Pension anomalies

By May 1, 2018Financial

Paul Kenny, former Pensions Ombudsman, jokes that the Irish public pension system is, ‘‘a classic example of, if I were you, I wouldn’t start here’’.

The Irish pension system has grown up piecemeal over many decades. This has contributed to the recent controversy over pension entitlements, particularly as it relates to women.

How to qualify for a pension

To qualify for a Contributory State Pension. You need to:

  • have paid a minimum number of contributions at one of the qualifying PRSI classes
  • satisfy an ‘averaging’ test, which dictates how much your pension will be.

You may not have an annual average of 48 contributions, between those you paid and those you were credited for, from 1979 onwards. If you don’t, then the state works out your average over your whole lifetime of contributions. Credited contributions come from times when, for example, you were a homemaker.

In 1997, the state decided to make access to pensions more difficult. It increased the minimum number of paid contributions needed to qualify for a pension from 260 to 520 at Class A. For self-employed people, the necessary contributions are Class S. However, this couldn’t happen overnight, so the state set 2012 as the year to put the new rules in place.

Payment bands

A second development was when the state introduced new bands of payment. Before 2012, there were only four bands of payment. This meant there was little difference in the rate between the top and bottom band. However, the increase to six bands widened the gap between those who had small average payments and those who had the full number of payments.

The state pays the maximum pension if you have an average of 48 annual payments or more. If you have between 40 and 47 payments it only goes down by 2%. If your average is less than 30 it begins to fall quite steeply.

Those in the lowest band with an average of 10-14 payments, receive only 40% of the maximum pension. An average of less than 10 means you will not get any Contributory State Pension.

Average of 520 contributions needed

It can be difficult to build up this average of 520 contributions.

For example, your average could be low if you:

  • had a summer job at 18
  • entered the PRSI system
  • came out of the system because you went to university or left the country.

For women it has been difficult to build up the average if they left employment for long periods to raise families.

Such anomalies mean you can enter the system very late in the day, at say 55 years (you must make paid contributions before the age of 56), work consistently for 10 years, achieve an average of  48 payments per year and then qualify for a full pension.

However, those who might have entered the system early, but for whatever reasons came out, could struggle to make the 520 contributions over their working life. In addition, they would have lower averages, therefore reducing their entitlement.

Women struggle to meet pension criteria

Women are disproportionately affected since they are the ones most likely to opt out of the workforce to raise children or act as carers.

It is estimated that 62% of women as opposed to 38% of men have been negatively affected by these rules. Indeed, until 1973, the marriage bar within the Public Service (and copied by many private sector employers) forced women to leave their jobs.

The question of time out for childcare was addressed somewhat when a system of ‘disregards’ was introduced after 1994. If you – usually a woman – were raising children under age 12 after April 1994, that period (maximum 20 years) is disregarded when calculating the average. This had the effect of increasing your average, and therefore possibly increasing the amount of your pension entitlement.

Issues around equality and discrimination in relation to women make this a very sensitive area.

Better pensions cost state more

Politically the move to a new system has been regarded as too expensive. However, Regina Doherty, Minister for Minister for Employment Affairs and Social Protection, in an Oireachtas exchange with Deputy Willie O’Dea from Fianna Fáil, said: “It is my intention to bring forward the total contributions model for the calculation of pensions from 2020 onwards,” (https://beta.oireachtas.ie/en/debates/debate/dail/2017-11-07/11/).

Moving to such a system and addressing the historic issues around averaging contributions has financial implications. For the Government to underwrite this move, it would need to find income to fund it.

All in all, as Paul Kenny, says: “We are where we are, what we have got to do now is to examine the present system, and any proposed system, minutely and deal with any practical examples that it will throw up.”

Talk to your politicians

Those who have already retired and may be suffering and those who are to retire shortly should continue to raise this issue with their local politicians. Too many people are being affected – and women disproportionately – to allow it to disappear.

Our courses discuss all these issues

RPCI discusses State pensions as a key component of our pre-retirement courses.

Bear in mind that if you attend our course, afterwards you can consult us on any retirement-related issue including pensions, free of charge.

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