Article published in The Irish Times - 02 January 2014
Pensions have been in the news quite a bit in 2013. Much of the focus tends to be on the problems facing defined benefit schemes as they struggle to provide the benefits promised or on large pension payouts to senior executives.
The recent government announcements on changing the priority order on how the assets of defined benefit schemes are distributed on wind-up was welcome and will help bring some greater equality for members who have yet to retire although for some it is too late and for others it may be too little.
However, as we face into 2014 perhaps the biggest challenge facing pensions is our attitude as a nation to saving for retirement (only 50% of the working population of Ireland have a pension saving of any kind). It is understandable given the negative press associated with pensions and the lack of a clear and supportive Government policy on pensions but is it leaving us, as a country, exposed to the economic consequences of our changing demographic?
As we all know, Western Europe is aging; by 2050 there will be only 1.8 workers to every retiree versus a current level of 3.5. Ireland’s population is also aging albeit at a slower rate. This demographic shift is one of the biggest challenges facing Western Governments and has broad reaching social implications. People will need to work longer; the cost of providing public healthcare services will increase dramatically; long-term care requirements will increase as people live longer in ill-health. This problem is very real and it is happening now. The scale of the financial impact dwarfs that of the Banking crisis.
Planning for an aging population includes many aspects, spanning sensitive matters such as immigration and social policy, but at the heart of any solution must lie the government’s pension policy. It was this challenge that led former Minister for Finance Charlie McCreevy to set up the National Pensions Reserve Fund in 2001. Unfortunately, in the last five years all of our focus has shifted from this very real, and very large, long-term problem to the more immediate challenges created by our banking crisis. The treatment of our Pensions Reserve Fund is symptomatic of the government’s current approach to retirement savings in general.
The need for balance
This focus on short-term finances is completely understandable. There is no point saving for the future if you cannot put bread on the table now, the critical piece that is missing, however, is balance. The longer term population aging and associated social and financial implications have not disappeared; in fact they are now just a little further advanced. What has changed is the focus of our Government. The complete focus on the short-term needs to stop, we need Government to also consider the future and what type of retirement the current working generation and their children will be able to afford. It is the current 30 and 40 somethings who have borne the brunt of the burden of the Banking crisis that are the very ones who will also bear the burden of the aging population unless immediate action is taken?
3 changes to pension policy that will help position Ireland to better deal with the challenge
1: Reduce the levy for 2014 back to 0.6% and cease the levy completely at the end of 2014 as originally promised.
The Government’s use of pension levies is just wrong, it sends out completely the wrong message to people saving for retirement, people who are facing up to the fact that Government will not be able to support them to the same extent as they support current pensioners.
2: Radically simplify the current Defined Contribution (DC) pension system so that there is only one type of DC pension scheme with one set of rules governing it. At present there are 9 types of DC pension scheme with a myriad of different rules. This will have the double positive effect of allowing people to understand more easily their pension and also significantly reducing the cost of administering/advising on pension.
This could be achieved quite easily if policymakers had the appetite to do so. Until pensions are simplified, it will always remain very difficult for people to engage with and understand their pension.
3: When the economic environment supports it, the government should introduce a (soft) mandatory system to nudge people towards increasing their savings for retirement.
By having a system that people must opt out of as opposed to opt into will dramatically increase the number of people with pension savings and the amount of pension savings they have. A word of warning here, however, there is no point in introducing a (soft) mandatory system until such time as levies are stopped and the system is simplified and all the unnecessary costs of providing pensions are stripped out.
If taken, the above actions will go a long way towards putting Ireland in a more secure position for the future and allow the current generation of workers face into old age with much greater security and confidence.