As people enjoy better health and live longer, pensions costs are far exceeding what once would have been expected. As a result, defined benefit (DB) schemes – based on years of service and final salary – are no longer providing the comfortable retirement private sector employees anticipated; in contrast their public service counterparts who continue to enjoy gold -plated certainty funded largely by the taxpayer.
Many private DB schemes have been wound up, reorganised (with benefits cut and contributions raised) or closed to new members. Among the top 20 companies listed on the Irish stock exchange, pension deficits have almost doubled to (€5.7 billion) in the seven months to July last.
Difficulties in private sector pension provision have been exacerbated by falling global interest rates. Central banks have used quantitative easing – printing money to buy government bonds – to stimulate economic activity. This has depressed interest rates, resulting in higher bond prices and lower bond yields, with adverse effects for pension funds. Lower yields have made the purchase of retirement income more – and in some cases prohibitively – expensive.
Public service pensions also operate on a defined benefit model but, in contrast, are funded differently. They are largely financed from general taxation on a pay-as-you go basis, supplemented by members' contributions. Answers to Dáil questions from Sinn Féin's Pearse Doherty have starkly illustrated the difference between the two sectors.
A public service pension of €66,000 for someone aged 65 would, if bought in the market place, cost €3.3 million to purchase. A private sector worker aiming to secure a pension of €24,000 annually from age 65 would have to contribute €15,750 annually from age 25 in order to do so. Since 2008, the public service pension bill has risen by 75 per cent and last year cost €2.8 billion.
The issue of how the State provides a far more generous pension system for the public service has yet to be seriously questioned. Though as major beneficiaries of the inequality involved, politicians are hardly incentivised to do so.