3 March 2004

Public Service Superannuation (Miscellaneous Provisions) Bill 2004, Dail Eireann Second Stage Speech by Mr Charlie McCreevy, TD, Minister for Finance

The Government is bringing forward this Bill to give effect to the age related pension reforms for new entrants to the public service announced in Budget 2004. These important reforms are aimed at securing the proper evolution of Exchequer spending on public service pensions over the longer-term, while also ensuring that future public servants are provided with an acceptable and fair income at retirement.

In accordance with these objectives, the Bill introduces two key changes which will affect most new entrants to the public service from 1 April 2004. Firstly, it raises the standard minimum pension age for new entrants in the public service from 60 to 65 years, and secondly, it abolishes the link for new entrants between age and compulsory retirement in most areas of the public service.

These changes will affect new entrants to the civil service, local government, teaching, the health sector, non-commercial State bodies, the Dail and Seanad, and ministerial office. As recommended by the Commission on Public Service Pensions, the special nature of the duties of the Permanent Defence Force, Gardaí, Prison Officers and fire-fighters means that maximum retirement ages will continue to apply in these areas. The Bill does, however, raise minimum pension ages for new entrants to the Garda Siochana and the Prison Service, as well as providing for new pension arrangements to be put in place for new entrants to the Permanent Defence Force.

I would emphasise that the measures in the Bill apply to new entrants only; neither serving staff nor existing pensioners are affected in any way.

The changes set out in the Bill have been decided on by Government following consideration of the report of the Commission on Public Service Pensions. On foot of the Commissions report, there were extensive discussions between the Government and trade unions and staff representative organisations in the public service. Despite our best efforts, full agreement was not reached in the course of this dialogue. Following its own examination of the position, the Government took the policy decisions announced in the Budget and presented here in this Bill. This is something I will return to later in my speech. However, I want to make the point, now, that while the changes in this Bill are urgently needed, they have evolved from a background of lengthy consideration and extensive consultation.

Demographic Factors

Demographic change dictates the urgent need to act now to ensure the long-term budgetary sustainability of public service occupational pensions. In particular, the clear and definite trend toward greater longevity is central to the need for appropriate reform now.

We have become used to thinking of ourselves as a predominately young population, with the advantages that come from that. We are fortunate that, while we still have one of the younger populations in the EU, we can learn from the experience of other EU countries now facing immediate ‘pension time bomb’ problems. But, significant demographic change will occur in Ireland over the coming decades and decisions on change have to be taken now. Either we take moderate, reasonable steps now to secure the future, or like our EU partners, we must face the need for more radical changes in the years to come.

The demographic changes are striking. Since the foundation of the State, life expectancy has risen sharply. In the case of men, it has increased by about 15 years, and in the case of women it has gone up by over 20 years. It is generally agreed that there will be continued improvement in life expectancy in the years ahead. While, of course, this is a welcome development, it would have the effect of significantly increasing the cost to the taxpayer of financing public service pensions in the future, unless appropriate reforms are put in place now.

Most forecasters agree that pension numbers are likely to treble over the next 50 years. While it is difficult to be certain about the likely size of the labour force at mid-century, especially given the size of immigration in recent years, the labour force would, in effect, have to treble in order to keep the pensioner support ratio at its current level.

A recent study published by the Department of Social and Family Affairs projected that the number of people of pension age in Ireland will rise from 430,000 currently to 673,000 in 2021, and then to 1.2 million in 2056. This means that our current ratio of 5 people of working age to every pensioner can be expected to fall steeply to less than 2 people of working age to every pensioner by 2056. The projected increase in life expectancy, combined with a declining birth rate underlines the necessity for action now to forestall unsustainable impositions on the Exchequer in the future.

Costs

It would be completely irresponsible to ignore these facts.

Public service and Social Welfare pensions now cost the Exchequer about 5% of GNP. Maintaining the present level of provision is expected to cost about 12.5% of GNP in 2056.Over the same period the public service pension component of this spending is set to rise from 1.4% to 2.5% of GNP.

As Minister for Finance, I have been very concerned to ensure that we do everything possible now to prepare for the challenges ahead. This Government has adopted a pro active approach in this area through actions such as the establishment of the National Pension Reserve Fund, targeted taxation adjustments and the introduction of PRSAs to foster responsible pension planning by individuals in the workforce generally.

Public service pensions are paid on a pay as you go basis as part of current expenditure, at an estimated 2003 cost of some €1,500 million. With cost-containment over the medium to longer-term clearly posing a major challenge, the Bill before the House today is directed at lessening the Exchequer burden in years to come, through implementation of moderate and well-founded changes which in the long-run are expected to achieve annual savings of some €300 million at current prices.

Report of the Commission on Public Service Pensions

The need for reform of public service pensions has long been acknowledged. This was clearly recognised by the Commission on Public Service Pensions, which was set up by Government in 1996 and which issued its report in 2001.

The Commission’s membership included the social partners, academic experts, pensions industry professionals and Departmental representatives. Its terms of reference required it to examine the pension terms of public servants in the light of changes in the working environment and conditions of employment of public servants, claims for improvements in existing terms, emerging costs and the operational requirements of the public service. It recommended its package of measures as representing an integrated strategy aimed at securing the long-term viability and stability of public service pensions.

In this context, it cited as “key aspects” the growth in long-term pensions expenditures, changes in the nature of public service employment, the issue of retirement age and claims for early retirement.

In 2001, the Government accepted the bulk of the Commission’s proposals, including those in relation to pension age.

It is worth emphasising that the provisions of this Bill about increasing minimum pension age for new entrants are a direct implementation of specific Commission recommendations. In endorsing such an approach, the Commission took a very thorough approach: it examined all relevant factors, including, in particular, the demands placed on the different occupational groups, and cited increased life expectancy as a key factor in its decisions.The Government agreed with the Commission’s conclusions.

The Commission made no general recommendation as such concerning compulsory retirement ages, which this Bill will abolish for most new entrant public servants. In my view, however, this is an appropriate accompanying measure to the change in minimum retirement age for new entrants, and will facilitate future public servants in continuing to make a productive contribution in the workplace at older ages.

From a pensions perspective, I believe that the forecast decline in the dependency or support ratio as the first half of this century unfolds makes it a particularly opportune moment to dispense with mandatory age-based retirement for most new entrant public servants. At the same time as the worker/pensioner ratio falls over the decades ahead, people will be living longer. In the context of the major impact which these changes will have on the labour force, it makes sense to allow people to continue to work and contribute for so long as they are able and willing to do so. The benefit for the Exchequer should be a reduction in pension costs.

Discussions with Public Service Unions

In September 2001, the Government agreed the recommendations of the Commission in principle, and set up a working group with the public service unions to advise on implementation of those recommendations. The Group was established in January 2002 and reported in October 2003.Parallel groups with similar remits were set up in respect of the Permanent Defence Force and the Garda Síochána, and the Government also had the benefit of reports from these groups in informing its decision-making.

In addition, individual meetings were held between officials of relevant government departments and representatives of the Irish Hospitals Consultants Association, the Irish Medical Organisation and the Psychiatric Nurses Association. Also, bilateral discussions were held with SIPTU, Prison Officers Association, ASTI, INTO and TUI in relation to specific Commission recommendations.

Although the trade union and management participants on the main working group were able to make good progress on several important aspects of the Commission reform package, agreement was not reached on some other critical items in the package, notably the raising of minimum pension age for new entrants. It must be put on record that every opportunity was given to arrive at an agreement in the course of these talks, but this did not prove possible.

Budget Announcement

Against this background, I considered that action was urgently required following what had been a prolonged phase of study and consultation. In my view, to delay further risked missing the opportunity for reform created by the Commission’s work.The Government agreed that change had become a pressing priority.

Accordingly, I announced in my Budget Statement last December that the Government had decided to implement the bulk of the recommendations of the Commission. More specifically, I announced the intention of bringing forward legislation, as now embodied in this Bill, to increase minimum pension age and remove compulsory age-based retirement for most new entrants to the public service.

In view of the value to public servants of a guaranteed system of pay-related pension increases, the Commission recommended that all serving public servants should make an additional explicit 1% contribution towards the cost of pay-related pension increases. However, in line with the Government’s concern to secure a balanced reform package which would not have implications for pay negotiations, I announced in my Budget Statement that the Government would not be proceeding with this recommendation.

Similarly, I decided not to proceed with the Commission proposal for the use of a new index for the purpose of determining public service pension increases – a proposal which was generally opposed by both pensioner groups and public service unions.

In addition, I announced my intention of drawing up a further set of pension changes arising from the Commission’s recommendations in respect of existing public servants.

These changes, which are not part of this Bill, may include amendment of the formula used for integrating public service and social welfare pensions to make better provision for current and future staff on lower pay levels, along with a new single additional voluntary contribution-type scheme for the public service, as well as the possibility of optional early retirement on the basis of actuarially reduced benefits.

Also, it is proposed to examine the feasibility of implementing the Commission’s recommendation for the payment of survivors pensions to non-spousal partners. These further changes are the subject on ongoing discussion with the public service unions.

I am sure that this outline of the recent background will have impressed on members that this Bill has its roots in a lengthy and thorough deliberative process and is a measured, timely response to the challenges that lie ahead. The provisions of the Bill, are, therefore, in no way rushed or improvised, but instead have been developed by the Government in the context of expert independent analysis and appropriate consultation with all the interested parties.

Structure of the Bill

I will now turn to the structure of the Bill.

Some public service pension schemes, such as the scheme for established civil servants, are provided for in primary legislation. Others, such as the pension scheme for unestablished civil servants, are provided for by administrative arrangements. However, the majority of public service pension schemes, for example the Local Government Superannuation Scheme, are provided for by means of secondary legislation. In order to ensure that the pension reforms for new entrants have effect across the public service on the same day, this Bill amends the relevant primary legislation and overrides the relevant secondary legislation and administrative arrangements as appropriate.

The first two sections of the Bill deal with definitions, including the definition of new entrant. These are followed by sections which remove or raise or leave unchanged compulsory retirement ages for new entrants to the public service. The Bill then deals with the design of new superannuation arrangements that will be introduced for the Permanent Defence Force and provides for the Chaplaincy Service to the Permanent Defence Force. The next sections provide for the increase in the minimum age at which pension may be paid. The concluding sections are essentially technical in nature, covering matters such as removal of doubts and collective citation.

The Bill contains two schedules. The first Schedule is a list of State Bodies, mainly commercial, which do not come within the definition of public service body in this Bill, but whose employees in certain circumstances will not be deemed new entrants on assuming posts in the public service. The second Schedule lists those areas of primary legislation which the Bill is intended to amend.

In order to clarify some issues raised in the Seanad debate on this Bill, I would point out that the first Schedule is an exclusion list and identifies those commercial State Bodies that might, by virtue of the definition of public service body used in the Bill, be deemed to come within the ambit of its provisions. It is intended that such bodies be excluded from the terms of the Bill. As noted however, employees of these bodies will not be deemed new entrants on entering the public service.

In relation to the second Schedule, as outlined earlier, this amends those areas of primary legislation which state pension or retirement ages

New Members of the Oireachtas and Office Holders

I think that members will acknowledge that I, as Minister for Finance and this Government, have been very pro active in securing reasonable entitlements for those who find themselves on the benches of either House.

We have, in particular, been concerned that those who embark on very demanding careers as public representatives are properly and reasonably remunerated.

Members will note that the Bill’s provisions on minimum pension age extend to new members of the Oireachtas and Office Holders including Ministers and Ministers of State. Although the Pension Commission’s remit did not cover members of the Oireachtas and Office Holders and, hence, the Commission did not make any recommendations regarding their pension terms, the Government, nevertheless, considered that they should be encompassed by the current change.

The reason for including Oireachtas members, Ministers and other Office Holders within the scope of this change in minimum pension age is that we are public servants. We serve the public in a most fundamental way.

However, unlike most public servants we do not have security of tenure – this is the nature of the job.We are subject to the will of the electorate from time to time and so there can be a considerable change in Oireachtas membership from one Dáil or Seanad to the next. It goes without saying that, in many cases, these changes are involuntary, but this does not change the basic position that we are public servants and, to that extent, should be part of a pension reform package.

However, the requirement to be re-elected from time to time means that Oireachtas members are different from the general body of public servants. I consider it appropriate that this special factor should be taken into account in the Bill for serving or former Oireachtas members and Ministers.

Accordingly, the definition of “new entrant” in the case of members of the Oireachtas and Office Holders does not include any member of the Oireachtas or any Office Holder who was first elected or appointed before 1 April 2004.

This is an exception, but it is a reasonable exception on the basis that even the most effective TD, Senator or Minister may not be re-elected, and does not have the same security of tenure as other public servants. As I have said, this is not a voluntary matter and, accordingly, having been once elected or appointed as an Office Holder before 1 April 2004 should be sufficient to take the person out of the “new entrant” category when they are elected or appointed an Office Holder in the future.

Persons being elected for the first time after 1 April 2004 will be subject to the “new entrant” age limits. This is entirely consistent and reasonable as individuals going forward for Dáil or Seanad election for the first time in future will be aware of the new age limits and will be in a position to take this into account in considering their own circumstances.

You may also notice that Taoisigh who are first elected to the Oireachtas after 1 April 2004 will be exempt from “new entrant” status.

This exemption relates only to the pension in respect of holding the office of Taoiseach – it will not extend to the person’s entitlement under the Oireachtas members’ pension scheme. The existing provisions for Office Holder pensions recognise the status of the post of Taoiseach as leader of the Government. It is appropriate therefore that the respect accorded to the post and to former holders of the post should be preserved.

Gardaí, Prison Officers, Defence Forces, and Fire Service

In the Pension Commission’s view, the operational requirements of the Gardaí, Prison Officers, military personnel and fire-fighters continue to warrant special treatment in terms of minimum pension age and retirement age provision for these groups. Notwithstanding this, the Commission did recommend certain changes for these groups, and these changes are being proposed for implementation in this Bill.

In the case of Gardaí and staff in the Prison Service, the Bill sets a minimum pension age of 55 for new entrants.Currently, staff in both those groups may retire at age 50 subject to meeting certain service criteria. The Bill retains the current compulsory retirement age of 60 for new entrants to the Prison Service and provides a single compulsory retirement age of 60 for new entrant Gardaí, with service in the Gardaí between ages 55 and 60 being subject to certain health, fitness and competence criteria. At present Gardaí up to and including the rank of Inspector have a compulsory retirement age of 57; for Gardaí above that rank, the compulsory retirement age is 60.

For new entrants to the Permanent Defence Force, the Commission recommended that payment of pension should be dependent on age and service, rather than on service alone, and that the earliest age at which a pension would be paid would be 50 years.

This Bill legislates to implement this recommendation on minimum pension age, as well as providing for the making of an appropriate pension scheme on this basis for new entrants to the Permanent Defence Force.

The Commission considered that there should be no change in the minimum pension age of 55 or the compulsory retirement age, also 55, of fire-fighters. The Bill reflects this. The Commission did however recommend that new entrant officers in the fire brigade should have standard public service terms, and accordingly the Bill provides for them to have a minimum pension age of 65 and no compulsory retirement age. Fire-fighters are defined in the Bill as “specified fire brigade employees” and an explanation of that term is given in section 1 of the Bill.

Definition of new entrant

I now wish to turn to the definition of new entrant.

The guiding principle adopted in the Bill is that a new entrant is a person who is appointed as a public servant, as defined in the Bill, on or after 1 April 2004.The new arrangements do not apply to public servants who are serving on 31 March 2004.A broad scope has been given to the term “serving” in the context of this Bill.

The general principle is that anyone who has an employment relationship with the public service as of 31 March 2004 will not be deemed to be a new entrant.

This means that:-

staff on paid or unpaid leave or on secondment from public service bodies on 31 March 2004 will not be regarded as new entrants on their return;

a person who has received a written offer of employment prior to 1 April 2004 but has not yet taken up duty will not be regarded as a new entrant;

persons training in the Garda College who were admitted to training prior to 1 April 2004 will not be regarded as new entrants on completion of their training;

staff who were employed in a temporary or seasonal capacity will not be regarded as new entrants if they resume duty in the public service within the same employment relationship.

Provision has also been made that any current public servant who leaves employment but subsequently returns, within a period of 26 weeks, to a public service job, will not be regarded as a new entrant. The stipulated period of 26 weeks in this case reflects similar provisions in employment law generally.

For purposes of mobility within the public sector, staff who are serving in the public sector on 31 March 2004 and who subsequently take up appointment in the public service will not be regarded as new entrants.

I am fully aware of the views of the public service unions. There have been discussions between officials of my Department and the unions on this issue. In drafting the legislation, I have been as sensitive as possible to the unions’ concerns in relation to the definition of new entrant. I am confident that the definition contained in this Bill is fair, sensible and workable. The approach adopted is a balanced one, allowing a reasonable “interim” period within the overall context of a clear and practical definition. In this context also, account has been taken of existing part-time, temporary, seasonal and contract staff.

General concluding section

I think it is useful, in conclusion, once again to remind the House of the essentials of what this Bill is setting out to achieve.

The removal of compulsory retirement ages will heighten the necessity for strong management and performance control in the public service, and, in this regard, guidelines on these issues are in preparation for the civil service in the broader context of human resource modernisation in the public service.

The proposed measures in this Bill will not only lighten the burden on the Exchequer over the decades to come, but they will also ensure that the pension 'packages' on offer to potential new recruits to the public service will continue to be a very attractive feature of public service employment.

The Bill therefore offers a 'win-win' outcome when viewed in its entirety. Not alone does it make a major contribution towards fiscal soundness - by making future pension outlays manageable, it is also a vital component in making it possible for the State, as a good employer, to provide a reasonable income for its employees at retirement.

Viewed in this light, I am sure that Members will conclude that the case for change is incontrovertible, and that, as such, this Bill is the right means of delivering that change.

I commend this Bill to the House.

ENDS