Statutory Pension Schemes

Consideration will now be given to the historical development of pension schemes for civil servants, sometimes called “public pensions”, but more properly referred to as “statutory pension schemes”. In 1671 the British Customs and Excise were established and soon became the largest and most important branch of the civil service. In the early days the pension arrangement was that a successor to an office would pay half his salary to the previous holder. The system of appointing a successor and getting him to pay half his salary to the previous holder continued throughout the eighteenth century. As a means of providing pensions for the higher paid, this system was soon found to be unworkable for lower paid employees. Rhodes comments :

“The confusion of arrangements for appointing and paying public servants was reflected in the confusion of arrangements for providing for both old age and retirement.”

In 1712 a Superannuation Fund was established by Treasury Warrant and officers in certain grades were required to pay 6d in the £ from their salaries. By 1725 this fund was in debit because the contribution was fixed on a “pay as you go” basis and took no account of the possibility of future increases in the ratio of pensioners to those still at work. The Receiver-General was required to make good the deficiencies out of public money. Subsequently, a condition was introduced requiring a minimum of ten years’ service to qualify for a pension. In the beginning pensions were only paid to those “worn out in service”.

However, 60 years came to be established as the minimum normal pensions age. The Napoleonic wars produced a period of high inflation that played havoc with the purchasing power of fixed salaries and pensions.

In 1810 an Act of parliament provided that this scheme should become non-contributory and that the pensions should be payable directly out of public funds. The 1810 Act fixed the age for retirement at 60 years and laid down a scale of pensions related to final salary.

In 1828 a parliamentary select committee# reported that heads of department were using the provisions relating to infirmity “to hasten removal of the less useful of their clerks”, to this fact in particular the committee attributed the rise in expenditure on superannuation. The first act devoted exclusively to pensions was the Superannuation Act 1834#. It provided for a contributory scheme for male civil servants giving a pension of two-thirds of final salary after 45 years’ service. The 1834 Act extended non-contributory pensions to the whole of the civil service. Those who had entered service prior to 1829, could after 50 years service, qualify for a pension equal to their full salary. Those entering later got a maximum of two thirds of their salary after 45 years service. Rhodes comments that :

“These are landmarks in pension history because they attempted for the first time to establish a comprehensive and uniform scheme for all whom we should now call civil servants.”#. In 1856 a royal commission was established to consider whether any changes were required in the 1834 Act. The Superannuation Act 1859 replaced the existing civil service schemes with a scheme which contained many features similar to those of the present day. In 1874 pensions for army officers had been introduced having been necessitated by Lord Cardwell’s reforms. Previously, when commissions had been bought and sold, an officer could obtain a capital sum on retirement by sale of his commission.

As a result of a royal commission report of 1903, the Superannuation Act 1909# amended the civil service scheme to provide an annual pension with an accrual of one-eightieth of final salary for every year of service and a cash payment of three-eightieths of final salary, with a maximum of 40 years’ pensionable service. The accrued cash payment provided for under the 1909 Act has (it will be noted later) had important consequences for pension schemes.

Towards the end of the nineteenth century pressure was exerted from other parts of the public sector for adoption of schemes along the lines of those established for the civil service. The Elementary School Teachers (Superannuation) Act 1898# set up a scheme which was initially a money purchase scheme, but moved to a final salary scheme with the enactment of the School Teachers (Superannuation) Act 1918#. Regulations# issued under the National School Teachers (Ireland) Act 1879# made similar provision. The local authorities followed the civil service and many such schemes were set up by private Acts of Parliament. The Local Government and Other Officers’ Superannuation Act, 1922# established a standard for local authority schemes in Britain and allowed employees to transfer from one authority to another and to take their pension rights with them. The present scheme in Ireland is contained in the Local Government (Superannuation) Acts 1956 and 1980#.

At the present time these statutory based schemes cover the civil service, police, defence forces, local authorities, health services, education and numerous other elements of the public sector. In December 1995 there were 202,760 employees who were members of such schemes#. These pensions in the public sector are known as “statutory schemes”, because they are statute based and the state is the ultimate guarantor of their payments. Statutory schemes are generally unfunded, financed on a pay as you go basis and make very generous provision with respect to scheme benefits. Statutory schemes in the past provided a model for the establishment of occupational schemes and continue as a model to which they aspire. In the future it is likely that the generosity of statutory schemes will be curtailed as they become subject to more stringent funding requirements similar to occupational schemes.

In June 1995 the National Treasury Management Agency (NTMA) commented# that one quite significant element of indebtedness that has not been included in the formal calculation of national debt is that arising from unfunded state pension liabilities. It referred to research# in this area which has shown that in many Member States of the European Community the impact of these liabilities is such as to double the level of indebtedness relative to that reported by the conventional measure. The NTMA Report states that these liabilities represent a substantial call on the future resources of the economies of the European Community and are an area where further planning for the future will be required. With respect to Ireland# the difference between the 1994 debt/gross domestic product (GDP) ratio of 84% and the “true debt” position (after taking into account unfunded state pension liabilities) of 115% of GDP suggests a £10.8 billion shortfall based upon Department of Finance estimates. In July 1995, at the same time as agreement was reached with respect to early retirement for teachers, the government announced the establishment of a commission to enquire into statutory pensions.