Pension data published by Irish Life is a wake-up call for workers
Golden years: many Irish employees still think of pensions as providing a set percentage of their salary in retirement – the classic two-thirds of salary pension for those with 40 years service - but this scenario is increasingly irrelevant
The average member of a defined contribution scheme with Ireland’s largest pension fund provider is on target to retire with a pension of just 17 per cent of the salary, according to figures published last week by Irish Life.
It’s a scary thought but a timely wake-up call to Irish workers who are increasingly members of such defined contribution schemes – where your final pension relies on the amount contributed and the investment performance of that sum.
Many Irish employees still think of pensions as providing a set percentage of their salary in retirement – the classic two-thirds of salary pension for those with 40 years service. However, changing work practices and, more importantly, the increasing difficulties of traditional final salary pension schemes to meet their pension promise to members/employees mean that, for most private-sector employees, this scenario is increasingly irrelevant.
And the move to defined contribution schemes is throwing into stark relief the level of contributions required to have any chance of meeting people’s expectations.
Irish Life analysed company pension schemes that it administers – almost 1,400 across the State with about 38,000 members.
It shows that, on average, people do not start saving towards a pension until they are 37 years of age. Even then, they are putting a maximum of 10.3 per cent of their gross salary into a pension.
They took the average current member – a male (58 per cent of the number surveyed), aged 43, earning €46,000, with six years of contributions to date and a current retirement “pot” of €45,000.
At current projections, this average member can expect a pension pot at retirement (aged 65) of €190,500, giving them an average pension of just €7,900, or17 per cent of their salary.
Including the State pension at today’s rates – assuming it is still universally payable by then as it has it own looming funding crisis – this person can expect total retirement income of €19,900, or about 43 per cent of their working salary.
For those on higher pay – where the proportional benefit of the State pension clearly reduces – the percentage of final salary will clearly be lower. The data suggest that someone with a salary of about €100,000 would receive a pension of just 31 per cent of that.
If you strip out the “average” employer contribution in the survey of 5.7 per cent, the survey findings show employees are putting just 4.6 per cent of their pay into their retirement fund.
At a time when people can expect to live to 80 or beyond, that is a perilously small sum to set aside to fund 15 or more years in retirement. The survey assumes people retire at 65, which most of Irish Life’s current schemes allow. That is likely to increase in line with State pension age over coming years but the shortfall in expectations and reality remains substantial.