The uncertain future of pensions
Deposit-style pension products might be safer and cheaper than funds linked to riskier investments
It’s not rocket science. We’re living longer, saving less, the economy is in a parlous state and many companies are just clinging on for survival. Little wonder a pension crisis looms.
With people strapped for cash – and no upturn in sight given the introduction of new taxes such as property and water charges – long-term saving in the form of pensions is increasingly being put on the long finger.
But it’s not just about people having less money. In 2008 Irish pension funds, which were disproportionately weighted towards Irish equities, lost 40 per cent of their value as bank stocks collapsed, leaving many pension holders disillusioned. People are now reluctant to put whatever spare cash they might have into these funds.
For Ian Mitchell, a pensions expert and financial coach at 80/20 Focus Limited, the problems are also due to the disconnect between people’s perceptions of what a pension fund should be and what they actually are.
“A lot of people who had been putting money into pensions saw themselves as savers; but the pension industry saw them as investors,” he says. “People took on more risk than they wanted to.”
It’s a fair point. As Mitchell points out, he checks his pension funds’ performance every morning – how many of us can say we do the same? If that’s what it takes to be an “investor”, maybe the majority of people have simply invested in the wrong products – largely because they were the only ones available. “If the pensions industry produces attractive products then people will buy them,” says Mitchell, adding that, up to now, there haven’t been “enough cautious options”.
While this is being rectified somewhat, there might be an argument in favour of less expensive, deposit-style pension products.
Defined-benefit schemes: Juimp now or stick with it?
They have been described as the “biggest Ponzi schemes in the world” given that they rely on new participants making contributions in order to fund the distributions being made to retirees – particularly so given that some 80 per cent of Irish defined benefit (DB) schemes, which pay a pension based on salary and length of service, are facing deficits.
So if you’re still some way away from retirement, should you stick it out or should you jump now?
“If I was a young person in a defined-benefit scheme, I’d be asking myself some questions. If I had a well-funded opportunity to move, I’d take it,” says Mitchell.
For Derek Hunter, head of retirement solutions at Tower Watson, the security of DB schemes depends on the covenant .
“By and large multinational covenants are seen to be quite strong,” he says. For indigenous companies, where there may be no recourse to a stronger parent, it gets a little trickier, he adds.
Unlike Britain, where there are statutory provisions that make it difficult for companies not to fulfil pension claims, there are no such legal guidelines in Ireland.
This means that whether or not a pension scheme must fulfil its obligations will differ from company to company.
“You could have what seem like identical pension schemes but one company is able to walk away without too much difficulty while another one will find it extremely difficult to walk away,” says Hunter.
Given that for most people their DB pension scheme will be their biggest asset after their house, this is something people need to consider.
“It is a question that should be asked by most DB members. If there is a deficit in their scheme, the question needs to be asked as to what is the position if the company stops sponsoring it – what sort of security is there?” says Hunter.