New entrants to the Civil Service will no longer retire on final salary pensions under new arrangements introduced by the Gibraltar Government at the last budget. The measures, which begin next year, are aimed at tackling a rising pensions bill that represented a significant burden on the public purse.
The Civil Service final salary pension scheme is entirely unfunded and is paid out of the Government’s annual expenditure budget.
As salaries increased over the years, so did the cost of meeting those payments.
In 1983, the cost of meeting the pension payments of retired civil servants was £3.8m. By 2011, that had risen to £26.6m.
Under the present system, Gibraltar employs civil servants, pays their wages and enjoys the services they provide, but it is future generations who must pay the pension of those civil servants.
“Because it is unfunded, what it basically means is that we are leaving the pensions liability for current civil servants to our children and grandchildren, who will be the taxpayers in 33 years time when a civil servant recruited today retires,” said Chief Minister Peter Caruana during his last budget address just before the summer break.
“Just as we, today’s taxpayers are now paying the pensions of past civil servants who have retired and will pay the pensions of current civil servants when they retire.”
In times of economic prosperity, such an arrangement works well and payments are met. But the risk is that a downturn in the local economy could saddle future generations with an unsustainable burden.
It is that risk that the Government sought to address by putting Civil Service pensions on a contributory footing.
“If at some future time the economy were to do less well, this could become unaffordable and thus a serious problem for our children and grandchildren and for future generations in Gibraltar,” Mr Caruana said.
“We should eliminate that risk to them as soon as possible. This can be done by establishing a new occupational pension system for future civil servants in which the Government and the employee both put aside each year a proportion of each employee’s salary into a pension fund for that employee.”
When that employee retires, the accumulated content – annual contributions plus investment income over the whole career – of that employee’s pension fund will pay for his her occupational pension, which will thus no longer be linked to final salary and will not be a financial burden on taxpayers at the time that he/she retires.”
Under the Defined Contribution Provident Scheme, the cost of public sector pensions will be spread over 33 years of a civil servants working life and paid annually by the taxpayers who employed and obtained the benefit of that civil servant.
Unlike in the UK, this change in the civil service occupational pension system will not affect existing employees, who will continue to enjoy their present pension arrangements.
In effect, it means the change will increase existing costs for the Government, which will have to meet current final salary pension payments while funding annual contributions for those in the new scheme.
“So this is not about saving money now,” Mr Caruana said. “It costs more money now.There is nothing in this for the Government today except extra cost.”
“This is about taking seriously our responsibility to our children and grandchildren and to future generations
by relieving them of need to pay later for the cost of things that we do, enjoy and decide today.”
Over 1017 public sector workers – around 25% of the public sector workforce – are already employed on the basis of this new pension scheme, most of them in statutory agencies outside the main Civil Service structure.
It already applies to new entrants in public authorities and agencies and, as from January 1, 2012, will apply to all new entrants in the Civil Service.
The Government is currently preparing the legislative changes needed to put the new scheme into place.
It also envisages improving the terms of the Provident No.2 Pension Scheme by increasing employer contributions from their current 10%.