RCPSA SUBMISSION ON THE VALUE OF PUBLIC SERVICE PENSIONS
1.1 The RCPSA notes the specific inclusion in the Commission’s terms of reference that in reaching its findings it will, inter alia, have regard to pension and other benefits applying in the public service.
1.2 The Association welcomes the Minister for Public Expenditure and Reform’s statement that work on determining future pay rates should be fact and evidence based. At the same time we firmly contest his contention that the value of public service pensions had increased given that it has actually fallen in recent years.
2007 Public Service Benchmarking Body Valuation of Pensions
2.1 The Public Service Benchmarking Body (PSBB), in Chapter 7 and Appendix 8 of its report in 2007, valued pensions by reference to the effective contribution (as a % of salary) required, throughout the working life of a 2007 public service recruit, to fund the pension. It found a contribution of 25% per annum would be sufficient, based on underlying assumptions considered appropriate at that time.
2.2 In view of the wide range of public service staff groups the PSBB adopted a single valuation figure for pension valuation of 25%, which was consistent with the gross costs of public service pensions across all groups.
2.3 This gross cost reflects a 5% employee contribution and an employer contribution of 20%. The PSBB found that the actual pension contribution costs for employers of broadly comparable jobs in the private sector was 8%. Therefore it concluded that, for pay determination purposes, the difference in the value of the public service pension over its private sector comparator was 12% and “that a discount of this amount should be applied in comparing remuneration levels in the public service and the private sector” (see summary on page 7 and Chapter7 of PSBB Report).
2.4 However, in the 10 years since the PSBB findings, evidence shows that the 2007 PSBB valuation of 25% for the gross cost of public service pensions was too high and that, rather than rising in value, public service pensions must now be valued much lower. A preliminary analysis suggests that the gross cost of pension terms for new recruits to the public service is now likely to be well below 15%. The net effect therefore, is that the discount rate for pensions should now be far lower than the 12% adopted by the PSBB.
2.5 The nature of this costing process, profiled by reference to new recruits, was not as meaningful for older serving staff and pensioners but it did facilitate the placement of a capital value on a pension at retirement. This took the form of the value of €1 of pension paid from retirement in 2047 and provided a more relevant measure of value to older staff and pensioners (see page 205 PSBB 2007).
2.6 The capital sum required to provide for €1 of pension paid (including lump sum) was calculated by the PSBB as €29.82, having regard to appropriate assumptions including those related to future pension increases. These assumptions have been overestimated in respect of the last 10 years.
Evidence of Over Valuation of Public Service Pensions
3.1 The evidence for the overvaluation of pensions arises from:
- the far less favourable pension terms of new recruits and
- the erroneous assumptions used that pensions would increase annually by 2% above inflation when in fact they have fallen.
3.2 Indeed for those retiring in 2017 the PSBB assumed in 2007 that their pension would increase by 25% in real terms over the period 2007 to 2017. There has been no increase in pay or pension since 2007 and in effect there have been a series of widespread income cuts for serving and retired public servants since 2009.
3.3 There is no indication that, even over the medium term, any of these Benchmarking Body assumptions will be restored. In fact public servants who have retired and are retiring post February 2012 are even today excluded from restoration of remuneration levels cut under 2010 FEMPI legislation (see Appendix B).
3.4 Furthermore the vast majority of public service pensioners, given that they were recruited pre 6 April 1995, suffer a further injustice. These pensioners do not receive the Contributory State Pension and in contrast to private sector pensioners on equivalent gross pensions (whose pensions are co-ordinated with the Contributory State Pension) their full pensions are subject to Universal Social Charges whereas the CSP element of the private sector pensioner is exempt from such charges.
The need for objective fact and evidence based analysis
4.1 The RCPSA has a very real concern that the Government is seeking to have the Commission take into account, when making recommendations on pay for public service workers, a non existent increasing value of public service pensions whose value has in fact been greatly reduced.
4.2 The Association calls on the Commission to carry out a fact based analysis in response to this Government line and to ensure that any such proposition should be scrutinised by reference to the expert, in depth analysis on pension valuation by the PPSB in 2007.
Problems in valuing pensions
5.1 The Association acknowledges the extensive problems in determining a suitable model for valuing pensions involving as it does factors and assumptions to be applied over decades of service and across a wide range of different public service groups.
5.2 The choice of a discount rate is crucial in determining the value of pensions. This rate is essential to convert future pension payments to a single current value. The lower the rate the higher the value placed on future payments and a small change in the rate can have a very large effect on a pension’s valuation.
5.3 The PSBB Report adopted a discount rate of 4% above inflation in respect of pre retirement years and 2% above inflation for post retirement years. There is no correct rate and experts differ. Given the apparent pressure to inflate the value placed on public service pensions there may be pressure on consultants to use as low a rate as possible in order to increase the apparent value of the pensions.
5.4 Since there is no correct discount rate for valuing pensions it is suggested that the rate to be used for the Commission’s purposes be the rate set down by Eurostat for valuing public service pension liabilities for National Account purposes. For 2012 Eurostat set down a single rate of 3% in excess of prices.
5.5 Adopting this approach would avoid the Commission having to engage with many complexities of interest rate matters and avoid the risk of consultants selecting a rate with the objective of inflating the value of public service pensions.
Future Pension Increase Assumptions
6.1 Future pension valuations require clarity on the future terms for increasing pensions. Post retirement increases for those recruited after 2012 have been linked by legislation to Consumer Price Increase movements [Section 40, Public Service Pensions (Single scheme and Other Provisions) Act 2012].
6.2 No similar clarity exists in respect of pre 2012 recruits who traditionally attracted increases on a par with pay and who have a legitimate expectation that this link would continue.
6.3 Pension costs are further complicated by reference to whether the public service pensioner is in receipt of just a public service pension or a pension comprising a Contributory State Pension co-ordinated with a public service element. As the State pension increases at a higher rate than CPI the total amount of pension paid to a non co-ordinated pensioner over their life time will be massively lower than that paid to a co-ordinated pensioner if parity with pay is not restored.
6.4 Any allowance for pension in a pay determination context may not be easily captured by the application of a single value figure. At the same time the practicality of applying a proliferation of pay scales for individual grades is not feasible and judgement based on available evidence needs to be exercised to determine a reasonable valuation.
6.5 The findings of the Commission regarding the value of pensions to be factored into future pay determination will undoubtedly have implications not only for future levels of pay in the public service but also for the levels of pay on which future pensions will be calculated.
6.6 In all the circumstances the Association trusts that the Commission will adopt a fair and reasonable approach in exercising careful judgement in its pension valuation process having due regard to objective analysis of the evidence available.
28 February 2017