Colm’s columns

Colm Rapple
Irish Mail on Sunday   November 18, 2007

For every seven workers employed in the health services three years ago there are now eight. Over the three years to June last staff numbers jumped by 13,900 to 111,600. It’s little wonder that the health service costs have rocketed. Pay rates have also been rising although health is the one sector for which the Central Statistics Office is unable to provides earnings figures. No-body knows, it seems, exactly what the wage bill is although official figures are available for every other sector, private and public.

But no doubt that won’t stop the benchmarking body, which is due to report within the next few weeks, to make recommendations on what pay awards, if any, are needed to bring public sector pay into line with the more market driven private sector.

The first benchmarking exercise was described by trade unionist and senator Joe O’Toole as an ATM machine just waiting to pay out generous pay increases to public sector workers. It lived up to that image but this time it may swallow up the card.

Union leaders are already trying to talk down expectations. Peter McLoone, general secretary of IMPACT, which represents some 55,000 public sector workers recently warned members to brace themselves for low single figure awards with many getting nothing at all. He said that the benchmarking body was likely to confirm that public sector pay has risen faster than private sector pay over the last couple of years and it was also likely to put a high value on the pension entitlements of public sector workers.

Pensions are believed to have been ignored in the first benchmarking report that recommended catch-up increases averaging 8.9% to public sector workers in 2003. We’ll never know, because the Benchmarking Body refused to publish a justification for its recommendations or explain how it arrived at its conclusions.

The forthcoming report is expected to be more transparent and Mr McLoone’s fears seem sure to be realised. There has been no great diverge between public and private sector pay over the past two years. That’s well documented in the official figures. At the same time the high cost of public sector pensions is being increasingly recognised so the Benchmarking Body will find it difficult to ignore the difference between public and private pension entitlements in its comparisons.

This year the exchequer will pay out almost €2 billion in public sector pensions and will also be incurring a massive unquantified bill for future pension liabilities. The pensions board recently estimated that the cost of public sector pensions would rise from 1.3% of national income in 2006 to 3.7% in 2056. The bill will be paid by taxpayers.

To fund a pension on a par with those enjoyed by most public sector workers, someone in the private sector would need to invest somewhere between 20 and 30% of income over forty years. The actual rate depends on what assumptions are made regarding pay increases, investment returns and annuity rates at the time of retirement.

Public sector workers don’t have to worry about such uncertainties and their pensions go up in line with the pay of those in the jobs they retired from. The €30,000 a year pay increase awarded to secretary-generals of Government departments in the recent O’Brien report, for instance, added €15,000 a year to the annual pensions of perhaps ten or more retired secretary generals.

It’s the type of pension everyone should be able to aspire to and entitlement to it should clearly be taken into account in any comparative study of pay rates.

The increases recommended in the first benchmarking report were paid in instalments between 2003 and June 2005. During the two years since the final instalment was paid public sector pay has risen by 10.8% marginally below the average 11.5% pay increase in the financial services sector and the 11.6% increase in the average industrial wage.

On the basis of those figures some small catch-up increase in public sector pay is warranted so long as the Benchmarking body takes the June 2005 situation as a base line. It’s not clear how it will take pension entitlements into account. It might take the view that they can be ignored since there has been no great change in relative pension entitlements since 2005.

Alternatively it may take the view that public sector workers should be paid somewhat less than a private sector counterpart because of the better pensions entitlements they generally enjoy. If, as suspected, it didn’t take pension entitlements into account in 2003, then it was over generous in its recommendations then and now needs to row back.

That conclusion would fit in with other independent research. One study published by a trio of economists from NUI Maynooth in 2004, concluded that, on a like-with-like basis, public sector workers were earning 13% more than their private sector counterparts. And that was before they got their extra benchmarking increases.

If the Benchmarking Body decides to reassess its 2003 findings and take pensions into account, it won’t be recommending many, if any, pay rises. But that would be admitting that it was over generous last time around. If it doesn’t want to make such an admission, it might simply take 2005 pay levels as a base line. But on the basis of pay trends since then it won’t be able to justify average pay increases of more than 1%. There would be some groups such as teachers who might get more because they haven’t done as well as others over the past couple of years. But there will be many more, as Peter McLoone warned, who’ll get nothing.

That’s the most likely scenario. The public sector industrial relations climate is set to change.

Colm Rapple
Irish Mail on Sunday, November 11, 2007

Over €30,000 million has been wiped off Irish share values since they hit a peak on February 21 last. Some of the sharpest declines have occurred in bank shares.  Allied Irish Bank shares are down over €10 from the €24.39 they were selling at earlier this year. Bank of Ireland is down over €8 from the high of €18.83 it hit in February.
Stockbrokers are advising clients to buy at these levels but there are still more sellers and buyers.

It doesn’t make sense.

Buy Bank of Ireland share at the current price and the dividend alone would provide you with a return of almost 6% a year. The dividend yield on AIB shares is 5%. The promise of such yields normally indicates that there is a high risk involved in such investments but is there?

Stock markets around the world have been hit by a combination of the crisis in credit markets, the upward spiral in the price of oil and general economic uncertainties. But the Irish stock market has been hit far harder than most.

Irish share values are down 30% on their February values. Elsewhere in the Euro zone share values have been volatile but they are currently only marginally down on where they were in February. So why are investors particularly pessimistic about the future prospects of Irish companies? One possibility is that they have been unduely influenced by those Jeramiahs in our midst who have long been prophesising  doom and gloom.

There is a growing danger that their prophesies will become self-fulfilling.

It would be understandable if the decline in Irish share values was simply a reaction to an unwarranted upturn in the past. But it can’t be explained that easily. There are objective ways of valuing share on the basis of current profitability and future prospects. On this basis Irish shares are significantly undervalued at current levels vis-à-vis their Euro zone counterparts.

Robbie Kelleher of NCB Stockbrokers estimates that to justify this undervaluation, 2008 earnings forecasts for Irish companies would need to be cut by 30% and the probability of that happening is as close to zero as it gets.

Of course some profit forecasts are going to be revised downwards. But not to anywhere near that extent. There is no reason to believe that the Irish banks are particularly exposed to the fall out from the sub-prime lending debacle. The danger of major loan defaults on the Irish market was never great and has been eased with this week’s clear signal from the EU central bankers that interest rates have peaked for the time being.

The economic forecasts remains good, not as good as we’ve become accustomed to but better than in most of our European neighbours. In its quarterly economic forecast published this week the Bank of Ireland predicted GDP growth of 4% this year. That’s a little higher than forecasts for the naturally pessimistic economists in the Department of Finance but 3 or 4% are good rates of growth.

The Bank predicts a bounce back to 5% growth in 2009.

Most  economists are agreed that inflation will slow to less than 3% which should give a boost to consumer spending if the flood of pessimism doesn’t spread too wide. And despite the high profile closures and job losses the number at work continues to rise sharply. The number at work is expected to grow by over 40,000 next year. That’s a slow down from the 72,000 net new jobs expected to be created this year but it’s still a growth in employment.

The Irish economy will continue to grow at a good rate in both historical and international terms.  There’s no justification for the “poor mouth” mentality that’s eroding confidence and is affecting economic activity in all areas. That’s what is showing up in the stock market.

The upswing in Irish share values started early in 2003. Over the previous three years share values had more or less stagnated. There had been a minor rally in 2001 but at the beginning of 2003 the ISEQ Index was down 15% on where it had been three years earlier.

As 2002 closed the ISEQ was a few points short of 4,000 and from then until it hit 10,000 at the end of last year the trend was steadily upwards with only small and short-lived downward blips. There was a similar blip in January with the index back up at 10,000 in February before the recent downward trend began. This week the index sank below 7,000.

At that level investors are some 75% up on where they were when the bull run started in 2003 and still 4% ahead of where they were two years ago. But that’s scant consolation when they are down 30% in nine months. And of course, it’s not “they”, its “us”. That €30,000 million written off share values is reflected in the values of the investment and pension funds that impact most people in the country.

They may only be paper losses at present that can hopefully be regained but they are losses none-the-less. They will encourage, or be used to justify, moves by employers to close down more defined benefit pension schemes. But of more immediate concern is the fact that they will serve to dampen consumer and business confidence.

We need to keep telling ourselves that we are one of the richest countries in the world and that on the basis of current forecasts we need to worry less about wealth creation than the use to which we are putting that wealth.

Colm Rapple

Irish Mail on Sunday November 4, 2007

Politicians have borne the brunt of public anger at the massive pay increases awarded by the Review Body on top public sector pay. They are the recognisable faces. But the biggest winners are top civil servants some of whom will not only get substantial pay increases but have fought off a suggestion that some of their pay should be related to performance.

While the performance of their immediate underlings is already open to regular assessment, they are to remain immune from such outside scrutiny. And we can’t blame the review body for that. It recommended that the secretary-generals of Government Departments, the Garda Commissioner and the Chief of Staff of the Defence Forces be subject to the same performance-related pay award scheme that applies to second level civil servants. But the Government has decided against making the change.

The pay of top-level secretary generals is to go up by 11.3% to €303,000 a year. That’s an extra €31,000 a year which isn’t far short of the average industrial wage which last June stood at €627 a week or about €32,600 a year.

On top of that pay they enjoy pension entitlements which, according to the Review Body are worth 15% of salary more than their private sector counterparts who, at this level, generally enjoy very good pension benefits. So for comparative purposes that €303,000 a year goes up to almost €350,000.

That 15% has been misunderstood by some who assume that a similar differential will apply to public/private sector comparisons in the forthcoming benchmarking report. But the gap between private and public sector pension entitlements is far greater at lower levels than it is at the top. Civil servants at all but the very lower levels enjoy the same pension benefits as their top level colleagues. That’s not the case in the private sector.

This current review is in itself a benchmarking exercise and recent salary surveys indicate that the €350,000 recommended for secretary generals is not out of keeping with what the chief executives of large private sector firms are currently earning. But the performance of private sector managers is open to constant scrutiny. Most of them are about as secure in their jobs as an Irish soccer team manager. If they don’t perform they seldom survive.

That’s not the case with top civil servants. If the best of them are to be retained in the public sector, they need to be paid something equivalent to what they could get in the private sector. The trouble is that, without some performance assessment, we can never be sure that the salaries are justified. Over generous salaries simply provide an incentive for under performers to hold tight to their secure civil service jobs.

There are plenty of examples of mismanagement in both the public and private sectors. But while serious mismanagement in the private sector generally brings swift retribution, there are very few examples of top level civil servants being held accountable for the many well documented blunders that have cost taxpayers dear.

Each year the Comptroller and Auditor General adds greatly to the list. We learn about the money that has been wasted but little or nothing about the people responsible. Ministers are expected to field the questions and the criticisms but we know that they are not always to blame.

Was Minister Noel Dempsey warned by his well paid civil service advisers of the possible consequences of his initial decision on provisional driving licences?  Presumably some official has specific responsibly for policy in this area and should have made him aware of all the implications. At the top of the pile the responsibility for briefing the Minister must rest with the permanent head of the Department – the Secretary General.

If the brief was inadequate, then Mr Dempsey should say so. The old tradition that Ministers take it on the chin for the failings of their officials is outdated particularly in the case of secretary generals earning €303,000 a year. Perhaps Mr Dempsey was adequately briefed and is to blame for a bad decision. We may never know.

But that’s only one case of mismanagement and one that isn’t going to prove too costly in monetary terms. There are plenty more examples of far costlier blunders for which civil servants must take at least part of the blame.

Of course, the final decisions are made by the Government but the ideas are often initiated by civil servants and it is their job to accurately cost proposed changes and implement them.

So civil servants must bear some of the blame for the massive cost overruns on intrastructural projects and for grossly underestimating the cost of social welfare and health benefit changes. They must also take some responsibility for the introduction of faulty legislation that opened tax avoidance loopholes, and for the tardiness with which some of these were eventually closed off. Administrative failures were at least partly responsible for both the nursing home charges and electronic voting debacles.

The failure to tackle the nursing home charges issue is expected to cost in excess of €1 billion in refunds. The Comptroller and Auditor General concluded that the electronic voting proposal was not adequately appraised. Minister Martin Cullen may have been pushing his officials hard for a positive response but it was their job to give independent advice on the basis of a proper appraisal. So they must bear some of the blame for the €60 million wasted in buying the machines and the €1 million or so a year that it is costing to store them.

The Government needs to justify its rejection of the Review Bodies’ recommendation that top civil servants be brought into the performance assessment scheme.