This is the second publication by the CSO on Irish pension liabilities (see Table 2.1) of all occupational pension schemes including those managed by government. The publication shows the amount owing to households by private employers and government at the end of 2018 as well as the transactions which took place in 2018.
Because of the importance of pensions to the economies of EU member states, this table on pensions was adopted by the European Commission in the European System of Accounts, (ESA2010).1 Data were first transmitted in 2017 with reference to pension liabilities of 2015. Member States are obliged to transmit data every three years and this is published on the Eurostat website.
The main purpose of this table is to supplement the core National Accounts and improve the recording and comparability of all pension schemes – private and public – throughout EU member states.
These estimates of Irish pension liabilities have been compiled using three main data sources:
• Pensions Authority Annual Scheme Information (ASI) and Annual Actuarial Data Return (AADR)2
• Department of Public Expenditure and Reform Actuarial Review of Public Service Occupational Pensions in Ireland (2020)3
• Department of Social Protection Actuarial Review of Social Security Pension Schemes in Ireland (2021)4
The methodology used in the estimates closely follows guidance from Eurostat and the European Central Bank outlined in the handbook produced for compilers and users of data on social insurance pension schemes – the Technical Compilation Guide for Pension Data in National Accounts (2020 edition).5
One of the key assumptions in estimating future pension liabilities in present values is the discount rate used in the model. It is the component of the model with the greatest impact on the value of the accrued-to-date-liability (ADL) of pension schemes. Eurostat set the discount rate to be used in respect of government managed schemes in order to ensure comparability across Member States. The discount rate (see table 1.1) used for the previous 2015 estimates was 5% in nominal terms (3% in real terms). For the 2018 data, a discount rate of 4% nominal (2% real) was used. The discount rate has a significant impact on the scale of the pension liability. For this reason, a sensitivity analysis of +/-1 percentage point is carried out and transmitted to Eurostat also. The impact on the discount rate is discussed in Chapter 4 Government Managed Schemes.
It should also be noted that, primarily due to the change in the discount rate used, the data in Table 2.1 for 2018 is not directly comparable with data in Table 2.1 of the 2015 publication.
Table 2.1 can be used to supplement the core National Accounts which currently show only the amounts owing to households from funded pension schemes (those which build up assets in order to fund the benefits paid in retirement); they do not include the liabilities of unfunded pensions. State pensions and most public service employee pensions are unfunded and operate on a pay-as-you-go (PAYG) basis whereby current workers' contributions are financing current pensioners' benefits. Table 2.1 goes beyond what is recorded in the core National Accounts to include the liabilities of unfunded pensions as well as those of funded pensions.
There are a number of important concepts to be considered when interpreting the liabilities recorded in Table 2.1, these are summarised in Table 1.1 below.
|Table 1.1 Summary of important concepts to be considered when interpreting the liabilities presented in Table 2.1|
|Gross liabilities||The liabilities in Table 2.1 are gross pension liabilities which means the estimates, in the case of funded schemes, do not take account of any assets which have been built up to pay benefits in retirement.|
|Accrued-to-date liability (ADL)||The measure of the liability used in Table 2.1 is called the accrued-to-date liability (ADL). It includes future pension benefits due to be paid to those already retired and in the case of current workers, it is the benefit right earned to date (based on past service) which is included. The ADL measure therefore does not include an (expected) contribution period ahead of current workers. For example, in the case of a 28 year old worker entitled to the State Pension (Contributory) at age 68, the remaining 40 year contribution period will not be incorporated in the ADL estimate in Table 2.1, only the rights built up during the individual’s career to date will be considered.|
|Fiscal sustainability||The ADL measure of pension entitlements as they appear in Table 2.1 do not allow any conclusions to be drawn as to the sustainability of the pension scheme as the estimates do not include pension rights that will be built up in the future. In addition, the ADL measure does not take account of assets of funded schemes or future PRSI contributions which also need to be considered when measuring fiscal sustainability.|
|Debt||For government managed schemes appearing in columns G and H, these are not liabilities in the sense of a debt which has been borrowed and has to be repaid but in the sense that they represent the obligations which are outstanding, as defined by current pension rules and legislation.|
|Liabilities and entitlements||Table 2.1 is compiled using data on obligations or liabilities of pension providers in Ireland. These are also entitlements or assets of households and can be viewed as such when interpreting the statistics.|
|Scope||The ADL as defined in Table 2.1 comprises both state and private pensions, but does not include means-tested state benefits such as State Pension (Non-Contributory) or private savings plans such as Personal Retirement Savings Accounts (PRSAs) and Retirement Annuity Contracts (RACs).|
|Discount Rate||The discount rate is one of the most crucial assumptions used in the actuarial estimation of the ADL for defined benefit schemes. The accumulated impact of the rate chosen to discount projected cash-flows over a prolonged period is very high. The Eurostat Technical Guide recommends that, for government managed pension schemes, the discount rate is set at 2% in real terms and 4% in nominal terms.|
The Eurostat table on pension entitlements (also known as Table 29) has been adapted in this publication to reflect the Irish pension system, the results of which appear in Chapter 2 (Table 2.1) along with a comparison with other EU countries. Chapter 3 provides further detail on funded occupational schemes and Chapter 4 looks at government managed pension schemes including a sensitivity analysis based on a +/- 1 percentage point change to the discount rate for these schemes.
The Background Notes in Chapter 5 provide detail on the compilation of Table 2.1 in terms of scope; column and row definitions; assumptions used; and modelling of government managed schemes. It also briefly examines the accrued-to-date liability (ADL) approach as a sustainability measure.
1The CSO is required, under Regulation (EU) No 549/2013 on the European system of national and regional accounts in the European Union, to compile a supplementary table on accrued-to-date pension entitlements in social insurance (Table 29). Updates are required at three year intervals with the data for 2018 transmitted to Eurostat before the deadline of December 31, 2020.
2Since 2012, trustees of defined benefit schemes subject to the funding standard as set out in the Pensions Act have been required to submit an Annual Actuarial Data Return (AADR) to the Pensions Authority.
3Department of Public Expenditure and Reform (2020). Actuarial Review of Public Service Occupational Pensions in Ireland. (PDF)
4Department of Social Protection (2021). Actuarial Review of Social Security Pension Schemes in Ireland as required by EU Regulation 549/2013.
5Eurostat, European Central Bank. (2020). Technical Compilation Guide for Pension Data in National Accounts. (PDF)