IRELAND - A new career average pension scheme is being introduced for new entrants to the public sector workforce from next year, in an effort to cut the government pay and pensions bill.

Brian Lenihan, the minister of finance, announced the changes in his Budget speech yesterday as the Exchequer spending on public service pensions in 2010 will be over €2bn. He also said the State pension bill will increase from 5% of GDP to 13% by 2050, of which one-third will be spent on public sector pensions.

He told the Dáil Éireann: "Cost increases on this scale cannot be ignored by a responsible government determined to secure our economic future. The new scheme will bring public service pension terms more in line with private sector norms."

In addition to introducing a career average scheme, which he claimed would be "more equitable than the present system", the minimum pension age for new entrants will rise from 65 to 66 and will then be linked to increases in the state pension age. However the changes also specify a maximum retirement age of 70.

Further details of the new scheme included in the Budget revealed the employee contribution rate would remain at 6.5% "but may apply to all pensionable pay", while special terms such as added years and non-actuarially reduced early retirement benefits for members of the Gardaí, Permanent Defences Forces, Prison Officers and Firefighters, "will be generally discontinued".

In his speech, Lenihan noted the recent report from the Comptroller and Auditor General on public service pension places the present actuarial cost at €108bn. But he warned that under the 'pay parity' basis for pension increases, the average pay rise had been significantly greater than increases in Consumer Price Inflation (CPI).

He therefore claimed: "A change to a CPI basis for post-retirement increases would reduce that cost to €87bn, a reduction of 20%. As part of the reform of public service pension arrangements, I will review the current arrangements and consider linking pensions to increases in the cost of living."

The finance minister meanwhile eased concerns raised by the Irish Association of Pension Funds (IAPF) that a new consolidated rate of pension tax relief of 33% would be introduced ahead of national pension reforms. (See earlier IPE article: Irish pension reforms may wait until 2014)

Instead, Lenihan said the Commission on Taxation's proposals on pension lump sums - that pension lump sums below €200,000 should not be taxed along with the treatment of sums above this level - and the 33% consolidated relief rate on pensions "will be considered in the government's National Pensions Framework shortly to be published by the Minister for Social and Family Affairs".

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