is expected to rise from 1.1 per cent of GDP now to 1.5 per cent by 2040 and to flatten out and start reducing after that.