Everyone has their own ideas about how they would like to spend their golden years. You have worked all of your adult life and you hope to have some quality time after retiring. Many of us begin to plan that trip of a lifetime that we have always fantasised about. Others plan to learn a language, take up new hobbies, finally tackle that unruly garden or simply make more time for family and friends. And why not? The children have grown up and moved on, you have put in the hours day-in and day-out for decades and now is the time to relax and take it easy.
Retirement is when most of us are at our happiest. In today’s world people are living longer and enjoying fuller and more active retirements. The reason that they can do this is because they have made the necessary pension provisions so that they do not need to worry when they retire and can peacefully enjoy this special time in their lives. It is very important for people in the workforce to remember that once you retire there will still be expenditures that need to be taken into consideration. Most of us during our lives will take out a mortgage and purchase a home. But while your mortgage might be taken care of by the time you retire, there will still be other expenditure costs to consider such as food, bills (gas, electricity and telephone), clothes, insurance, medical costs, entertainment, holidays etc.
It is vital that people who are still working ensure that there are sufficient provisions made during their working lives to assist them in being more financially independent in retirement. The longer you pay into your pension the more funds you will save, and money paid in earlier will be invested for a longer period of time and should have a better return.
In theory all of this makes sense. Planning for the future seems simple in theory, but it is not so easy in practice. The fact is that most Irish workers do not adequately plan for their retirement. A pension survey carried out by Friends First revealed that 37% of the people questioned had absolutely no pension coverage.
As well as that, 36% of people who did not have a pension revealed that they had not thought about how they will provide for themselves in their old age. The economic downturn in recent years has obviously played a significant role in this and people are choosing to spend their income in other areas. 59% of the people surveyed who did not have a pension said that this was due to the fact that they simply could not afford one, and a further 23% indicated that they had not got around to starting one.
During the recession people were forced to limit their expenditure on luxury items and pursuits, but it also appears that necessities such as pensions were also cut back on. A reason for this could have been that the high cost of entry was too prohibitive and had prevented people from getting the ball rolling on a pension provision. Factors like reduced hours, pay cuts and general cut backs also would have played a massive role in this. It should be noted that even a little pension provision is better than none at all. If we put this off until we feel that we can afford one, it could be too late.
Things may not become much easier in the future as the pension landscape in Ireland has endured dramatic upheaval in recent years. A lack of solvency has seen many defined benefit schemes wound up or renegotiated with significantly reduced benefits for members. Trends in workforce numbers have also played a part in this instability.
At one point a defined benefit scheme would have promised a retiree an income after work for 10-15 years. Those same schemes are still in place even though the average worker can expect to live 20-25 years after retiring. The demographic trends are a key point when you look at pensions going into the future. An important figure when taking this into account is the ratio of workers to retired people. At present, there are 5.7 workers for every retired person in Ireland. This figure is set to drop dramatically by the year 2040 to just two workers for every one retired person.
As this ratio increases, the Government’s ability to maintain the level of state pension will become increasingly unsustainable. Until now they have succeeded in maintaining current rates but according to a report by Insurance Ireland, state spending on pensions may rise from 5.2% of GDP in 2007, to 8% in 2035 and 11% in 2060.
The current government framework includes the introduction of a mandatory auto-enrolment pensions regime when the economic outlook allows for it. This scheme was endorsed by the OECD 2013 report Review of the Irish Pensions System but it is not clear when this could be introduced. People currently in employment, particularly younger workers, need to start making pension provisions. However participation in pension schemes remains low.
One suggestion to tackle the low participation is a system that would see employees that are over 22 years of age being automatically enrolled in a scheme that would see minimum contributions by the employee, the employer and the State. This would mean that employees would need to opt out and would be re-enrolled every two years.
A similar model has been successful in the United Kingdom. The scheme in the UK also operates on the basis of leaving it up to the employees to opt out of the scheme. This system offers the employees the ability to be able to control their pensions instead of having to purchase annuities.
Another worrying aspect for workers emerged in a recent study carried out by the Australian Centre for Financial Studies and Mercer which indicated that future generations of workers in this country cannot be certain that they will receive a state pension.
The reason for this is due to the fact that the current cost of hidden state pension liabilities are estimated at e440 billion by the Pensions Authority. That figure is more than double the national debt estimate for the end of this year which is e203 billion. It is a figure that needs dramatic reduction under European budgetary rules as it amounts to 111% of GDP.
The report did say however that at present Ireland’s state pension does actually rank highly when it is compared to other pensions throughout the world. The study examined 25 state pension systems looking at things like adequacy and sustainability. Ireland was ranked 11th of the countries surveyed by Mercer Global Pension, with a “score” of 62.2. Denmark appeared to come out on top of the countries surveyed with an overall score of 82.4.
The Danes are seen to have a well-funded pension system which offers good coverage, a high level of assets and contributions, developed regulation and a parallel private pension system offering good benefits.The report indicated concerns over Ireland’s sustainability heading into the future, where it ranked 20th out of the 25 countries surveyed.
Peter Burke, DC consultant at Mercer who presented the findings believes that this should be a concern for Ireland. speaking about sustainability he said, “The Melbourne Mercer findings highlight that future generations cannot be sure of receiving a state pension in line with current levels. now is the time to reform the pension system so as to reduce the risk of future pensioners facing poverty.” Mr. Burke also called for the introduction of an autoenrolment system for irish workers.
A reform does seem to be the logical solution to the pension problem going forward. The high percentage of people who do not have adequate pension provisions highlights this. The issue of cost seems to be a major factor in the high number of workers without pensions. recent research carried out by the investment and pension company irish life said that 49% of irish workers do not have a pension in place. Their research suggested that 73% of people surveyed would rather work for a company that provided a pension and had a desire to save money for their retirement.
David Harney, irish life’s corporate business managing director, said recently that it would be in the best interests of both the employer and employee to have a pension plan in place. Mr. Harney said “The research findings revealed the benefi ts for employers offering a company pension plan. Nearly four in five full-time workers claim they would be happier to work for a company that provided a company pension. A company pension plan is also important in attracting the best talent with 73% of those surveyed claiming they would prefer to work for a company that provided a pension.”
These issues could become more and more of a concern for Irish workers as there seems to be no definitive solution to the pension problem. The Council Journal sat down with Dominic Coyle, the Deputy Business Editor at The Irish Times to discuss the current issues surrounding Irish workers and their pensions.
C.J: A recent survey revealed that 37% of Irish people do not havepension coverage. Why do you think this is the case?
D.C: I’d be surprised if it was just 37 per cent and certainly, if one were to strip out the public sector, I think you would find the rate of pensions saving in the private sector to be much lower. The two main issues with pensions coverage is that most people struggle to relate to the whole issue of retirement until it is looming on the horizon and, mostly, they are already struggling with immediate demands on their fi nancial resources that leave them little scope for savings – especially if they have recently bought a home or started a family.
A separate issue among those who do like to save – and have the capacity to do so – is the long-term locked-in nature of pension savings. I’m not saying that’s a bad thing. Personally I would be wary of recent initiatives to give early access to pensions savings. The data says we are not saving enough in any case: it seems somewhat short-sighted then to allow people to tap those needed funds in advance.
C.J: 51% of those surveyed who do not have a pension are planning to rely on the state pension to provide them with a retirement income. Is this a smart move on their behalf?
D.C: Not in my opinion. recent figures show that there is a €440 billion shortfall in funding for the state pension and public sector pensions. To put this in perspective, it is almost seven times the scale of the bank bailout that we have cursed since it emerged and which people argue continually will hamstring our children’s generation. It must be accepted that public sector pensions are, by their nature, unfunded but that still doesn’t address where the money to meet this bill is going to come from. It is not unrealistic to expect that the state pension will come under pressure to move to a means-tested formula – ironically putting at a disadvantage those who have put money aside for retirement. in any case, even without a mortgage and education or family-rearing bills, how many of the people considering this option have tried to survive on just under €12,000 per annum recently.
C.J: Do you think that irish people are simply unable to afford pension coverage and what can be done to tackle this issue?
D.C: I think that early in their working lives, people are more likely to struggle with the concept of a pension than with the reality of saving. Most of them are quite adept at saving for holidays or other major purchases. It certainly does get more diffi cult when you start a family or start dealing with your first mortgage but, even then, if you have put aside some money previously, it will continue to grow (hopefully) and you can return to the savings habit as you adjust to the cycle of family life.
The tax advantages of pension saving are generous, as they should be in my view, so there is quite a bit of incentive already available. There is much talk of auto-enrolment or mandatory pensions but there is little political will to drive through any more unpopular initiatives ahead of the next election. In any case, like learning Irish, I remain to be convinced that people forced down a certain path will develop any genuine enthusiasm for the process.
C.J: People still seem to be reluctant to part with their money despite signs of economic growth. Does the financial services industry have to do things in a new way if they are to regain consumer trust?
D.C: It has not helped that pension investment performance has been erratic over the past decade, nor that defined benefit pensions which people in the private sector were once assured were guaranteed turn out now only to be promised and, even then, rarely delivered in full. But the financial services sector has its own case to answer. It seems constitutionally unable to explain in clear terms what it is selling, what it can deliver and what variables affect that. As an industry, it is blighted by a herd mentality: there is little imagination or innovation in pension product design, and little desire to be out of step with other providers in basic offering design. It also charges far too much, especially to small or individual retirement savings accounts.
C.J: If people are planning to rely on a state pension, this could become problematic for the government. Is there a way for them to tackle this issue before it becomes insurmountable?
D.C: It could. And government could start by not undermining the concept of retirement saving. Tempting as it may be for government to tap private sector retirement savings to fund jobs initiatives ‑ and the pension levy has taken more than either local property tax this year or water charges next with little or no hue and cry in the streets ‑ it is a self-defeating policy if government really wants people to invest in private pensions, as they do. Separately, there is an increasing division between public and private sector pensions. It is very hard to convince people who, as taxpayers, will be among those funding generous public sector pensions that they should also lock their money into long-term savings that will deliver a less generous outcome. If the government is serious about increasing pensions coverage and adequacy, it needs to operate a more level playing field.
C.J: There seems to be a lack of incentive for workers to begin saving for retirement. Are there any pension schemes that could change this?
D.C: There is always the possibility of auto-enrolment or some other form of mandatory pension. Notwithstanding my reservations above, if people will not save for their retirement because of self-interest or the reasonably generous reliefs available, increasing longevity means ways are going to have to be found to force them to do so ‑ the alternatives are a retirement in penury, or greater strain on the public purse. It is no good assuming the state can fund an open cheque, and in any case, as stated above, it is very unclear whether it can even meet its existing obligations.
C.J: The government has until now been able to maintain the level of State pension. The ability to maintain this in the future will become increasingly unsustainable if dependency increases. How will they tackle this?
D.C: Increase Exchequer funding (unlikely and ultimately untenable) or reduce/means test the state pension, which is all the more reason for people to make their own provision.
Dominic Coyle: Deputy Business Editor at The Irish Times