Pension policies require radical overhaul

It is the Godzilla of economic policy issues, looming so high above our heads we can't even see it: a faint stir of its future and significance was given in Germany last year when a political party - the Grey party, appropriately enough - was founded to represent pensioners.

The stability of the post second World War era made traditional pensions policies possible. An age expectancy hovering around the mid-70s was financially consistent with a retirement age of 65 and a defined benefit system. Families were strong and divorce less common, so that a good proportion of old people were cared for in the family, reducing the burden on the state of age-related health and care services.

A further factor in the good old days was that interest rates on fixed incomes - a mainstay for any defined benefit pensions regime - were attractively high. But as a recent conference in Dublin heard, pension policies need a radical rethink across Europe. Since the fateful year of 1925 - when the retirement age was set at 65 - the world of work has changed and changed utterly.

For a start, life expectancy is rising by one year a decade and, by 2025, the average worker will live 10 years longer than the average worker in 1925. Work today is far less manual than it was 80 years ago. And - hard though it sometimes is to believe - health provision is much better. Today's worker retires in far better shape and with far more years ahead of him or her than of old. But even more to the point is the fact that the age of lifelong employment is dead or dying. A pensions system institutionally designed around a job for life is one entirely irrelevant to the new economy we are entering.

Another issue facing pensions policy is international portability. Only about 2 per cent of the EU's population has worked in another EU country. With that proportion higher - and rising - among younger workers, governments must introduce pensions that are recognised between states.

For all of these reasons last week's conference on the future direction of pensions policy was a very timely one. It was unfortunately overshadowed by publication of the Department of Finance's pre-budget projections on the same day. That was a pity. The line up of speakers was extremely impressive, including Adair Turner (of the ground-breaking Turner report on UK pensions) and Karin Lissakers (chief adviser to George Soros on globalisation).

The quality of home-grown contributions was pretty good as well, even if a little less celebrated, and the speeches the conference produced were well worth a listen. the time it took to read them.

Donal Casey of Irish Life made one of the most interesting, and perhaps controversial, observations: as well as being out of date for aforementioned reasons, the current preference for the defined benefit system only persists because those who benefit from the defined benefit system - older workers settled in stable employment - are better represented than those who don't in the corridors of power.

"The relative losers in the defined benefit model are people who move jobs regularly, who have more modest salary growth and who go part-time in their mid-careers", Casey told his audience. With refreshing candour he admitted that the winners were people like him with more than 20 years employment in the one firm.

Hard-working 20 to 40-somethings - who may change jobs three times in their career - could lose up to half their pension benefits. This is because early transfer values - always the most valuable component of a pension package due to the time value of money - are sundered on changing job.

Underlying all aspects of the pensions problem is the fact that, while we have in this century achieved literacy in reading and writing, the number of people who are financially illiterate today is the same as in 1925. As Adair Turner pointed out, those people will find the rest of us increasingly unable to carry them on our shoulders: using estimates calculated in 2004, he showed that by the time today's 20-somethings hit 65 in about 40 years' time, they will expect to live another 23 years.

And for those relying on a tide of young immigrant workers to pay the pensions bill, he had further bad news: with globalisation come expectations for better living conditions and falling fertility rates. By 2020, fertility rates in Iran, Turkey and Brazil will fall below the critical level needed to keep dependency ratios stable. In most of Asia, this has already happened. In short, the pensions crisis is about to go global.

After putting the lid on the debate with the pronouncement: "the future is defined contribution. There is simply no going back", Gerry Keenan of Irish Life Investment Managers started talking about the problems that this future poses - increasing lifespans and low contributions.

The fact is that there is only one solution to solving the pensions problem. A culture of personal responsibility coupled with strong tax incentives from the State.

As Donal Casey said, we must get out of the mentality of giving up on our careers at 45. We must accept that work is not something to be endured, but rather an act of self-expression and self-validation in a world that needs our contribution.

Shifting to this culture will entail policy change in a whole range of areas. Corporate structures must flatten to give employees more ownership over their contribution.

Life-long learning must be incentivised by the tax system and suppliers must ensure that the products they supply to mature students are well geared towards the kind of career development they need. No matter what the job, the work culture must be restructured so that the more one advances towards retirement, the less burdensome and more stimulating work becomes.

Such a shift will help a new generation of workers to accept the logic of defined contribution systems as well as the necessity to work a few years beyond the age of 65.

Everyone deserves a comfortable and a generous retirement. But retirement is one thing. Prematurely copping out of life is another.