CHAPTER 7 - PRELIMINARY REVIEW OF PUBLIC SERVICE OCCUPATIONAL PENSION ARRANGEMENTS IN OTHER COUNTRIES

7.1 Introduction

7.1.1 The Commission has carried out a preliminary review of current public service pension arrangements and developments in other countries, both in Europe and elsewhere. The findings in relation to other European countries are summarised in this chapter.

7.1.2 It is important to note that pension arrangements in any country will reflect the general economic, social and political conditions in that country. Pensions for public servants may be linked with the national Social Security system, or, if independent of it, may reflect Social Security provisions and conditions, for example in relation to retirement age. In addition, pensions form part of the public servant's conditions of employment, and represent agreements reached between public service unions and employers in each country. For these reasons it is difficult in a widely-based review such as this to make direct comparison between pension and retirement arrangements in Ireland with those in other countries. However, it is considered that certain features and trends can be identified which, insofar as they are relevant, will be of use in the Commission's examination of public service pension arrangements in Ireland. For the purpose of its final report, the Commission intends to focus in more detail on the pension arrangements of a number of countries in Europe - namely, Germany, the Netherlands, Sweden, and the UK.

7.1.3 The findings summarised below are based on the information currently available, which it should be noted is incomplete in certain respects. The following features are considered:

* type of scheme, legal basis, and the scope of the pension arrangements;

* minimum service conditions for pension and service taken into account;

* retirement ages;

* level of benefits and system of calculation;

* contributions payable;

* early retirement provisions;

* mobility and pension benefits;

* pension arrangements for part-time employees;

* provision for pension increases;

* financing arrangements;

* recent and current modifications

7.1.4 In its review, the Commission's approach has been, as far as possible, to examine the pension provision for civil servants in other European countries and, where different, the arrangements applying to other public service groups, in particular employees of local authorities. Certain categories of public servants have special coverage, e.g. military, firemen, as is the case in Ireland, but it would not be practicable to deal with each specific category to any great extent in this summary. This chapter mainly concerns itself, therefore, with the pension arrangements in operation for mainstream civil and public servants.

7.1.5 Under the pension arrangements applying in a number of the countries reviewed, public servants are entitled to receive benefits under the State Social Security system as well as the occupational pension scheme (see section 7.2 below). The integration of benefits between the two systems is an important and often complex feature of the pension arrangements to be considered. It is not discussed in any detail below due to the absence of adequate information. The Commission will consider the operation of integration in its future examination of public service pension arrangements abroad.

7.2 Type of Scheme, Legal Basis, and the Scope of the Pension Arrangements

7.2.1 Public service occupational pension schemes are distinct from the State Social Security pension arrangements. In most of the countries considered, statutory schemes are in operation but collective agreements form the basis for the occupational pension provision in Denmark (local authority service only), Italy, the Netherlands and Sweden. Collective agreements came into operation in both Italy and the Netherlands on 1.1.96 - previously, statutory schemes applied and will continue in force on a transitional basis.

7.2.2 The schemes are normally "stand-alone", i.e. they do not simply top-up the member's entitlements over and above the State Social Security pension entitlements. In Denmark, the Netherlands, Sweden, Switzerland and the United Kingdom the entitlements are additional to those payable from the State Social Security system.

7.2.3 The schemes give coverage to most civil and public servants.

7.3 Minimum Service Conditions for Pension and Service Taken Into Account

7.3.1 All countries have minimum membership requirements as regards the length of service needed to qualify for a pension with the exception of the Netherlands, Sweden, Switzerland and the United Kingdom. For the other countries the minimum qualifying service ranges from one month (Finland) to 15 years (Austria, France, Portugal and Spain). Like Ireland, five years of service are required in Belgium, Germany and Italy.

7.3.2 Service in the public sector reckons in all countries (with the exception of military service in Denmark and Sweden) as does maternity leave and part-time service. The latter is subject to certain conditions in some countries and is reckoned in different ways, i.e. as being either equivalent or proportional to full-time service. Professional experience in the private sector may be allowed in certain circumstances (usually involving a financial transfer) in Denmark, Germany, Luxembourg, Portugal, Spain, Sweden and Switzerland. Service given in the public service of another country is not normally reckoned.

7.4 Retirement Ages

7.4.1 The position regards minimum and maximum retirement ages varies between the other European countries considered. Certain categories of public servants in each country, e.g. military, firemen, have a lower retirement age, but as mentioned above, these special categories are not covered in this examination.

7.4.2 The minimum service conditions outlined at paragraph 7.3.1 apply in all cases. There are no age restrictions for retirement due to ill-health; however, different minimum service requirements apply in many cases.

7.4.3 Table 7.1 sets out the current minimum and maximum retirement ages in the other countries and also gives an indication as to whether there is an actuarial or equivalent change in pension benefits in the event of retirement before a certain age within the minimum and maximum ranges.

Table 7.1 Retirement Ages in a range of European Countries

* i.e. excluding retirement on ill-health grounds or special early retirement grounds in cases of redundancy, specific efficiency measures or other short-term measures to induce structural changes

Notes:

(i) If retirement takes place before the age of 67, pension is reduced by 0.5% for each year between the member's age on retirement and age 67.

(ii) Until 1993 the maximum retirement age was 63 years. For all employees recruited since then, the maximum retirement age is 65. For those already in employment at the start of 1993 the maximum retirement age is between the ages of 63 and 65. Members may retire at any time from an age which is five years earlier than the maximum retirement age subject to the minimum membership conditions. However pension is reduced by 0.5% for each month of early retirement

(iii) The minimum retirement age is 62, but this is due to be raised to age 63 shortly. A reduction of 3.6% will apply for each year of early retirement. The maximum retirement age is 67, but the usual age of retirement is age 65.

(iv) Under the new scheme members may retire from the age of 57 provided they have 35 years of service or at any age provided they have 40 years of service

(v) In general there is no provision for early retirement. However early retirement on request is possible from age 61

(vi) Early retirement is possible from any age once the member has completed at least 36 years service.

(vii) Members may retire at any time from age 60 onwards provided they have at least 30 years of service.

(viii) Members may retire at any time from the age of 61 years onwards, with a reduction in pension of 0.4% for each month of early retirement.

(ix) A person who retires before age 62 or retires after that age with less than 40 years service has his or her pension reduced according to specified rates.

(x) The normal retirement age is 60 but, a person may retire from age 50, subject to an actuarial reduction of 5% to pension and 2.5% to lump sum for each full year of premature retirement. Exceptionally, if in the interest of the service, a person may serve until age 65.

7.5 Level of Benefits and System of Calculation

7.5.1 In most countries the pension calculation has integral linear progression (i.e a fraction of pensionable pay is payable for each year of pensionable service), which is also the system applying in Ireland. In other countries, the system involves the combination of a constant or a basic sum (for service up to a certain level) and integral linear progression (for service above that level).

7.5.2 The salary used to determine pension benefits varies. Most countries use the salary applicable on retirement or salary averaged over a certain period prior to retirement. In Denmark and Spain a level of pensionable salary, which may be somewhat below the actual level of salary the member is in receipt of, is fixed periodically, either by the Ministry of Finance or by law.

7.5.3 Table 7.2 sets out the maximum pension entitlements as a percentage of pensionable salary for a range of European countries, the accrual rates used, and the length of service required to qualify for maximum pensions.

Table 7.2 Maximum Service required to qualify for Maximum Pension, Annual Accrual Rate, Maximum Pension Benefits, in a range of European Countries

Notes:

(i) The pension benefit is based on pensionable basic salary (pbs) which is 80% of the last salary received. The calculation basis is 50% of pbs for 15 years of service plus 2% of pbs for each additional year up to a maximum of 40 years. The maximum pension is equivalent to 80% of considered remuneration.

(ii) The pension benefit is based on pensionable salary, which is an individual basic salary, lower than the salary actually paid. The calculation basis is 1.75% of pensionable salary for service between 1 and 16 years; 1.5% of pensionable salary for service between 17 and 32 years; and 1% of pensionable salary for service between 33 and 37 years.

(iii) This is the calculation basis as introduced for new recruits from 1 January 1993.

(iv) A new scheme has been introduced for people recruited after 1 January 1996. Pension benefit is determined by the amount of contributions paid during membership. The amount is re-evaluated according to rises in the cost of living index and is multiplied by a specific coefficient which is fixed every 10 years and depends on the retirement age, the estimated life expectancy and economic growth. The figure for maximum pension of 80% of pensionable salary represents the old scheme maximum benefit.

(v) The calculation basis is 20/60 of pensionable salary with a length of service of 10 years and a further 1/60 of pensionable salary for each additional year subject to a maximum of 40 years of service.

(vi) For those recruited before 1993, maximum service is 36 years and the annual accrual rate is 1/36th of pensionable salary up to 36 years. Therefore the maximum pension entitlement is 100% for these members

(vii) Pensionable salary is basic remuneration which is fixed annually by the law on general State budgets. The pension is the product of pensionable salary and a specific coefficient according to the number of years of service. The maximum pension is fixed by law on an annual basis. The maximum pension is equivalent, on average, to 95.4% of final salary.

(viii) The Swedish system comprises of two pillars. The first pillar is a defined contribution system, and the pension reflects the pensionable income earned by a person throughout his or her working life. The maximum pension paid under this pillar is approximately 60% of pensionable salary. Under the second pillar pension is based on the average pensionable salary in the five years preceding the year of retirement. 30 years of service is required to achieve maximum pension under this pillar, which amounts to approximately 13% of pensionable salary.

(ix) Combination of Social Security and occupational pension.

(x) In the UK system, benefits consist of retirement lump sum and pension; this is generally accepted as being equivalent to a replacement income of 66% of pensionable pay. No other country (apart from Ireland) pays a lump sum in addition to pension. It is possible for a person to qualify for maximum pension benefits of 73% of pensionable salary (i.e. between pension and lump sum) if he or she has 45 years service at age 65. Normal retirement age is age 60.

7.5.4 The maximum survivor's pension as a percentage of the retirement pension varies from 50% to 80% (Denmark). The rate is 50% in most countries.

7.6 Contributions Payable

7.6.1 In Austria, Belgium, Finland, France, Greece, Italy, Portugal, Spain, Sweden, Switzerland and the United Kingdom, members pay a specific percentage of salary as a contribution towards the Scheme. The rate of contribution varies from 1.5% in the United Kingdom (towards survivor's pension only) to 11.75% in Austria. The rate in most countries is in the 7% to 10% range.

7.6.2 Implicit or notional contributions through either a lowering of salary levels, a levy on the pension, or recoupment of part of the employer's contribution apply in Germany, Luxembourg, United Kingdom, and the Netherlands.

7.6.3 In Finland, Italy, the Netherlands, and Sweden there is an explicit employer's contribution. The rate varies from 17.25% of salary in Sweden to 23.8% of salary in Italy.

7.7 Early Retirement Provisions

7.7.1 Retirement with immediate payment of pension benefit from a minimum retirement age is permissible in all countries subject to certain minimum service conditions (see section 7.3), in some cases with actuarial reduction (see Table 7.1). The minimum age is usually 60 years.

7.7.2 In many countries members who retire voluntarily before a minimum pension may qualify for a deferred pension. This provision does not exist in Austria, Germany, Greece, Italy, Luxembourg and Switzerland.

7.8 Mobility and Pension Benefits

7.8.1 Mobility of pension rights is largely confined to the public sector. Periods outside of the public sector are rarely allowed to reckon but there is some scope for this in certain countries as discussed in section 7.3.

7.8.2 Periods of service given in another country are not normally transferable although an agreement exists between Denmark, Finland, Norway and Sweden whereby transfers of service may be allowed in certain circumstances. This agreement is under review, however. In a similar manner, Greece recognises professional experience acquired in the civil service of Cyprus. Some countries recognise periods of employment given with certain international organisations.

7.9 Pension Arrangements for Part-Time Employees

7.9.1 Membership of schemes is open to part-time employees in all countries considered. Many countries do not have any minimum hours requirement for this purpose. Where such a requirement exists, it either takes the form of a specified number of hours per week (12 in Denmark [local authority service] and 15 in Germany [local authority service]) or a specified percentage of equivalent full-time hours (40% in Sweden).

7.9.2 Part-time service generally counts proportionately to full-time service, with the pension benefit being calculated by reference to the full-time pay equivalent.

7.10 Provision for Pension Increases

7.10.1 All countries increase the pensions of retired members although the method of increase varies. The information available shows that increases by reference to a combination of developments in the cost of living index and salary increases in the public sector apply in a number of countries. Exact information on how this operates in practice is not available. Other countries apply increases in line with salaries of serving staff. The remainder apply increases in line with a cost of living index. Table 7.3 summarises the position.

Table 7.3 Provision for Pension Increases in a range of European Countries

7.11 Financing Arrangements

7.11.1 In most countries the public service pension provision is budgeted with benefits being met on a pay-as-you-go basis. Pensions are fully funded in the Netherlands and a fund now operates in Italy also from the beginning of January 1996. In Finland, Portugal and, since October 1996, Sweden, partially funded systems are in operation.

7.11.2 In some countries members are obliged to make contributions (see section 7.6) while in others the contribution is hidden or notional in that salary levels are adjusted downwards.

7.12 Recent and Current Modifications

7.12.1 The extent of modifications made to public service pension arrangements over the past 10 years varies in the countries surveyed. These modifications may have been part of general changes to government expenditure programmes, in response to fiscal pressures or due to other causes. It would appear that the underlying factors in the modifications made include:

* recognition of the long-term cost of public service pension schemes,

* reform of State Social Security systems,

* general reforms in public service structures and management, and

* staff claims for increased flexibility in pension schemes.

These factors often operate in combination with each other.

7.12.2 A brief general outline of the types of modifications reforms made, by country, is given in Table 7.4 below

Table 7.4 Modifications to Public Service Pension Arrangements in a range of European Countries