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Report of the Commission on Pensions
From Department of Social Protection
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- 1. Report and Associated Documents
- 2. The Commission’s Conclusions and Recommendations
- 3. General Recommendations
- 4. Funding State Pensions
- 5. Payment Rates
- 6. Total Contributions Approach
- 7. Long-Term Carers
- 8. Retirement Age
- 9. State Pension Age
- 10. Flexible Access to State Pensions
- 11. Increasing Social Insurance Fund (SIF) Income
Report of the Commission on Pensions: Executive Summary
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Pensions Commission: Work of the Commission Infographic
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Pensions Commission: The State Pension Challenge Infographic
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Technical Working Paper 1: Population and Labour Force Projections
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The Commission supports measures that encourage economic growth and competitiveness and increase labour market participation, including for older workers.
The Commission recommends that any of the proposals that are progressed by Government are subject to further gender, equality and poverty proofing.
The Commission emphasises the need for enhanced transparency, and recommends ongoing communication relating to State Pension reform to secure public understanding of the importance of sustainability, certainty and poverty prevention.
The Social Insurance Fund (including the State Pension system) should continue to be financed on a Pay-As-You-Go basis.
The Commission recommends the creation of a separate account in the Social Insurance Fund (SIF) for State Pensions. The separate identification, accounting, and reporting of State Pension contributions will provide transparency in relation to how State Pensions are financed, and the Fund’s ability to meet its commitments on an ongoing basis.
- The volatility of working age payments makes it difficult to calculate the level of contributions needed to keep the SIF in balance. Due to the largely predictable nature of State Pension spending, a separate State Pension SIF account would enable a calculation of the level of contributions required to balance State Pension expenditure.
- A separate SIF account for State Pensions would enable any funds in the account to be ringfenced for State Pension expenditure and not used for other payments. For instance, the financial impact of introducing enhanced working age benefits would not affect State Pension funding (or vice versa).
- A separate State Pension SIF would increase transparency as there would be a clear visibility of State Pension income and expenditure, and funding adequacy.
- This would enable consideration to be given for a creation of separate State Pension contribution rate, by sub-dividing PRSI.
The Commission supports the principle of annual Exchequer contributions to the ‘State Pension’ account of the SIF. Rather than rely on Exchequer subventions only when the SIF is in deficit, the State should identify and allocate a separate Exchequer contribution to the SIF State Pension account.
- This could be based on a minimum percentage of the previous year’s expenditure on the State Pension Contributory being paid into the SIF State Pension account on an annual basis by the Exchequer. For the purposes of its work and in order to carry out costings, the Commission used an indicative Exchequer contribution of 10 per cent of State Pension Contributory expenditure per annum.
- This approach would formalise the tripartite basis of SIF funding by employees/self-employed, employers, and the State, envisaged at its foundation by providing an annual Exchequer contribution to the State Pension element of the SIF.
- In so doing, it would be in line with the tripartite approach being considered for the automatic enrolment retirement savings system which would have a legislative basis for the provision of a dedicated direct Exchequer contribution and/or tax expenditure.
- The formalised basis for this funding would enable the State to plan for non-labour revenue sources to help fund the State Pension system. Relying solely on PRSI increases to fund the State Pension system in the context of an ageing population would likely have negative labour market impacts.
- This Exchequer funding would also help fund some of the solidarity aspects of the State Pension system.
- Sufficient Exchequer contributions, while demographics are relatively favourable, could enable a buffer to be built-up in the State Pension SIF. A buffer would operate to address unexpected falls in income, and could be used to maintain the value of pension payments required under benchmarking.
- The Commission notes that, should a deficit arise, an Exchequer subvention would also be required to meet any shortfall.
The Commission endorses the early introduction of an automatic enrolment retirement savings system, which will introduce a funded component to the pension system and improve retirement income adequacy for future pensioners.
The Commission recognises and supports the State Pension system as the bedrock of the pensions system, and its first pillar function of preventing pensioner poverty.
The Commission endorses the general principle of benchmarking and indexation of State Pension payments.
- The Commission supports the use of benchmarking and indexation as a means of providing certainty to pensioners, maintaining the relative value of State Pension payments compared to earnings growth and price inflation, and ensuring that the poverty prevention role of the State Pension system is maintained.
- Benchmarking and indexation can help with fiscal sustainability by framing the potential level of increases in State Pension payment rates; however, it can adversely affect fiscal sustainability if the design does not prevent ‘ratchet’ effects.
To ensure that the State Pension system continues to provide a level of income that effectively prevents pensioner poverty, and to address public calls for certainty in the value of State Pension payments for current, upcoming and future pensioners, the Government should immediately implement the smoothed earnings approach the benchmarking and indexation as outlined in the Roadmap for Social Inclusion 2020 – 2025.
- The Commission is mindful that benchmarking State Pension rates against earnings will not necessarily protect against poverty. While recognising that a State Pension rate benchmarked at 34 per cent of average earnings would have been effective at preventing pensioner poverty in the past (see Technical Sub-Committee Working Paper No. 4 on Benchmarking and Indexation for details), the Commission cautions that this does not mean that it will continue to do so in the future.
The Commission supports the establishment of an independent standing body that would advise Government on pension rates of payment as calculated initially by the smoothed earnings benchmarking and indexation mechanism recommended above, in a manner analogous to the Low Pay Commission as proposed in the Roadmap for Social Inclusion 2020 - 2025.
- The Commission recommends that this independent standing body should periodically review the effectiveness of the benchmarking and indexation approach in preventing pensioner poverty, including a consideration of poverty by household type (single and couple pensioners households and pensioners living with others).
- The body could propose amendments to the benchmark if the review found that the benchmark was not effective at preventing pensioner poverty, or the body could take its findings and wider social and economic factors into consideration when making its recommendation on rates to Government.
- Recommended increases in the weekly rates of payment should apply to all State Pension schemes.
The Commission recommends that this body and its functions be established on a legislative basis.
The Commission commends the recent policy approach to Budget increases in the Living Alone Allowance and recommends that this pattern of enhanced increases in the weekly rate of the Living Alone Allowance continue to provide targeted support to single pensioner households who are at greater risk of poverty.
The Commission recommends that the full transition to a Total Contributions Approach and the abolition of the Yearly Average approach to calculating entitlement to the State Pension Contributory rate of payment should be implemented as soon as possible, pending the passage of necessary legislation and IT system changes.
- Since 2019, both calculation methods are in operation, with the better rate from the two calculation methods awarded. This has created further anomalies and unfairness in the system, whereby people with fewer contributions are still able to qualify for higher levels of payment. This also works to increase the cost of the State Pension Contributory at a structural level.
The Commission recommends that for those who are better off having their pension entitlement calculated under the Yearly Average approach, a phased transition to the Total Contributions Approach should apply gradually over a 10 year period.
- The Commission recommends that for the transition period, where a person does not qualify for the maximum weekly rate of payment under the Total Contributions Approach and would have been better off under the Yearly Average Approach, a proportion of the rate will be calculated under the Yearly Average Approach and the remainder under the Total Contributions Approach.
- These proportions will gradually change over time – pensioners who would be better off under the Yearly Average approach who qualify for the State Pension Contributory in the first year of the transition will receive 90 per cent of the rate calculated under Yearly Average approach, and 10 per cent under the Total Contributions Approach for the duration of their pension payment. Pensioners qualifying in the second year of the transition, will receive 80 per cent of the rate calculated under Yearly Average, and 20 per cent under the Total Contributions Approach for the duration of their pension payment, and so on, with the full transition completing over 10 years. This is similar to the approach taken in Norway when they introduced a change in the calculation method.
In terms of the specific design of the Total Contributions Approach (TCA), the Commission recommends that the current ‘Interim’ TCA should become the definitive TCA i.e. 40 years – or 2,080 contributions – required at State Pension age to qualify for a maximum rate pension. This includes 10 years of credited contributions and 20 years of HomeCaring periods, but with a cap of 20 years combined credited and HomeCaring periods.
The Commission recommends the issuing of regular PRSI contribution statements in an easy to understand format so that PRSI contributors are aware of their level of contributions and how this relates to the level of State Pension Contributory that they can expect to receive. These could be made available in real-time on MyGovID or could be issued to a person’s digital post-box.
The Commission recommends that long-term carers (defined as caring for more than 20 years) should be given access to the State Pension Contributory by having retrospective contributions paid for them by the Exchequer when approaching pension age for any gaps in their contribution history arising from caring.
The contributions would be exclusively for State Pension Contributory purposes, and would be recognised as paid contributions both for the purposes of the qualifying for the State Pension Contributory and for the purposes of calculating pension rate entitlement under the Total Contributions Approach.
- This would deal with the barrier for long-term carers who, because of the length of their caring lives, are unable to acquire 520 paid PRSI contributions or who qualify for a reduced rate of pension.
The relevant Government Department(s) should examine, in conjunction with relevant stakeholders, options for the creation of a statutory ‘Family Carer Register’ which could, in time, facilitate the identification of long-term family carers for State Pension Contributory purposes as well as assisting in the planning and delivery of services for family carers. This could be considered as part of the Programme for Government commitment to update the National Carers’ Strategy.
The Commission recommends aligning retirement ages in employment contracts with the State Pension age, by introducing legislation that allows but does not compel an employee to stay in employment until State Pension age. Any such legislation must meet the standard required by the Equality Directive (objectively justified by a legitimate aim as set out in Article 6)
The proposed policy objectives of this legislation would be that:
- In general, an employer cannot set a compulsory retirement age below the State Pension age;
- It would be important to ensure that a worker’s property rights in terms of their ability to retire at a time of their choosing (regardless of the gap in relation to accessing the State Pension) and receive a pension under their existing occupational or personal pension scheme is not adversely affected;
- Where possible, the same terms and conditions regarding the provision of insurance, financial services and related benefits should apply to all employees, subject to the availability of these benefits from providers and the cost not being disproportionate for employers;
- This legislation would apply to existing and new employment contracts;
- In strictly limited cases where a retirement age below the State Pension age continues to apply (as a result of legislation, collective agreement or at individual employment level), employers would be required to give notice to workers in order to ensure that the worker is aware that a retirement age below the State Pension age applies, and to evidence compliance with the law in terms of objective justification by a legitimate aim and appropriate and necessary means;
- This legislation would not affect employment contracts where the retirement age is set above State Pension age and would only apply to contracts with a compulsory retirement age;
- While the State may introduce such legislation, it would need to be independently reviewed on a periodic basic to ensure that it still meets the grounds of objective justification with a legitimate aim.
- Social partners are encouraged to take this recommendation on board through agreement, collectively or locally, in advance of the legislation being enacted.
The Commission supports measures that facilitate and encourage fuller working lives. Social partners, relevant Government bodies, and the Workplace Relations Commission should consider and issue guidance on measures to facilitate those who wish to continue working past retirement age, with proposals to be considered at appropriate fora, including the Labour Employer Economic Forum.
The Commission recommends a review by the relevant Government Department or statutory body to:
- Provide clarity on the use of successive post-retirement fixed term contracts and to establish whether there is coherence in the application of the Protection of Employees (Fixed-Term Work) Act 2003 and the Employment Equality Acts 1998 – 2015.
- Review the application of the Employment Equality Acts 1998 – 2015 to the provision and non-provision of insurance or related financial services benefits to employees on age discrimination grounds.
By a significant majority (10 out of 11 members *), the Commission recommends a gradual incremental increase in the State Pension age by three months each year commencing in 2028, reaching 67 in 2031 (10 years from now), with further increases of three months every second year reaching 68 in 2039.
- One of the main concerns with an increase in the State Pension age – the gap between the traditional retirement age in employment contracts (65) and the State Pension age (66) has been partially addressed with the introduction of the Benefit Payment for 65 Year Olds and will be further addressed if the Commission’s recommendation to align retirement ages in employment contracts with the State Pension age is implemented. This legislation should be enacted in advance of any increase in the State Pension age.
- The gradual implementation will reduce the impact of the pension age increase on upcoming pensioners.
- The increase in the State Pension age will apply to all State Pension schemes.
* The member nominated by ICTU did not support any increase in the State Pension age.
The Commission recommends that access to the State Pension should be on a flexible basis.
The Commission recommends that a person may choose to defer access to the State Pension up to age 70, and receive a cost neutral actuarial increase in their State Pension payment.
The Commission recommends that a person can continue to pay social insurance contributions past State Pension age at their existing PRSI contribution rate (employees, employers and the self-employed) to improve their social insurance record for State Pension Contributory purposes.
These PRSI contributions will enable individuals without a full contribution record (and who have deferred access to the State Pension) to become entitled to the State Pension Contributory, or increase the pension rate of payment, as a consequence of the additional paid contributions.
As an option for Government to consider, done in conjunction with a State Pension age increase, the Commission sees merit in recognising long PRSI contribution histories by including a provision whereby those who choose to retire at 65, and have a long Total Contributions (TCA) record of 45 years, may receive a full pension.
- Done on its own, this is a cost increasing measure. By limiting access to those with a long contribution history, and retaining a retirement condition, the costs of this option are curbed. In light of experience with take-up, it may need to be reviewed as the pension age increases.
The Commission recommends increasing the self-employed PRSI contribution rate. In the first instance, the Commission recommends that Class S PRSI for all self-employed income is gradually increased from 4 per cent to 10 per cent. In the medium term, the Class S PRSI rate should be set at the higher rate of Class A employer PRSI (currently 11.05 per cent).
Increase the Class A rate of PRSI for both employers and employees.
- The level of increases required depend on the package that the Government chooses to implement (if any). The Commission recommends Package 4, which will not require PRSI rate increases for employers and employees until after 2030. It will require a 1.35 percentage point increase in Class A each for both employers and employees by 2040.
The Commission considered a range of PRSI base broadening measures.
- Broadening the base will reduce the burden on current PRSI contributors, will reduce the required effective tax on labour income (with its attendant negative labour market efficiency effects) and will enhance intergenerational equity.
The Commission recommends maintaining the exemption from PRSI on all social welfare payments.
Other than social welfare payments, the Commission recommends removing the exemption from PRSI for those aged 66 or over.
- The Commission recommends that all those over State Pension age should pay PRSI on a solidarity basis (Class K) on all income currently subject to PRSI.
The Commission further recommends removing the exemption to pay PRSI on supplementary pension income (occupational and personal pensions, and public sector pensions).