Why Public Sector Pay Negotiations ought to be Televised.

By May 10, 2017Blog

Finally, after decades of withering criticism about the skewed legacy of the Benchmarking process which copper fastened a remuneration gap as between private sector (PS) and Public Sector (PuS), the Public Service Pay Commission (PSPC) report attempts to price in the value of guaranteed pensions indexed to pay grade rises. This is a step in the right direction, hitherto the focus has been on pay rates but much still needs to be done if Ireland is to avoid a significant level of retirement poverty in the near future, part of which requires PuS pensions to be reformed.

Published this week the PSPC report adds some further light but the reporting of it is flawed and unhelpful in deconstructing much of the mythology surrounding the premium terms enjoyed and the wealth transfer effect from PS to PuS. Here are ten reasons why coming negotiations ought to be televised;

1. The PSPC dodged putting a value on Security of Tenure. The Revenue has no issue in pricing perks like Cars, Preferential loans, Crèche subsidies and Car Park spaces to redistribute income via the tax system using BIK. But the most valuable perk, guaranteed lifelong earnings over 70 years, is still off the radar, why? The PSPC says it’s because it’s too complicated but what’s really happening is that it’s being bypassed because it’s too political.

2. The headline reportage that the value of PuS pensions represents between 12% and 18% more on top of earnings is hugely misleading. The comparison is against guaranteed PS schemes so-called defined benefit (DB) types. But what’s not reported is that these cover just 16% of the PS workforce and even then many are wobbling.

So the PSPC report does not measure against 84% of the PS workforce where six in every ten has no pension scheme and most of the remainder are under-funded, thus in practice the gap versus the PS workforce is very much greater than 12% to 18%.

3. The PSPC report does not price the guaranteed nature of PuS benefits putting no value on the difference between benefits secured by taxpayers directly, built into public contracts and the volatile market risk taken in PS DB schemes. This is a significant error in measurement and is akin to comparing annuity mortgages to endowment mortgages without adjusting for risk.

4. The finding that, purely on pay, lower-paid PuS workers are better off relatively speaking versus higher paid PuS, comes as no surprise but is unlikely to reverse myths to the contrary.

However, add in pensions and the PuS worker most priced against, those with a credible but unvoiced grievance, are the low paid, late joiners. These are being overcharged for their pension benefits due to the way in which the Old Age Pension integrates with PuS superannuation at retirement. The amount these pay in Pension-Related Deductions (PRD) is unfairly and wrongly subsidizing older PuS on high pay who pay far less than the economic costs.

PuS workers, especially those under age 40 on lower pay ought to impress on Trade Union leaders the need to shift from the blunt instrument of flat charging for pensions to customized pricing. This would remove these egregious anomalies ensuring that the lowest paid PuS workers do not carry the burden of the higher paid longer servers.

5. The PSPC report dodges running detailed comparisons against European models in favor of general comments about some comparables in Education and Defense where premiums here are 22% and 12% more respectively. The report does so, arguing that it’s too complex, that economies differ by too much. The nearest equivalent economy by size and mix is Finland and it’s a pity the PSPC didn’t focus upon it where, like most of Europe, PuS remuneration is at a discount, not at a premium to PS. Irish teachers at the top end of the scale here earn more than a third more than Finnish teachers where the education outcomes are regarded as the best in Europe.

6. On Monday night last on RTE Claire Byrne show I used the opportunity on the eve of the PSPC report to make a number of observations. It is the case that pay averages mask important detail, but CSO data nonetheless shows that PuS average pay in many sectors is nearly fully recovered since the Depression. This is borne out in the PSPC report for the lower paid. It is for higher paid that the case for restoration is strongest.

Average PS pay in 2017 is only now approaching PuS averages in 2000. This is a nominal comparison, adjusting for older ages, higher education and experience, the gap narrows but, purely on pay only, the PuS is paid a premium over PS. When pensions and security of tenure are added the premium is quite substantial. Debates on pay differences that fail to account for pensions and security of tenure, are by their nature, flawed.

Other than for lower paid PuS late joiners, claims that PRSI and PRD contributions mean that the public sector pension bill is self-funding is patent nonsense. The Garda who jumped the pay settlement queue is a case in point, there are 12,816 serving members and 10,211 in receipt of retirement benefits, a ratio of nearly 1:1. The pay bill is €1bn rounded, the pension bill at €311m, about a third of it. Gardaí pay about 12% of the pension cost. John Horgan prices the fast accruing Garda pension worth an extra €40k yearly, putting average remuneration at €100k. Judges are in Bugatti Veyron pension schemes which accrue twice as fast as Gardaí.

In 2001 the total PuS pension bill was €876m, before the GFC it had doubled to €1.58bn in 2006 and today its doubled again to €3.3bn so roughly for every €5 going out in PuS pay €1 is going in pensions and the PRD covers about 22 cent. The ratios are deteriorating and the reason is simple, the PuS workforce is aging, as is the population generally, compressing the ratio between earners and retirees who are living much longer. The most recent Actuarial report for Ireland’s largest DB scheme puts average life expectancies well into the 80’s. It is rising each decade so unless 75 become the new 65, costs are going through the roof.

7. The net present value (expressing future deficits as a capital sum today) of the PuS pension debt is €100bn. The net present value of the black hole in the Social Insurance Fund (SIF) 85% of which will be Old Age Pensions is €324bn over the next four decades. These are real black holes. Both will move higher. The five yearly Actuarial assessment on the SIF time dated to 2015 is due shortly. PuS workers who joined after the mid-1990s have their benefits part- paid by the SIF through PRSI Class A and so are exposed on both fronts. It’s quite clear that either social insurance goes up or benefits are delayed or cut.

8. The Pension Related Deduction (PRD) is a Tax Write off, a fact rarely aired in public debate. This write off is in addition to normal tax relief on pension contributions, greatly lessening its impact for higher rate PuS workers. Replacing the PRD with PuS pension contributions first ought to be customized to the scale of the benefit to stop lower paid worker cross-subsidies and secondly, the thorny issue of tax relief needs to be equalized to the much lower levels of tax relief given to private workers.

9. Ideally Ireland ought to decapitate PuS pension accruals at a level that is affordable (likely to work out close to the average industrial wage) and press forward with a Universal Pension Scheme that doesn’t differentiate between public and private sector workers, built with real assets and credible levels of contribution from Employers and workers alike.

10. Both Benchmarking and the foundation of Irish Water were pulled off behind closed doors without minutes and involved insiders negotiating with each other. This time negotiations post the PSPC report, ought to be in the sunshine not in the shadows and televised in the same manner as a PAC enquiry. A pivot to broadcasting negotiations would do much to break down barriers and earn public trust in a process where, what is at stake is what’s left over to repair vital services like Health, Education and Security.