CHAPTER 9 - PRELIMINARY REPORT ON ISSUES EXAMINED

9.1 Introduction

9.1.1 Under its terms of reference the Commission is required to examine and report on the occupational pension arrangements of public servants, and to present its report to Government in 1998. As at the date of this interim report, the Commission has not yet determined the shape of its recommendations, whether, for example, to recommend a radical change to current public service pension arrangements or the retention of existing arrangements subject to certain modifications, or whether any changes proposed should apply to all staff or to new entrants only. Hence, it must be emphasised that comments made on the issues considered below are necessarily incomplete and preliminary.

9.1.2 As outlined in Chapter 1, the Commission is presenting this report following referral to it by the Minister for Finance of a number of matters for early consideration - (i) claims by SIPTU in relation to non-officer grades in Eastern Health Board and Dublin voluntary hospitals and (ii) nurses' pension claims.

9.1.3 The Commission has identified the following issues on which it wishes to make preliminary comments:

* Cost of public service pensions

* Financing and administration of public service pension schemes

* Pension contributions by public servants

* Normal retirement age and early retirement

* Integration between occupational pension and State Social Insurance benefits

* Pensions and part-time work

* Pension increases

9.2 Cost of Public Service Pensions

9.2.1 It has been shown in Chapter 4 that, in constant salary terms, the annual cost of public service occupational pensions is projected to increase almost threefold from £540 million per annum in 1995 to £1.4 billion per annum over the next thirty years. This is a significant increase. While the full picture on pension costs must await completion of the Commission's actuarial project, indications are that the increase in costs is likely to be of the order predicted.

9.2.2 Pension contributions made by individual public servants who are members of contributory pension schemes have not been included in the projections, but will form part of the Commission's own actuarial review. Furthermore, it has been accepted in a number of pay arbitration findings that an implicit contribution is made through salary being set at a lower level to take account of the benefits payable under the pension scheme (see section 9.4 below).

9.2.3 The principal factors underlying the anticipated growth in public service occupational pension costs (in constant salary terms) are:

* the significant increase in recruitment to the public service in the late 1970s and early 1980s which will result in a major cohort of public servants reaching retirement age in the period 2015 to 2030;

* the increased number of female public servants who will be retiring over the period in question; as females have longer life expectancy than males, pensions in payment for longer periods will contribute to increased costs; while fewer spouses will qualify for spouses' pensions in respect of female public servants compared with male public servants, the overall effect on pensions will be an increase in costs;

* anticipated improvements in life expectancy for older people generally.

9.2.4 The cost of occupational pensions will peak around 2025 after which it should fall with the passing of the anticipated bulge in retirements and the reduction in occupational pension costs arising from integration with the Social Insurance system. In relation to the latter, it has been shown in Chapter 4 that the overall cost implications for the State of extending full PRSI to all public servants will probably be adverse, although the increased PRSI contributions being made by public servants would have to be taken into account before a complete assessment could be made.

9.2.5 Cost projections are sensitive to the assumptions made about the progression of salaries. The projections in paragraph 9.2.1 are based on the assumption of constant (1995) salary terms. If, instead, we assumed constant (1995) price terms combined with an annual rate of growth in pay per head of 1.5% above the rate of inflation, the cost of occupational pensions would grow from £540 million per annum in 1995 to £2.2 billion per annum by 2025 and £2.6 billion by 2045. Public service salary increases have tended in the past to exceed price increases

9.2.6 On the same assumptions, as a percentage of GNP, public service pensions will fall in the early period from a figure of 1.6% of GNP in 1995 to a low of 1.3% in 2005, reach a peak of 2.3% in 2025 before falling again to 1.8% by 2045. As a percentage of pay, gross pensions expenditure will increase from 11.5% in 1995 to a peak of 30.4% by 2030, before falling slightly to 25.9% of pay in 2045.

9.2.7 It should be noted, however, that these projections do not take account of the reduction in occupational pensions which will result from the integration of public service pensions with the Social Insurance system arising from the change in PRSI status for public servants recruited on or after 6 April 1995. This should begin to impact on costs from about 2025 onwards. In addition, as noted at paragraph 9.2.2, contribution income has not been taken into account.

9.2.8 Projections over a long period such as this are, of course, fraught with difficulties and the number of variables involved are such that the actual costs, whether in money terms, as a proportion of GNP, or as a proportion of pay could be quite different from these projections.

9.2.9 If, for example, as approximates to the case between 1987 and 1995, average pay levels were to increase by 5.2% annually, a growth of 2.5% above the rate of inflation, the pensions bill in 2025 would rise to £2.9 billion in real terms (constant prices). This is an increase of almost one-third on the estimate of £2.2 billion based on the assumption of pay increases of 1.5% above the rate of inflation.

9.2.10 It is clear that, whether expressed in constant salary or constant price terms, the gross cost of public service pensions will undergo rapid escalation over the period 2005 to 2025. The substantive point, then, is the question of "affordability" during that period. Recent economic assessments of the economy's capacity for growth, the likely demographic trends (and consequent effects on the dependency ratio) and the underlying Exchequer position have been such as to discount the more alarming suggestions of a pensions "time-bomb". While it is true that in a macro-economic sense Government finances are currently in a favourable situation, an increase in the future pension costs of public servants of the magnitude indicated must nevertheless give serious grounds for concern.

9.2.11 The projected increase in pension costs will impact not just upon the fiscal position but upon the competitiveness of the economy as a whole, by pre-empting resources which could otherwise be used to expand investment in physical infrastructure and to reduce taxation.

9.2.12 It must be emphasised that the projections made are on the basis of current pension terms. A major change in these terms could cause a significant escalation in public service pension costs well beyond these figures. While the effect of any such change might be modest in the short run, regard must be had to the long-term effects and the possibility that specific arrangements made in respect of one group of employees might trigger similar demands in respect of others.

9.2.13 In this regard, the Commission considers that the proper management of public service pensions would require regular actuarial reviews of pension scheme costs and that any future proposals to amend pension scheme terms should include an actuarial study of the costs involved.

9.2.14 The Commission considers that the cost trajectory for public service pensions requires careful control. A reasonable objective would be to monitor very carefully any further commitments which would add to the growth in public service pension costs.

9.3 Financing and Administration of Public Service Pension Schemes

9.3.1 Chapter 3 outlines the current financing and administrative arrangements of public service pension schemes. It makes some preliminary comments on the most appropriate method for financing public service pensions (pay-as-you-go, advance funding, or other method), and raises a number of administrative and operational issues for further consideration.

9.3.2 The advantages of the pay-as-you-go approach to financing public service pensions are that it is easy to operate, is relatively inexpensive to administer, facilitates transferability of service within the public service, and is in keeping with the Government's budgetary system generally. In addition, the primary objective of advance funding in the private sector - to give security for the pensions of employees - is met through the State's permanent and continuing commitment to discharge its pensions obligations as they arise. Moreover, the pay-as-you-go approach to financing public service pensions is the system adopted generally in most other countries.

9.3.3 The main difficulty with pay-as-you-go is that, because it does not make advance provision for future liabilities, there is a lack of transparency about the real cost of pensions. As a result, benefits, not costs, tend to become the main focus of attention. Substantial increases in personnel covered and/or improvement in pension terms, which usually have only a minor impact on costs in the short term, may result in a disproportionate increase in medium to long-term expenditure. In a funded system, the existence of contribution rates for a pension fund would bring home to members the value of their pension entitlements and the costs of improving them, and the State too would become more conscious of the real cost of recruitment. In addition, advance funding would give a more stable profile of costs over time compared with the pay-as-you-go approach.

9.3.4 Some of the financial implications of establishing a pension fund to meet the full cost of public service pensions are discussed in Chapter 3. In practice, the State would be involved in a double cost situation, as it would have to meet the ongoing pay-as-you-go cost of pensions as well as contributing to a pension fund to meet the cost of future service. The necessary resources would have to be raised from either taxation or borrowing, each of which would pose certain difficulties.

9.3.5 An alternative to full funding would be the establishment of a partial fund (perhaps using pension contributions made by scheme members) which would be available to supplement the pay-as-you-go system and maintain expenditure at a reasonably stable level when the major increase in costs occurs in the first quarter of the next century. There may be other possibilities to be examined, such as the funding of certain aspects of pension schemes. But the establishment of even a modest partial fund could impose a significant cost burden on the Exchequer.

9.3.6 If a public service pension fund (whether full or partial), were established issues would arise in relation to its management and control, including its investment strategy and level of independence.

9.3.7 While it is clear that funding would raise significant practical and budgetary issues, the Commission will consider in its final report the full range of arguments for and against the various approaches to financing public service pension costs. Its final recommendations will also take account of the experience of other countries in this regard.

9.3.8 Chapter 3 refers also to a lack of transparency in government financial management and accounting systems in taking account of the accruing cost of public service pensions. In its discussion of the projected growth in public service pension costs, the Commission has referred at paragraph 9.2.13 to the need for regular actuarial reviews of pension schemes and of proposed changes to pension scheme terms. The Commission notes with interest the pilot initiative of the Department of Transport, Energy and Communications in introducing an accrual-based approach to recording pension costs and liabilities in its financial statements. An approach such as this might contribute to an improved awareness amongst public service managers, employees and unions of the true value and cost of public service pensions and of the cost impact of changes in pension terms.

9.3.9 Several other management and administrative issues for further consideration are detailed in Chapter 3 and listed below:

* tracking of pensionable service for individual public servants who have worked in a number of public sector employments

* provision of general information to scheme members and provision to individuals of information on their pension entitlements and any outstanding contribution liabilities

* need to ensure that pension scheme arrangements are as simple and easy to understand as possible, and are fair and transparent in operation

* most appropriate system for resolving difficulties concerning pension entitlements

* the establishment of a single pension scheme for all public servants

* mechanisms for considering the implications for public service pension schemes of issues arising at national or EU level, such as legislation in the area of pensions or relevant court judgements

* provision of centralised data on public service records and costs

9.4 Pension Contributions by Public Servants

9.4.1 Most occupational pension schemes in the private sector are contributory. This is true also of public service occupational pension schemes, although this fact does not appear to be widely recognised outside the public service. It has been shown in Chapter 2 that a large number of public servants make explicit pension contributions towards the cost of their main pension scheme benefits while all public servants who are members of a spouses' and children's contributory pension scheme pay a contribution for membership of the scheme. In 1996 the value of all pension contributions made by public servants was estimated at £178 million.

9.4.2 A main scheme contribution of 5% applies to a number of groups including teachers and local authority and health service personnel. Members of the Garda Síochána attested prior to 6 April 1995 pay a pension contribution of 1.75% (a small number have a 2½% rate of contribution). The contribution rate for spouses' and children's benefits is 1½%. All new entrants to the public service, appointed on or after 6 April 1995 to areas where the lower modified rate of PRSI formerly applied and who now pay the full rate of PRSI, pay an explicit main scheme pension contribution of 5%. In calculating the pension contribution for those who pay the full rate of PRSI, remuneration is reduced, as appropriate, to take account of the entitlement to State Social Insurance benefits (the operation of this arrangement is explained at section 2.5 above).

9.4.3 A main scheme contribution rate of 5% is equal to one-third of the contribution rate which (as noted at paragraph 4.6.1 above) would be required to fund a pension on standard public service terms for a male aged 20 retiring at age 65. A spouses' and children's scheme contribution rate of 1½% was reckoned at the time of establishing the various schemes to represent one-half of the cost of the scheme.

9.4.4 The principal areas of the public service where main pension scheme contributions do not apply (leaving aside the April 1995 changes for new entrants) are the civil service (both established and non-established) and the Permanent Defence Forces.

9.4.5 In certain negotiations on pay for established grades in the civil service, comparisons are done with analogous employments in the private sector and elsewhere in the public sector. For those employments having contributory pension schemes a deduction is made in respect of the amount of employee pension contribution made (excluding any contribution for spouses' and children's benefits). This deduction, which averages about 5%, is seen as an implicit contribution by civil servants towards the cost of their pension. A similar approach has been adopted in various reports of the Review Body on Higher Remuneration in the Public Sector. As noted above, an explicit 5% contribution rate, in line with that applying in other public service contributory pension schemes, was introduced for new entrants to areas where modified PRSI rates formerly applied. In consequence, salaries and relevant allowances which were subject to periodic pension deductions were uprated by 1/19th.

9.4.6 In addition to this basic deduction, certain reports of the Review Body on Higher Remuneration in the Public Sector have made a further deduction when setting the salaries of public servants in respect of the more favourable pension arrangements which they hold in comparison with the private sector. Report No. 20 (the second General Review) of 1979 concluded that a deduction of 3.5% would be appropriate in the case of those public servants who had civil service type post-retirement pension increase arrangements. Report No. 30 (the third General Review) of 1987 made a wider comparison of all superannuation costs, and determined that a deduction of 1.5% would be appropriate to take account of the more favourable arrangements applying in the public sector. The most recent General Review, Report No. 37 of December 1996 (the Buckley Report), made no reference to any such deduction. A report of the Civil Service Arbitration Board in 1983 in relation to the pay of executive grades made a deduction of 3% to reflect the more favourable post retirement increase arrangements in the civil service compared with the private sector. A 1988 Arbitration report continued this deduction and stated that it was fully justified in the light of subsequent events. It continued that insofar as the comparative pension situation between the private sector and the civil service might have changed, this was more than offset by the ever increasing asset value of security of tenure.

9.4.7 In its consideration of public service pension arrangements the Commission will take into account the contributions - whether explicit or implicit - being made by individual public servants towards the cost of their pension benefits, including in particular the role of pensions within the salary determination process.

9.5 Normal Retirement Age and Early Retirement

9.5.1 For the majority of public servants the retirement age is between age 60 and age 65. Retirement at an earlier age is generally available on grounds of ill-health only. A number of public service groups have a general facility to retire early - age 50 in the case of Gardaí and prison officers (with at least 30 years' service), age 55 in the case of teachers, psychiatric nurses, and fire brigade staff - usually with more favourable pension benefits than apply generally. Certain groups have sought improvements in early retirement arrangements (a number of arrangements proposed are outlined at paragraph 5.2.1 above).

9.5.2 In its actuarial review the Commission is seeking to quantify the cost of existing early retirement provisions in the public service. It has been estimated that a contribution rate throughout service of about 15% would fund a civil service pension for a 20 year old male in modified PRSI class retiring at age 65. The corresponding rates would be 19% for retirement at 60, 23% for retirement at 55, and 27% for retirement at 50, in each case with no provision of "added years" for pension calculation purposes. These percentages indicate the heavy cost of an early retirement option.

9.5.3 Early retirement can be categorised in a number of ways - an optional facility to be availed of by staff, i.e. a staff benefit; an operational requirement for the efficient and effective discharge of a public service; a component in human resource management at the level of the individual public servant; and a management tool to achieve staff reductions or productivity improvements.

9.5.4 In relation to the last of these, a management-initiated voluntary early retirement (VER) scheme was offered in certain areas of the public service in 1987/88 as a means of reducing public service numbers. The scheme included a redundancy added years option which offered public servants under age 60 immediate payment of pension and lump sum and up to seven added years for pension and lump sum reckoning purposes. As the figures given at paragraph 9.5.2 indicate, a VER scheme of this nature would impose significant additional costs upon public service pension schemes. In addition, it might well contribute to the creation of staff expectations about the offer of early retirement generally. The Commission considers that any similar VER schemes which might be contemplated in the future for sound management reasons should be actuarially costed and designed so as to make the real costs clear to staff and management.

9.5.5 A number of new retirement arrangements have recently been put in place and are currently being operated on a pilot basis. These include the limited retirement initiatives in respect of teachers and nurses (see paragraphs 2.12.9 and 2.14.5 above). The Commission will examine these initiatives as part of its consideration of early retirement. The Commission will examine also the recommendation of the Civil Service Inter-Departmental Committee on Work Sharing in relation to job-sharing after age 55 with advance payment of half retirement lump sum.

9.5.6 As discussed in Chapter 6, the Commission will examine, in the context of general improvements in living conditions, health and life expectancy, the extent to which standard public service pension terms continue to be appropriate. The improvement in the general health of older people has resulted in an increasing proportion being fully capable of work up to a greater age than had been the case in the past. In addition, those who retire are living longer. The Commission will consider also the impact of current and anticipated operational requirements on groups having special pension and retirement terms as well as other groups which may face specific operational needs. The outcome of the various modernisation initiatives and reviews currently underway in the public service, such as that being undertaken by the Commission on Nursing, will be important considerations.

9.5.7 Chapter 7 gives comparative information on retirement ages and early retirement provisions in other European countries. It is important to qualify, however, that public service pension arrangements in other countries have to be seen in the context of the general economic and social context of those countries, and that recent modifications to these arrangements may have been made as part of general changes in Government expenditure programmes, among other things, in response to fiscal pressures and the need to improve national competitiveness. Notwithstanding this qualification, the information available shows that, on average, the minimum and maximum retirement ages in other European countries are 60 and 65, respectively, as is the case in Ireland. In some countries, an actuarial reduction is applied where retirement takes place before a certain age. Categories of public servants with special coverage, e.g. military and firemen, are not included in the comparative information. Chapter 7 also shows the modifications which have been made to public service pension schemes in Europe in recent years. There is no evidence to suggest that these modifications have resulted in reduced retirement ages either generally or for specific groups - rather the opposite appears to be the case, with a tendency to increase retirement ages. Flexibility in relation to retirement ages has also been introduced in some countries and the Commission intends to investigate this further.

9.5.8 It has been shown in Chapter 8 that while early retirement, i.e. retirement at any age after age 50, is available in the private sector, it is available normally at full actuarial cost to the individual. The Commission notes that a similar facility is not generally available in the public service.

9.5.9 The Commission considers that at a general level staff interest in early retirement will relate to a number of factors, including:

- age profile of serving staff - this may influence the decision of individual public servants on whether or not to remain in service when promotion opportunities have become more restricted

- labour market and general economic conditions - the likelihood of securing other employment on taking up early retirement, or alternatively, the ability to withstand the major cut in income which early retirement would entail

- public service reforms - individual public servants may be experiencing difficulties in coping with substantial and rapid changes in work as a result of the introduction on new technology and new work arrangements

- health issues - it has been suggested that the combined effect of a quickening in the general pace of life and ever increasing work demands has led to health problems such as stress, "burnout", etc. for many public servants.

Reference is made to some of these factors in the submissions received by the Commission (see section 5.2 above).

9.5.10 These factors will impact differently in different areas of the public service. In addition, the personal circumstances of individual public servants will impact upon his or her view of the option to avail of early retirement. This would include, for example, the person's age, whether or not his or her children were in full-time education, etc. The early retirement terms offered would also have an obvious impact.

9.5.11 There is little research information available on employee attitudes to early retirement in the public service. A report published in 1996, Flexible Working Lives: The Changing Nature of Working Time Arrangements in Ireland contained results of an employee survey carried out in 1994 among private and public sector employees under a number of headings including intentions in relation to early retirement. The public sector sample comprised most public sector bodies and organisations, but excluded a number of important groups (such as civil servants and teachers). The survey results showed that employees in age brackets between 26 and 55 had the highest probabilities of considering early retirement at some future date while the percentage expressing an interest in this option fell significantly for those aged 56 and over. The report noted that the latter might no longer perceive early retirement as being "early" while the former might not have considered in full the financial and other realities of what early retirement could involve. The report also found that while interest in early retirement did not vary significantly between the public and private sectors, a greater number of older public servants expressed interest in early retirement.

9.5.12 The survey also covered the post-retirement intentions of those who stated that they would be interested in taking up an early retirement option at some date in the future. Only 14% of private sector and 27% of public sector workers said that they would never wish to work again after early retirement. Approximately 53% of both public and private sector employees said that they would like to take up part-time employment, while 32% of private and 18% of public sector employees said that they would consider the option of self-employment after early retirement. The report comments that the net effect of early retirement could be a shift of a section of the labour-force from one form of employment status to another.

9.5.13 These survey results raise a number of issues which will be considered by the Commission in its future examination of early retirement. Information available on average retirement ages for Gardaí, national and secondary teachers, and established civil servants in the recent past show that retirement generally does not take place at the earliest age at which it is available, and that retirement ages have remained relatively unchanged over the past few years. The impact of the 1987/88 VER schemes (see paragraph 9.5.4 above) must be considered in any analysis of recent retirement trends.

9.5.14 The National Pensions Policy Initiative Consultation Document raises the questions "Is the current approach to "Normal Retirement Age" sustainable? Will greater longevity make it feasible or desirable, for people to work longer?" The Commission will monitor the debate on this point as The Pensions Board and the Department of Social, Community and Family Affairs bring their policy review of pensions in Ireland to a conclusion at the end of 1997.

9.5.15 The Commission considers that early retirement should be available as a management tool, as a component in human resource management at the individual level, and as an operational requirement for the efficient and effective discharge of a public service (the latter to be subject to monitoring to allow appropriate adjustments in light of changing operational requirements). The Commission also favours the introduction of greater flexibility into current retirement arrangements. However, the issue of contributions towards the cost involved would need to be addressed.

9.5.16 While the Commission notes that there is a clear demand for early retirement in the public service, and some considerations on this have been discussed above, it is not immediately clear that this demand is sustainable on grounds of cost, operational requirements, practice in the private sector, increased longevity, and trends in public service retirement arrangements abroad. Against this background, the Commission intends to consider the entire issue more fully in its final report.

9.6 Integration between Occupational Pension and State Social Insurance Benefits

9.6.1 For public servants paying the full Class A rate of PRSI the occupational pension is integrated with State Social Insurance benefits. The pensionable remuneration figure is reduced by a figure equal to twice the maximum personal rate of State Social Insurance Contributory old age pension. The purpose of this calculation is to recognise the proportion of final earnings that is replaced through State Social Insurance benefits. Where a public servant has 40 years' service, this will result in a combination of occupational pension and personal rate of Social Insurance old age pension which is equal to the target replacement ratio of one-half of retiring pay (the same result as for a public servant paying modified PRSI, who will not receive a Social Insurance old age pension). Together with the retirement lump sum, this is generally reckoned to be equivalent to a total replacement ratio of two-thirds of retiring pay.

9.6.2 The operation of integration for a public servant paying full PRSI who retires at age 65 after 40 years' service can be illustrated as follows for three different levels of final earnings (in each case a public servant in similar circumstances who pays modified PRSI will be entitled to an occupational pension of one-half final earnings):

(i) if final earnings are £400 per week, the public servant will be entitled to a combined weekly pension of £200, made up of an occupational pension of £122 per week and the personal rate of Social Insurance contributory old age pension of £78 per week (with effect from June 1997)

(ii) if final earnings are £200 per week, the combined weekly pension will be £100, comprising an occupational pension of £22 and the personal rate of Social Insurance contributory old age pension of £78

(iii) if on retirement the public servant is earning a figure equal to twice the personal rate of Social Insurance contributory old age pension, i.e. £156 per week, no occupational pension will be payable. The Social Insurance old age pension will itself equal the target replacement ratio of one-half of earnings. Where earnings are less than £156 per week, the Social Insurance old age pension of £78 per week will represent a replacement ratio greater than one-half of earnings.

A retirement lump sum equal to 1½ times annual earnings will be paid in each case, amounts of £31,308, £15,654, £12,210, respectively. As will be evident in these examples, the operation of integration will result in the proportion of replacement income represented by the personal rate of Social Insurance old age pension being higher at lower levels of pay.

9.6.3 Where less than 40 years' service is involved, the combination of occupational pension and Social Insurance old age pension will be greater than the occupational pension payable if the public servant was paying the lower modified rate of PRSI and was not subject to integration. For example, if the public servant has 20 years' service on retirement, the rate of occupational pension in examples (i) and (ii) will be £61 and £11, respectively. With the Social Insurance old age pension this gives a total weekly pension benefit of £139 and £89, respectively. For the public servant paying the modified rate of PRSI, the weekly occupational pension will be lower, at £100 and £50, respectively (it is assumed that the public servant concerned had no prior Social Insurance contributions giving an entitlement to a Social Insurance old age pension).

9.6.4 The calculation of occupational pension does not take account of any dependants' additions that may be payable along with the personal rate of Social Insurance benefits. The weekly rates of dependants' allowances are currently £55.40 per week for an adult aged over 66, and a maximum of £15.20 per week for a child dependant (as at June 1997). Accordingly, the combination of occupational pension, personal rate of Social Insurance old age pension, and dependants' additions in any particular case could result in a pension equivalent to a replacement ratio that is much higher than 50%. Of course, only a very small number of pension recipients would qualify for child dependant additions to their old age pension. In addition, a small number of retired public servants who had paid modified PRSI during service may qualify for a Social Assistance non-contributory old age pension, and so may qualify for dependants' additions on that basis.

9.6.5 Integration affects contributions as well as benefits. Remuneration on which weekly salary contributions are calculated is reduced by an amount equal to twice the maximum personal rate of Social Insurance contributory old age pension. This calculation recognises the contribution being made by the public servant to the cost of Social Insurance benefits through the PRSI system. In the examples given at 9.6.2 above the weekly main scheme pension contribution of 3½% will be as follows:

- for weekly earnings of £400, a contribution of £8.54 per week;

- for weekly earnings of £200, a contribution of £1.54 per week;

- for weekly earnings of £156, no pension contribution.

As retirement lump sum is unaffected by coordination, a weekly contribution of 1½% of earnings will be payable in each case.

9.6.6 As noted at paragraph 9.6.3, public servants paying the lower modified rate of PRSI have no entitlement to Social Insurance old age pensions, and so no integration takes place. In each of the three examples already given the rate of pension for a person paying modified PRSI will be one-half of earnings. Where a contribution of 3½% applies under the main pension scheme, the amount of pension contribution will be £14 per week on earnings of £400, £7 per week on earnings of £200, and £5.46 on earnings of £156. The rates of lump sum contribution will be identical, i.e. 1½% of earnings.

9.6.7 As the Commission has not finalised its examination of public service pension costs it does not yet have a complete picture of the cost implications of integration within the pensions system. However, a 1996 report by Mercer Ltd. for the Health Service Employers' Agency, on behalf of SIPTU, concluded that the capitalised cost over a 40 year period of removing integration in respect of those in non-officer grades in the Health Service and the Local Government sector, a total of 34,500 staff, would be about £515 million. An actuarial estimate of the cost in terms of a new entrant rate, based on a salary of £12,000, would be an additional 2.6%.

9.6.8 The total number of public servants paying full PRSI who are members of pension schemes and subject to integration arrangements is approximately 40,000 at the present time. However, it is important to note that following the introduction of full PRSI for all new public servants appointed on or after 6 April 1995 integration of pension benefits will, in time, apply to all public servants. Thus, the removal of integration for the public service would give rise to significant expenditure in addition to that indicated above.

9.6.9 The Commission recognises that the purpose of integration is to ensure that, for a person retiring with 40 years' pensionable service, the target replacement ratio of one-half of retiring pay (excluding the value of the retirement lump sum) is met through the combination of occupational and Social Insurance old age pension (excluding any Social Insurance dependents' benefits that might be payable). This practice ensures that the public servant paying the lower modified rate of PRSI, who has no entitlement to Social Insurance old age pension, is not at a disadvantage when compared with a colleague paying the full rate of PRSI (where both have 40 years' pensionable service). The practice of integration applies throughout the public service and in the majority of firms in the private sector, as is shown in Chapter 8.

9.6.10 Notwithstanding the major issues of cost and comparability with public servants paying modified PRSI discussed above, it is clear that the effect of integration can be to produce a very low or zero rate of occupational pension. The lower levels of pay applicable to many groups who have traditionally been subject to integration contribute to this effect. A number of suggestions on how to address this issue have been made in the submissions received (see paragraph 5.3.2. above). The Commission will examine these as part of its consideration of integration for the purposes of its final report. The Commission notes that the issue of integration is among those referred to it by the Minister for Finance (see paragraph 1.3.1 above) and has been the subject of extensive discussions between staff and management as well as consideration by the Labour Relations Commission. The Commission on Public Service Pensions does not have any role in adjudicating on matters being processed under the industrial relations machinery.

9.7 Pensions and Part-Time Work

9.7.1 The number of part-time staff in the public service is currently estimated at 20,000, employed primarily in the health services, local authorities, and post-primary schools. This number includes temporary as well as permanent part-time employees, and so is subject to some variation over time. In addition, there are approximately 8,500 job-sharers in the public service. Part-time and job-sharing public servants thus account for approximately 13% of total public service employees of 218,000.

9.7.2 Most part-time public servants are female. The European Court has ruled that Article 119 of the Treaty of Rome, which deals with the application of equal pay without discrimination based on sex, prohibits sex-based discrimination against part-time employees as regards access to pension schemes. A policy might be held to constitute indirect discrimination on grounds of sex where it affected a disproportionate number of one sex in comparison with the other and could not be objectively justified by factors not related to sex. The Court has also found that a right of access to a pension scheme should not mean that those persons previously excluded on sex-discrimination grounds should have any greater rights than those persons already members of the scheme.

9.7.3 Traditionally, permanent part-time public servants have been granted access to occupational pension schemes only if they become permanent full-time staff subsequent to their part-time service. Prior part-time service could then be reckoned for pension purposes. Part-time public servants have traditionally been recruited to areas where full PRSI applies. Under the Social Insurance system, part-time staff with weekly earnings of £30 or more and who meet the PRSI contribution requirements are entitled to receive the full rate of Social Insurance old age pension (currently £78 per week). While access to occupational pension schemes has recently been offered to part-time public servants in permanent or quasi-permanent employment, who work on a regular pattern, at least 15 hours per week, subject to the same pension terms applying to full-time staff, including full integration with State Social Insurance benefits, few part-time public servants are now members of pension schemes. Those who have worked for 10 or more hours per week and have completed five years' service may be entitled to extra-statutory gratuities (see paragraph 2.6.3 above). Job-sharing public servants, on the other hand, are members of pension schemes, with their pension terms calculated pro-rata to full-time public servants (see 9.7.6 - 9.7.11 below).

9.7.4 The Commission recognises that for part-time public servants, the question of access to pension schemes and of the pension scheme terms to be applied - particularly the operation of integration - are closely interlinked. With full integration, the calculation of pension for part-time public servants is based on the period over which they have worked and the actual amount of pensionable remuneration payable on the date of retirement. This is the same system as applies to full-time public servants (paying full PRSI). Thus, the fact that the public servant is working part-time (no matter what number of weekly hours are worked) will have no bearing upon the pension calculation.

9.7.5 As shown in the examples at paragraph 9.6.2 above, at lower levels of weekly earnings there may be no occupational pension payable, or the amount involved may be low.

9.7.6 For job-sharing public servants, the majority of whom are in the modified class of PRSI, the question of integration will not arise (the position of those who are in the full class of PRSI is outlined at 9.7.8 below). Unlike part-time public servants, it is assumed that job-sharing public servants will resume full-time working prior to retirement. A full-time public servant who retires having previously worked for a period as a job-sharer will have half of the period of job-sharing service included in pensionable service. Pension will be based, in the normal way, on final earnings. In the case of a public servant who retires while job-sharing, pensionable service will be calculated in the same way (i.e. the total period of full-time service plus half of the period in which he or she job-shared). However, pension will be based on the rate of final earnings payable to a full-time public servant having the same grade and salary point. This will ensure that the job-sharing public servant will receive pension benefits in respect of the period of job-sharing work which are pro-rata to those received by a colleague working full-time over the same period of time.

9.7.7 For example, a public servant paying modified PRSI who job-shared for a period of 40 years and is in receipt of a weekly salary of £200 on retirement will be entitled to an occupational pension based on actual service of 20 years and full-time time salary of £400 per week. This will give an occupational pension of £100 per week. This outcome will be equivalent to that of a part-time (or full-time) public servant who works for a period of 40 years and retires on a salary of £200 per week. The fact that this public servant may be paying full PRSI and is subject to integration will not affect the comparison.

9.7.8 There is a different outcome in the case of the small number of job-sharers who are paying the full rate of PRSI and are entitled to the same pension arrangements (i.e. pro-rata) as job-sharers paying modified PRSI. Thus, a public servant who job-shares for 40 years and is in receipt of £200 per week on retirement will be entitled to a pension based on 20 years actual service and pensionable remuneration of £400 per week. This will give an occupational pension of £61 per week. The Social Insurance contributory old age pension of £78 per week will also be payable, giving a combined pension of £139 per week. The occupational pension will be pro-rata to that payable to a full-time public servant with 40 years service who has the same grade and salary point, i.e. an occupational pension of £122 per week, in addition to the Social Insurance pension (see example (i) at paragraph 9.6.2 above).

9.7.9 Under pro-rata integration, the position for a job-sharing public servant will contrast with that of a public servant who works, whether full- or part-time, for the same period of time and is in receipt of the same rate of earnings on retirement. As shown earlier (example (ii) at paragraph 9.6.2) a public servant who worked for 40 years and is in receipt of £200 per week on retirement will be entitled to an occupational pension of £22 per week, which, with the contributory old age pension, will give a combined pension of £100 per week. As shown in paragraph 9.7.8, the job-sharing public servant will be entitled to a combined pension of £139 per week.

9.7.10 If the job-sharing public servant paying full PRSI was in receipt of £156 per week on retirement, the occupational pension under pro-rata integration will be £39 per week. With the contributory old age pension this will give a combined pension of £117 per week. A public servant paying full PRSI and in receipt of £156 per week (most likely on a part-time basis) will have no entitlement to an occupational pension as the amount involved equals twice the rate of contributory old age pension of £78. A public servant paying modified PRSI and in receipt of the same level of earnings on retirement will be entitled to an occupational pension of £78 per week.

9.7.11 The above illustrations show that pro-rata integration for a job-sharing public servant paying full PRSI will give a more favourable treatment compared with a part-time public servant paying full PRSI, a full-time public servant paying full PRSI, and a full-time public servant paying modified PRSI. It is assumed that the pattern of employment of each has remained constant for 40 years and the same level of actual earnings applies at date of retirement.

9.7.12 Chapter 8 provides information on the approach in the private sector in relation to part-time employees. The eligibility of part-time employees to join pension schemes is discussed at paragraph 8.4.1. As indicated at paragraph 8.11.3 and 8.11.4, a number of large firms replied to a specific question about method of integration for part-time employees who are in the pension scheme. Of these, 80% used a method in which pensionable remuneration was taken as the equivalent full-time salary and pensionable service was taken as actual service, i.e. pro-rata integration.

9.7.13 The final report of the National Pension Board recommended that where part-time employees were being included in occupational pension schemes this should be done on a proportionate basis by taking into account such amount of the Social Insurance old age pension payable as is proportionate to the period of part-time working, but added that it must be recognised that there could be situations where other approaches would be more appropriate.

9.7.14 The Commission notes that a number of question asked in the National Pensions Policy Initiative Consultation Document are relevant to its deliberations:

* What measures can be taken to improve coverage for atypical employees?

* In view of changing work patterns, do we need new pensions vehicles based on the individual's career rather than on each particular job held? If so, what type of vehicle would you favour?

The Commission will consider any proposals which may emerge from the national pensions debate on pension arrangements of part-time staff.

9.7.15 The Commission considers that part-time public servants should in principle be given access to occupational pension schemes. It notes the different outcomes and difficulties that arise under different methods of integration with Social Insurance benefits. In its examination of the operation of integration for those on lower levels of pay, as discussed at 9.6.10 above, the Commission will take due account of the position of part-time public servants.

9.8 Pension Increases

9.8.1 The public service system of increasing pensions by reference to movements in the pay of serving staff (i.e. a pay parity system) was adopted in 1969. Previously, there had been no systematic indexation of public service pensions and pensioners had, in practice, been only partially compensated for changes in the cost of living. Following the adoption of pay parity in 1969, policy was to relate pension levels to the pay levels applicable some years previously. Full parity, with pensions being increased with effect from the same date as the pay increase in question, was introduced in 1986. This applied to both general and special pay increases, with pensions continuously revised to reflect the salaries which would have been payable had the former public servants continued to serve in their old grades. In a small number of cases, no pension increase has been given arising out of the uplifting of salaries on restructuring of grades.

9.8.2 Pay generally increases faster than prices. It has been calculated that if pensions were increased by reference to the Consumer Price Index rather than pay, assuming annual pay increases of 1.5% above the rate of inflation, the cost of funding the arrangements for a new entrant would be reduced by 2 to 3%.

9.8.3 It has been shown in Chapter 8 (see section 8.16) that over 60% of large firms in the private sector provide guaranteed or discretionary increases in pensions. For those which provide a guaranteed annual increase, almost all apply a maximum annual figure of 3 - 4% per annum. If the annual increase is matched with increases in the Consumer Price Index, the maximum is 4 - 5% per annum. About 10% of firms do not guarantee an increase, but review the position from time to time, 20% do not increase their pension benefit, and somewhat less than 10% either have no pensioners or grant increases on some other basis.

9.8.4 Chapter 7 describes the approach in other European countries (see Table 7.3). From the information available it would appear that three countries among those surveyed - Austria, France, and Germany - increase pensions in line with the rate of salary increase. In the majority of countries (seven), reference is made both to the cost of living index and to salary increases in the public sector. It is not clear whether these arrangements produce effects which are more or less favourable than increasing pensions in line with the rate of increase in salaries. In the remaining four countries reviewed, pension adjustments are linked to developments in the cost of living index only.

9.8.5 The Commission considers that pensions should be increased in order to provide a secure and fair level of retirement income to pensioners. It is considered that three pension increase options are available: in line with pay, in line with the consumer price index, or in line with some other index appropriate to the situation of pensioners. The Commission will consider each of these, including their implications for costs and pension contributions, in its final report.