Keeping an eye on the bottom line in turbulent area of pensions
Not enough of us are saving or not saving enough, says Irish Association of Pension Funds’ Jerry Moriarty
The headlines are a distraction. “Cabinet pensions worth €36m”; “Pension entitlements more valuable than salaries for ministers of state”; Company chiefs get pensions five times higher than their workers.”
Jerry Moriarty argues the recent focus on massive pensions for a perceived golden circle do little to reflect the reality.
“What you lose in those headlines is that the biggest problem we have is that you don’t have enough people saving and, of those who are saving, most of them aren’t saving enough,” says Moriarty, chief executive of the Irish Association of Pension Funds (IAPF). “That’s going to cause problems 20 or 30 years down the line when people will not be able to retire or they will be forced to retire and will not be able to afford the sort of life they wish to.”
Moriarty sits at a modest boardroom table in the basement of the offices of the IAPF, the industry body representing the interests of 270,000 members of occupational pension schemes – either working or retired.
The offices are conveniently situated close to Dublin’s city centre, across the road from a Revenue office and just a stone’s throw from the Pensions Board, the body that regulates the pension sector in Ireland. A couple of doors away, an estate agent’s sign hails “magnificent Georgian and contemporary” accommodation in properties restored to earlier glories but the IAPF offices themselves are far from gilded, located down a warren of corridors in one of the more humble dwellings on the street.
“It’s about people at the end of the day,” he says. “You can get very caught up in modelling and tax relief, and all sorts of issues but it really is about making sure people have adequate retirement and the sort of retirement they aspire to.”
It’s a turbulent time in the pensions business. The guarantee generations of people thought they had with defined benefit, or final salary, pension schemes turned out to be a promise, a very conditional promise. And with the vast majority of DB schemes “under water” – where their assets will not suffice to pay their obligations if wound up, it looks increasingly as though traditional pension provision is dead, at least in the private sector.
“It’s certainly dying,” agrees Moriarty, “and I don’t see much coming down the tracks that is trying to prevent that. Some of the more recent regulations are kind of like the final kick, such as introducing risk reserving, where schemes already underfunded now have to put more assets in. For many people, that’s just the final straw.”
It’s not just an Irish problem, he says, but a global trend. He points out that there is not a FTSE200 company with an open DB scheme. “They are closed to new entrants and most are closed to future accrual,” he says.
That’s not all bad, he argues. DB schemes were designed in a time when workers stayed with one employer for life.
“I saw something during the week that most people entering the workforce now have seven to 10 jobs [over a working lifetime], so having something that is a bit more fluid and a bit more portable that you can transfer around with you does make sense, and DC does that.
DC is a defined contribution scheme, where the pension is determined by the amount contributed and the investment performance; there is no guarantee, or promise.
“There is this thing that DB is great, gold-plated, a Rolls Royce [of the industry] and DC is terrible,” Moriarty says. “The truth is a lot more in the middle. For a lot of people in underfunded DB schemes at the moment, they would have a lot better security in a DC plan because they have their own account that cannot be used to pay other people’s benefit.”
One of the recurring issues with the newer models of pensions is adequacy. Put simply, people are not putting nearly enough aside to meet their own expectations of pension in retirement.
“The benefits that come of saving earlier are massive – in terms of power of compounding. If you are getting investment returns on money you have been getting investment return on for many years, that makes a difference.”