Estimates of Irish Pension Liabilities 2021

In Ireland, government managed schemes refer to the state pensions managed by the Social Insurance Fund[1] and pension schemes for government employees[2].  These schemes are unfunded and operate on a pay-as-you-go (PAYG) basis whereby current workers' contributions are financing current pensioners’ benefits. The liabilities of these schemes are not included in the core national accounts. However, it is important to note that the unfunded obligations of government 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.

[1] State Pension (Contributory), Widow's, Widower's or Surviving Civil Partner's (Contributory) Pension, Invalidity Pension

[2] Including civil service, health, education, armed forces, gardaí, public office holders, non-commercial semi-state bodies.

Table 3.1 presents the main components in the movement of the accrued-to-date liability (ADL) of government managed schemes from the end of 2020 to the end of 2021.  The total ADL of government managed pension schemes was estimated at €646.4bn at the end of 2021, equivalent to 149% of GDP or 277% of GNI*. Nearly three-quarters of the total was in respect of state pension liabilities (see Figure 3.1), which were estimated at €470.7bn, 108% of GDP. The liabilities of public service defined benefit schemes, were estimated at €175.7bn, 40% of GDP.

During 2021, the ADL of Irish government managed schemes grew by €20.4bn, from €626bn to €646.4bn, an increase of just over 3%.

Column G: Defined Benefit Schemes of Government Employees

The estimates in column G of Table 1.1 refer to the pension entitlement of all public sector employees, pensioners and deferred pensioners as summarised by the following sectors:

• Civil Service (including Prison Officers)
• Education
• Health
• Security (Defence Forces, Gardaí)
• Constitutional, Ministerial and Judicial Office Holders
• Local Government (including Fire Fighters)
• Non-Commercial State Bodies

This relates to 365,858 employees (Full Time Equivalents) and 191,775 pensioners receiving a payment[3].

Figure 3.2 shows the components of the movement in the ADL from the opening balance to closing balance in 2021 for the schemes appearing in columns G Table 1.1. 

[3] See the DPENDR’s actuarial report for more information on data sources and estimates for column G.

The main factor increasing the pension liability of public sector employees during 2021 was the unwinding of the discount rate, which is equal to the ADL at the beginning of the period multiplied by the nominal discount rate of 4%. This relates to the fact that pension scheme members are one year closer to receiving their pensions.  This was estimated to be €6.6bn in 2021.  Employer imputed contributions, which are the difference between 'current service costs'[4] and the sum of actual employee contributions paid in the year plus 'experience effects'[5], are the next largest component of the movement at €2bn.  Employees made €1.4bn in contributions towards their pensions in 2021.  Finally public sector pensioners received €4.3bn in pension payments during 2021, thereby reducing the government’s liability.  Government, as an employer, does not make actual pension contributions towards the public sector pension schemes.

Table 3.2 below looks at the movement in the ADL from the closing balance in 2018 to the closing balance in 2021.

[4] Current service costs are the actuarial present value of the projected benefits, calculated based on the prescribed ADL methodology and assumptions and attributable to employees’ service in the current year.

[5] Experience effects reflect the assumptions taken in the calculation of the opening stock of pension entitlements and the actual experience. 

In addition to the impact on the ADL estimate that contributions and pensions paid make, changes to the model assumptions used to calculate the ADL need to be included. These are captured in row 8 of the table and are estimated to be €15.8bn. The assumption changes relate to salary inflation and wage inflation used in the model. There was no change in the discount rate between the 2018 estimates and the 2021 estimates (see the DPENDR actuarial report for more detail).

Column H: Social Security Pension Schemes

Social security pension schemes in Ireland relate to pension entitlements under the Social Insurance Fund; specifically to the State Pension (Contributory), Widow's, Widower's or Surviving Civil Partner's (Contributory) Pension and Invalidity Pension. The Social Insurance Fund financial statement 2021 and the Department of Social Protection Annual Statistical Report 2022 provided the following information in relation to these schemes for 2021:

DSP annual statistical report 2022

Approximately 60% of total benefits paid by the Social Insurance Fund in 2021 were accounted for by pensions. There were 3.2 million PRSI contributors to the Social Insurance Fund recorded for 2021 collectively paying €11.8bn[6] in contributions.

Figure 3.3 shows the components of the movement in the ADL from the opening balance to closing balance in 2021 for the schemes appearing in column H of Table 1.1.

[6] PRSI contributions finance all social insurance benefits such as income supports, illness, etc., not just pension benefits.

The single largest item, at €32.3bn, impacting on the increase in the ADL within the year is recorded in row 7; this item relates to the repeal of the legislative provisions[7] increasing the State Pension Age (to 67 in 2021 and 68 in 2028). The opening position assumed that pension entitlements would have occurred at a later age and thus not increasing the age means the ADL increases. Also increasing the liability in the year is the unwinding of the discount rate which relates to beneficiaries being one year closer to receiving their pensions (€18.2bn). The other changes in volume of €7.7bn (row 9) refer to changes in the model assumptions since the previous estimate. As the discount rate used for the 2021 estimates was the same as the 2018 estimates, there is no impact to be captured in this item (row 8). Contributions by employers and households during the year also add to the final year estimate of the pension liability and these amounted to €6.2bn in 2021. 

Other items in the table subtract from the end of year pension liability. The largest item in 2021 is captured in row 3 and this amounts to €42.1bn. This row reflects a residual/balancing figure which includes 'experience effects' found in social security pension schemes in which the observed outcome of pension modelling assumptions (real wage growth rate, discount rate, etc.) differs from the levels assumed in the previous estimation. Also reducing the pension liability were the payment of pension benefits in the year (€7.7bn) and pension scheme service charges (€100m). The Department of Social Protection actuarial report provides more detail on the data sources and assumption used in the model.

Table 3.4 below looks at the movement in the ADL from the closing balance in 2018 to the closing balance in 2021.

[7] Social Welfare (Miscellaneous Provisions) Act 2023 

Row 9 captures changes in assumptions used in the actuarial model to estimate the pension liability and is recorded as other changes to the volume of assets. This includes presumptions on future retirement behaviour, changes in the projection period and changes in the general framework of the actuarial model applied to improve accuracy. For the period from end December 2018 to end December 2021 this adds €59.4bn to the estimated pension liability. More details on the modelling assumptions can be found in the background notes.

Sensitivity analysis for government managed pension schemes

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.

A sensitivity analysis with respect to the choice of discount rate was carried out for government managed schemes in Columns G and H. Table 3.5 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 26% to €816.9bn. In contrast, an increase in the discount rate of 1 percentage point, shown in scenario 2, decreases the liability by 19% to €521.4bn.

Figure 3.4 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 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.