Public sector pension costs forecast to more than double by 2040

The cost of public service pensions will rise sharply in the coming years, increasing by €2 billion by 2025, while the level of pension contribution from public servants will remain steady.

An analysis by the Department of Public Expenditure has found that the cost of public sector pensions to the exchequer will rise from €3.4 billion last year to €5.3 billion by 2025, while the contributions from public servants will remain static at about €1.6 billion per year. By 2040, the cost will have reached €7.3 billion.

Public service pensions are financed out of current spending, However, pension contributions by public servants amount to - at today’s levels - slightly less than half the total cost of public service pensions being paid out.

But that proportion will fall sharply. By 2025, contributions will be less than a third of the cost of pensions. By 2045, contributions will amount to less than a fifth of the cost of pensions paid out.

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The report warns of the need to control recruitment because of rising costs, and says that further reforms could be introduced to limit pension increases to increases in the consumer price index. Historically public service pensions have increased in proportion with pay grades, and any change would need to be negotiated with the public sector unions.

Currently, public servants who retire with full service (40 years) receive a guaranteed pension of 50 per cent of final salary plus a once-off tax free lump sum of 150 per cent of final salary.

Reforms to public sector pensions were introduced in 2013 which will significantly reduce benefits. However, they only apply to public servants who were recruited after that date. In the case of a public servant who retires with full service, that will not be until the mid-2050s.

The report estimates that the total pension liability for the public service at present is €114 billion.