Key Highlights- The total accrued-to-date liability (ADL) of pension schemes managed by government was estimated at €508.8bn at the end of 2018, equivalent to 156% of GDP - Over 70% of the total was in respect of state pension liabilities which were estimated at €359.2bn, 110% of GDP - The liabilities of public service defined benefit schemes were estimated at €149.6bn, 46% of GDP - The calculation uses a 4% nominal discount rate. A decrease in this discount rate of 1 percentage point increases the liability by 27% to €644.8bn. In contrast, an increase in the discount rate of 1 percentage point decreases the liability by 19% to €410.9bn |
| Table 4.1 Accrued-to-date liability (ADL) of government managed schemes, 2018 | € million | ||
| Defined benefit schemes for government employees | Social security pension schemes | Total | |
| Eurostat column reference | G | H | |
| ADL at end-2017 | 143,700 | 326,700 | 470,400 |
| Increase due to social contributions | 9,500 | 21,200 | 30,700 |
| Reduction due to payment of benefits | -3,600 | -7,400 | -11,000 |
| Other (actuarial) change of pension entitlements | .. | -100 | -100 |
| Transfers between schemes | 0 | 0 | 0 |
| Changes due to negotiated reforms | 0 | 12,900 | 12,900 |
| Changes due to other flows | 0 | 5,900 | 5,900 |
| ADL at end-2018 | 149,600 | 359,200 | 508,800 |
The total accrued-to-date liability (ADL) of pension schemes managed by government was estimated at €508.8bn at the end of 2018, equivalent to 156% of GDP. Over two-thirds of the total was in respect of Column H state pension liabilities (see Figure 4.1), which were estimated at €359.2bn,110% of GDP. The liabilities of public service defined benefit schemes, appearing in Column G were estimated at €149.6bn, 46% of GDP.
International comparison shows that government managed schemes form the largest share of the liability in most European countries. It is important to note that the unfunded obligations of government, which do not appear in the core National Accounts, are not liabilities in the sense of a debt which has been borrowed and has to be repaid; they are deemed to represent the pension commitments of government as defined by current pension rules and regulations.
During 2018, the ADL of Irish government managed schemes grew by €38.4bn, from €470.4bn to €508.8bn, an increase of over 8%. Figure 4.2 shows the breakdown of the flows for the schemes appearing in Columns G and H of Table 2.1. Actual employer and employee contributions totalled €9.7bn in 2018 with imputed employer contributions recorded in Row 2.2 of Column G, estimated at €2.4bn. Employer imputed contributions are the difference between Current Service Costs and the sum of employee and employer actual contributions paid in the year, plus the experience effects which reflects the assumptions taken in the calculations of the opening stocks of pension entitlements and the actual experience.
The social contribution supplement recorded in Row 2.4 was estimated at €18.8bn. This is referred to as the ‘unwinding of the discount rate’ and is equal to the ADL at the beginning of the period multiplied by the nominal discount rate of 4% used in the calculation.
Payments made from these schemes, recorded in Row 4 of Table 2.1, totalled €11bn in the period. An estimated service charge of €0.2bn for Column H which is recorded as a reduction in Row 2.5, was calculated using the total administration charge associated with the scheme in 2018 multiplied by the proportion of 2018 Social Insurance Fund expenditure attributable to the relevant pension benefits.
The value of ‘other actuarial changes’ recorded for Column H in Row 3 of €0.1bn, is calculated as a balancing item and therefore any changes in pension entitlements over the year, not included in the other rows of this column, are captured here. It should be noted that, for social security pension schemes, ‘experience effects’ are included in Row 3.
Row 7 shows the impact of reforms on pension schemes structures on entitlement in relation to past service.This row includes the extension of invalidity pension to the self employed and the introduction of the interim Total Contributions Approach guarantee for State Pension (Contributory).
Row 9 includes changes to the demographic assumptions in the model between the opening and closing balance as well as the other changes that are not revaluations. A change to the actuarial model extending the projection period has been included here.
| Government managed schemes | |
| Defined benefit schemes for government employees | 29.4 |
| Social security pension schemes | 70.6 |
| Defined benefit schemes for government employees | Social security schemes | |
| Contributions | 3.8 | 8.3 |
| Unwinding of discount rate | 5.7 | 13.1 |
| Service charges | 0 | -0.2 |
| Benefits paid | -3.6 | -7.4 |
| Other actuarial | 0 | -0.1 |
| Negotiated changes | 0 | 12.9 |
| Other volume changes | 0 | 5.9 |
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The size of the pension liability greatly depends on the choice of discount rate. As the ADL is calculated in present value terms, a suitable discount rate needs to be applied in order to calculate the current value of future payments of pension benefits. The discount rate is one of the most crucial assumptions since the accumulated impact of the rate chosen to discount back projected cash-flows over a prolonged period is very high. Sensitivity analysis highlights the importance of using a representative discount rate and the care which should be taken when interpreting the liability value.
In order to ensure comparability and smooth the fluctuations of the estimates over time, Eurostat set the discount rate at 2% in real terms (after adjusting for price inflation) and 4% in nominal terms for the estimation of the liability of government managed pension schemes. This has been reduced from 3% in real terms (5% nominal) since data were compiled for 2015. This reflects the decline in the interest rates and market expectations of consistently low interest rates in coming years.
A sensitivity analysis with respect to the choice of discount rate was carried out for government managed schemes in Columns G and H. Table 4.2 shows the impact of diverging from the base case discount rate of 4% (nominal). A decrease in the discount rate of 1 percentage point, shown in scenario 1, increases the liability by 27% to €644.8bn. In contrast, an increase in the discount rate of 1 percentage point, shown in scenario 2, decreases the liability by 19% to €410.9bn.
| Table 4.2 Sensitivity analysis for government managed schemes (Columns G and H) in respect to changes in the discount rate, end-2018 | |||
| Scenario 1 | Base Case | Scenario 2 | |
| Nominal discount rate (%) | 3 | 4 | 5 |
| Accrued-to-date liability (€ billion) | 644.8 | 508.8 | 410.9 |
| Change in liability compared to base case (€ billion) | +136 | - | -97.9 |
| Change in liability compared to base case (%) | +27 | - | -19 |
Figure 4.3 illustrates the impact on the liability of a discount rate change for the individual schemes. A decrease in the discount rate increases the value of the liability, as shown in Scenario 1. This is because a lower interest rate means more would need to be to set aside today for the payment of pension benefits in the future. By the same token, an increase in discount rate decreases the value of the liability as shown in Scenario 2.
| Defined benefit schemes for government employees | Social security schemes | |
| Scenario 1 Discount Rate 1% real/3% nominal | 181.7 | 463.1 |
| Base Case Discount Rate 2% real/4% nominal | 149.6 | 359.2 |
| Scenario 2 Discount Rate 3% real/5% nominal | 125.3 | 285.6 |
The impact of the discount rate on the value of pension liability is also illustrated in Table 4.3 and Figure 4.3 below. Table 4.3 presents the change in the ADL of government managed schemes from the last valuation at the end of 2015 to the current valuation at the end of 2018. During that period, the ADL increased by €163.3bn (47%) from €345.5bn to €508.8bn. Rows 8 and 9 contain the value for the change in model assumptions over that period. The change in the discount rate (from 5% to 4%) is included in Row 8 and accounts for 57% of the increase in value of the ADL. Including the other changes to the actuarial model in Row 9 (e.g. change in demographics) increases this to 66%. The other main components of the change in ADL are the unwinding of the discount rate at €50.1bn included in Row 2.4 and contributions of €29.9bn paid to schemes included in Rows 2.1 to 2.3. Figure 4.4 presents a summary of the components of the change of the ADL over this period.
| Table 4.3 Change in ADL from end-2015 to end-2018 for government managed schemes | €millions | |||||
| Recording | Not in Standard National Accounts | |||||
| Unfunded (pay-as-you-go) schemes | ||||||
| Pension manager | Government managed | |||||
| Defined benefit schemes for government employees | Social security pension schemes | Total unfunded government managed schemes | ||||
| Eurostat Row No. ↓ | Eurostat Column Reference → | G | H | Total | ||
| Opening balance sheet | ||||||
| 1 | Pension entitlements/Accrued-to-date liability at end-2015 (Discount rate = 5%) | 114,500 | 231,000 | 345,500 | ||
| Changes in pension entitlements due to transactions | ||||||
| 2 | Increase in pension entitlements due to social contributions1 | 20,700 | 58,700 | 79,400 | ||
| 2.1 | Employer actual social contributions | 0 | 18,000 | 18,000 | ||
| 2.2 | Employer imputed social contributions | 3,100 | 0 | 3,100 | ||
| 2.3 | Household actual social contributions | 3,900 | 4,900 | 8,800 | ||
| 2.4 | Household social contribution supplements | 13,700 | 36,400 | 50,100 | ||
| 2.5 | Less: pension scheme service charges | 0 | 600 | 600 | ||
| 3 | Other (actuarial) change of pension entitlements in social security pension schemes | .. | -2,900 | -2,900 | ||
| 4 | Reduction in pension entitlements due to payment of pension benefits | 10,300 | 21,200 | 31,500 | ||
| 5 | Changes in pension entitlements due to social contributions and pension benefits2 | 10,400 | 34,600 | 45,000 | ||
| 6 | Transfers of pension entitlements between schemes | 0 | 0 | 0 | ||
| 7 | Change in entitlements due to negotiated changes in scheme structure | 0 | 10,300 | 10,300 | ||
| Changes in pension entitlements due to other flows | ||||||
| 8 | Changes in entitlements due to revaluations | 24,700 | 67,900 | 92,600 | ||
| 9 | Changes in entitlements due to other changes in volume | 0 | 15,400 | 15,400 | ||
| Closing balance sheet | ||||||
| 10 | Pension entitlements/Accrued-to-date liability at end-2018 (Discount rate = 4%) | 149,600 | 359,200 | 508,800 | ||
| 1Sum (Row 2.1 to Row 2.4) - Row 2.5 | ||||||
| 2Row 2 + Row 3 - Row 4 | ||||||
| 3Row 1 + Sum (Row 5 to Row 9) | ||||||
| .. These cells are not applicable. | ||||||
| Defined Benefit Schemes for Government Employees | Social Security Schemes | |
| Change in Model Assumptions (incl. discount rate) | 24.7 | 83.3 |
| Unwinding of Discount Rate | 13.7 | 36.4 |
| Contributions to Schemes | 7 | 22.3 |
| Pensions Paid | -10.3 | -21.2 |
| Other Changes | 0 | 7.4 |
These are unfunded defined benefit pension schemes for public service employees: Civil Service, Defence, Education, Health, Justice, Local Authorities and non-commercial State agencies (NCSA). This liability estimate was compiled by the Department of Public Expenditure and Reform,1 in consultation with the CSO. The methodology and assumptions used for the calculation of the liability for Column G follows those prescribed in the Eurostat's Technical Compilation Guide for Pension Data in National Accounts.2 The assumptions used are summarised in Table 4.4.
| Table 4.4 Summary of assumptions used for government managed schemes | ||
| Column in supplementary table | ||
| Column H | ||
| Source | Department of Public Expenditure and Reform Actuarial Review of Public Service Occupational Pensions (2020) | Department of Social Protection Actuarial Review of the Social Security Pension Schemes in Ireland (2021) |
| Liability Measure | Accrued-to-date liability | |
| Discount Rate | 4% nominal (2% real) | |
| Projected Benefit Obligation (PBO) | PBO approach used | |
| Wage growth assumptions | Ageing Working Group assumptions used | |
| Demographic assumptions | Society of Actuaries in Ireland Standard Mortality Tables | Eurostat mortality assumptions used |
| Inflation Rate | 2% | |
Pensions for public service workers are defined benefit schemes whereby employees accrue retirement benefits as part of their employment. The retirement benefit consists of two elements, namely:
• A lump sum at retirement
• A pension payable for life from retirement date
There are numerous pension schemes for government employees; however the retirement benefits provided by these schemes can be broadly categorised into three types (summarised in Table 4.5):
Pre-1995 entrant: An annual pension calculated as 1/80th of pensionable salary at retirement for each year of service to a maximum of 40/80ths plus a lump sum equivalent to three times the annual pension.
Post-1995 entrant: The retirement benefits are equivalent to the pre-1995 entrants but the annual pension is integrated with their State Pension entitlement so that their total pension is made up partly by a public service pension and the balance by their State Pension.
Post-2012 entrant: Retirement benefits are based on career average pensionable salary, adjusted by CPI increases, rather than final salary. CPI index linking is used for pensions in payment rather than current pay parity increases.
| Table 4.5 Summary of benefits provided by defined benefit schemes for government employees | |||
| Pre 6th April 1995 entrant | Post 6th April 1995 entrant | Single Public Service Scheme entrant (Post 2012) | |
| Pension Benefit | Final Salary Pension | Integrated1 with State Pension (Contributory) | Integrated pension based on career average salary; adjusted by Consumer Price Index |
| Lump Sum Payment | Final Salary Lump Sum | Final Salary Lump Sum | Career Average Lump Sum |
| Normal Retirement Age | 60 Years | 60 Years (65 years post 2004) | State Pension Age, currently 66, increasing to 67 in 20212 and 68 in 2028 |
| Pensions in Payment Indexation | Pay Parity | Pay Parity | CPI |
| 1Post-1995 public service workers are eligible for the State Pension (Contributory). Therefore that portion of their pension entitlement comes from the Social Insurance Fund and appears as an obligation of Column H in Table 2.1. | |||
| 2This reflects the legal situation at 31st December 2018. The Pensions Commission established in November 2020 is reviewing State Pensions arrangements (including retirement age eligibility criteria) and is due to report in June 2021. | |||
Benefits under most public service pension schemes are financed on a pay-as-you-go basis with the annual cost of pensions in payment being met from current revenue. The pension entitlement (but not the lump sum payment) of those who joined the public service after 6th April 1995 is integrated with their State Pension entitlement such that their total pension is made up partly by a public service pension and the balance by their State Pension.
This means that, in Table 2.1, the government’s liability for these employees is split between:
• The payment of public service pension funded by the Exchequer (included in Column G)
• The State Pension paid from the Social Insurance Fund (SIF) (included in Column H)
Column H of the pensions table covers social insurance-type pension schemes (e.g. State Pension (Contributory) and Widow’s, Widower’s or Surviving Civil Partner’s Pension (Contributory)) but not schemes based on social assistance-type benefits (State Pension (Non-Contributory)). This is because by definition any kind of means-tested social assistance is excluded from the table.
This liability estimate was compiled by the Department of Social Protection actuarial review of pension schemes in the Social Insurance Fund4. As is the case in Column G, the methodology and assumptions used for the estimation followed those prescribed by Eurostat in the Technical Guide for Pensions (see Table 4.3 for summary of assumptions).
The public pension system in Ireland is a basic scheme which is mandatory for all private-sector workers (and public service workers appointed on or after 6 April 1995) and one which can be supplemented with voluntary private pension arrangements. It delivers two types of flat-rate benefits: 1) the State Pension (Contributory), which is not means-tested, is paid from the age of 66 to those who have sufficient Irish social insurance contributions; and 2) the means-tested State Pension (Non-Contributory) which is a payment made to people aged over 66 who do not qualify for a State Pension (Contributory) or who only qualify for a reduced contributory pension based on their insurance record.
For the State Pension (Contributory), the rate of payment is dependent on the average social insurance contributions paid. Table 4.6 shows the rate bands for the State Pension (Contributory) scheme used in the calculations.
| Table 4.6 Post September 2012 State Pension (Contributory) Rate Bands | ||
| Yearly Average Contributions | % of full State Pension (Contributory) | Personal Rate Per Week (2019) |
| 48 or over | 100% | €248.30 |
| 40 to 47 | 98% | €243.40 |
| 30 to 39 | 90% | €223.20 |
| 20 to 29 | 85% | €211.40 |
| 15 to 19 | 65% | €161.80 |
| 10 to 14 | 40% | €99.20 |
1) The Widow’s, Widower’s or Surviving Civil Partner’s Pension (Contributory) which is payable if the deceased person or their spouse/civil partner has enough social insurance contributions. Table 4.7 shows the rates used in the calculations.
| Table 4.7 Widow's, Widower's or Surviving Civil Partner's (Contributory) Pension Rate Bands, 2020 | |||
| Contributions | Aged under 66 | Aged 66 or over | Aged 80 or over |
| 48 or over | €208.50 | €248.30 | €258.30 |
| 36 to 47 | €205.40 | €243.40 | €253.40 |
| 24 to 35 | €202.9 | €237.70 | €247.70 |
2) The Invalidity Pension is a social insurance payment which may be paid to people who cannot work because of a long-term illness or disability. At retirement age, recipients of this pension automatically transfer to the State Pension (Contributory) at the full rate (see Table 4.6).
Footnotes
1Department of Public Expenditure and Reform (2020). Actuarial Review of Public Service Occupational Pensions in Ireland. (PDF)
2Eurostat, European Central Bank. (2020). Technical Compilation Guide for Pension Data in National Accounts. (PDF)
3Department of Social Protection (2021). Actuarial Review of Social Security Pension Schemes in Ireland as required by EU Regulation 549/2013.
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