Putting off public sector pension reform three more years may increase the debt owed to pensioners by another three per cent of GDP, or more.

What’s more, while pension payments continue to be made from the consolidated fund, the Government will have to fork out billions of dollars more of taxpayers money each year.

The latest wage deal with public sector workers states that the reform programme is targeted for implementation in April 2016.

But at the start of the process, which was supposed to have commenced three years ago, it was already estimated that the implicit pension debt — pension payments due to current and future pensioners — was already 36 per cent of GDP.

Projections estimated the figure would hit 40 per cent of GDP by this year, and 43 per cent in 2016.

Furthermore, Government expenditure on public sector pensions rose from $16.7 billion (6.2 per cent of total non-debt expenditure) in 2010/2011 to $21.8 billion (7.6 per cent of non-debt budget) last year, before rising to what is expected to be a pay out of $24.1 billion (8.8 per cent) of this fiscal year, which ends next week.

Put another way, pension expenditure increased from 0.4 per cent of GDP in 1990 to approximately 1.4 per cent of GDP in 2010, according to the green paper on the options for reforming the public sector pension system.

A white paper is presently being created.

Currently, nurses and teachers make no contribution to the consolidated fund, while police contribute 1.6 per cent of salary, with some others contributing more, but there is no link between the contributions made by these workers and the benefit that is paid.

And all pension benefits are paid from the consolidated fund, and not a pension scheme.

Aside from the high burden on the public purse, the current way public pension is handled limits the adequacy of payments to retired officers.

Indeed, the Government increases the pension received by retired employees of the public sector, but it is done on an ad hoc basis.

At the end of 2009, the average pension received by a retired public servant was approximately $29,000 per month. In 2009, approximately 83 per cent of retired public sector workers received $33,000 or less per month, while the average pension of $29,000 per month or $12,720 more than the minimum wage at the time.

It is not clear how much the average payout has increased by since then, or if it has at all.

However, the expenditure on public pension rises as the wage bill increases each year.

Finance and Planning Minister Peter Phillips said that the recent signing of an agreement with public sector unions has provided a level of certainty in the wage bill, without which there would be no deal with the International Monetary Fund (IMF).

The agreement freezes wages until April 2015, when the two-year negotiating cycle will recommence and when wages for the for the three fiscal years 2012 through to 2015 will be settled, albeit, within the ceiling of nine per cent of GDP by March 2016.

But pension payments may not be subject to the freeze.

The wage agreement stipulates that “since pension payments are calculated on the last salary and whereas there will be no increase over the period of wage restraint, the Government will examine the proposal for an additional increment to be applied to the base salary used to calculate pension payment”.

The additional increment would go on top of the 2.5 per cent annual increased to which public sector workers are entitled, including temporary employed for two years and above who previously weren’t.

Those temporary workers may also become pensionable if they have been employed for 10 years and over and are within five years or less of retirement. The Government also agreed to that consideration under the agreement.

The concept behind pension reform included the implementation of a contributory pension scheme in order to partly transfer the cost of financing retirement benefits from the taxpayer to the ultimate beneficiary, which would reduce the long term cost impact of pension on the budget.

The Fiscal Policy Paper (FPP) tabled last May stated that the Joint Select Committee of Parliament, charged with reviewing the Green Paper on Pension Reform, had completed its deliberations and made certain recommendations for changes to the current system.

Among the recommendations are: A proposed change to the retirement age from 60 to 65; introducing employee contribution of five per cent of their annual salary; and changing the salary to be used in computation of pension to the average of the last five years, rather than the salary in the final year of employment as currently obtains, among others.

Last year’s FPP stated that the white paper should be ready before the end of this fiscal year.