Taoiseach who will get gold-plated pension tells minority of Irish private sector companies that provide occupational pensions to build up pension reserves from profits

Irish
Taoiseach who will get gold-plated pension tells minority of Irish private sector companies that provide occupational pensions to build up pension reserves from profits
By Finfacts Team
Nov 9, 2006, 13:11

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The Taoiseach Bertie Ahern has warned companies that they cannot just roll over the pension entitlements of workers.

Speaking at a Labour Relations Commission conference in Croke Park, he described the decision by some companies to reduce pension benefits as a tension point for workers.

He said he did not believe that the pension issue was affecting the viability of companies, particularly in profitable sectors, though he acknowledged that some firms in the manufacturing sector could be under pressure.

Ahern said that the State had foreseen pension difficulties and had set aside part of its profits in the National Pension Reserve Fund to create a fund to meet future liabilities. He said very profitable companies should consider that position.

He denied that his comments were aimed at Bank of Ireland, which is attending a Labour Court hearing today to discuss its plans to reduce guarantees in its pension scheme for new entrants.

A Bank of Ireland spokesperson said there were no plans to reverse the changes introduced for new staff last month. A spokesperson said today's hearing was an opportunity to present the case for change where there was a clear and compelling need for it.

The IBOA has said the Labour Court hearing will be a test case for industrial relations mechanisms in the country, particularly in the light of new provisions in the partnership agreement for pension disputes. Larry Broderick of the IBOA said the bank had no justification for closing off its pension scheme to new staff.

Everyone must take hard decisions on pensions - IBEC

In response to the Taoiseach's comments, IBEC Director Brendan McGinty said:

"Employees and employers in a number of business sectors know that the pension environment has changed utterly in recent years. As a result, many pension schemes in the private sector must be reformed if they are to remain viable.

"Pension costs have risen dramatically in the last five years because of increased regulation, including stricter funding and accounting standards, higher pay, low long-term interest rates, poorly performing equity markets and longer life-expectancy. In this context, the current trend of defined benefit schemes being closed to new entrants and new arrangements being put in place to manage future liabilities, shows no sign of abating. Trade unions are well aware of these realities given their experience with their own staff schemes.

"Pension funding is complex and not widely understood. Employers have a responsibility to act. If they increase pension costs beyond what is affordable in the context of future liabilities, this will threaten the viability of employment and of the business. Following reasonable consultation, corrective action is unavoidable. Otherwise, the ability of pension schemes to fund employees’ life in retirement may be put at risk.

BACKGROUND:

Public sector pay rose by 8% in 2005 and pensions now account for 10% of the total pay bill, up from 8.6% in 2001. The pensions bill has increased from €876m in 2001 to €1,588m in 2006 representing an 81.3% increase over the period. The increase in the health sector has been 104%. Pensioners also received the special benchmarking increase of an average of 9%.

The Sunday Independent has reported that according to a pensions survey of politicians' pension entitlements, using figures from the Department of Finance, the Taoiseach would receive a pension from the state of at least €282,000 in his first year out of office, and €146,161 every year after that, if he were to stand down after the election in 2007.

If he stays for another term - as is his stated plan - he could expect this sum to be further enhanced.

Ahern has been a TD since 1977. He qualifies for the maximum benefits of 60 per cent of his Taoiseach's salary of €167,960, and half of his basic TD's salary of €90,770 every year. These figures do not factor in any private pension scheme to which he may be contributing.

Under the terms of the Members Pensions Scheme, introduced in 1992, every TD who has served the maximum term of 20 years also receives a lump-sum payment of one and a half times their TD's salary, amounting to €136,155 in addition to their annual pension pay-out.

Bertie Ahern's pension will be index-linked pension for life with an entitlement to the same increases as future members of the Oireachtas will get - even more sham benchmarking as well.

A T.D is entitled to a pension of €50,000 per year after 20 years service, irrespective of age.

Last August, a report prepared by the Pension Board stated that at present over 900,000 people, almost half the country's workforce, have not made provision for any private pensions and, as of now, are moving towards a retirement in which their main source of income will be the State pension.

In May 2006, Danny McCoy, Director of Economic Policy at IBEC, the principal Irish employers' group, said that we spend 3% of our GNP annually providing pensions for our pensioner population of approximately 300,000.

We spend a further 1.3% of GNP in funding what are excellent pensions for 70,000 public service pensioners. The average public service pension is about twice the Social Welfare pension and the overall bill keeps growing as a consequence of Benchmarking and wage related indexation.

A private sector worker can provide for the equivalent of a public service pension for a maximum of two-thirds of final salary for retirement. However, 28% of salary would have to be put aside every year for 40 years to do so.

This figure is based on an assumption that a person's salary increases by 5% per annum; annual investment growth is 7% and annuity rates (which buy a pension on retirement) are 4%.

Company cost for typical 40-year-old worker in UK Defined Benefit Pension Scheme has risen from 9.2% of salary in 1995 to 23.8% in 2005

Private sector is adjusting

IBEC Director Brendan McGinty's comments on pensions last month:

“The dramatic rise in the cost of pensions over the last five years is forcing private sector employers to seek higher contributions from employees and to close membership of defined benefit schemes for new staff members. In the economy generally in the past five years, the numbers of members in funded defined benefit schemes has increased by 13% (about 30,000) while the numbers covered by defined contribution schemes has increased by 57% (or about 75,000). Pension costs have risen because of stricter funding standards, higher pay, low long term interest rates, poorly performing equity markets and longer life-expectancy. A recent study by Mercer suggests that in the next two years about one-third of defined benefit schemes will be closed to new entrants.

“Additional pension costs would further erode our competitiveness and we would inevitably lose jobs. Employer contributions have risen significantly in many companies in recent years simply to meet our draconian discontinuance funding standard, which imposes an overly restrictive solvency requirement on companies providing defined benefit schemes. We can’t afford anymore cost hits like this.

“Resistance by some trade unions to this inevitable change is short-sighted. Employers have a responsibility to act: if they increase payments beyond what can be afforded, this threatens the viability of employment and of the business. Following reasonable consultation, if corrective action is not taken, the ability of a pension scheme to fund employees’ life in retirement may be put at risk.

Public sector pensions

“The CSO has said that the average public sector worker has an earnings premium above the private sector worker of 40% in 2003: this has since risen to about 45%. The public service pension bill of €1.7bn is projected to treble (in 2004 terms) by 2040-2050 and from 1.3% of GNP to 4% of GNP. While private sector businesses and their staff are adjusting to harsh realities, the public sector continues to provide old fashioned expensive pension schemes. The coverage is higher in the public sector, the schemes are mainly non-contributory unfunded defined benefit schemes and public sector pensions are indexed to existing pay scales not just to inflation. This cannot continue indefinitely.

“If the second benchmarking process is to have any credibility in the eyes of the public it is essential that the benchmarking body undertakes a detailed actuarial assessment of the real value of public sector pensions along with annual leave, security of tenure, working hours and conditions of employment. Nothing less will do.”