The uncertain future of pensions
However, it can be difficult to leave a DB scheme. As Hunter notes, the majority of schemes are mandatory, which means that an individual may not be able to leave, but “for a mobilised group of employees it might be more likely”.
More detail on the challenges facing DB schemes is likely to come to light this summer, following the June 30th deadline by which pension trustees have to have a new financial recovery plan in place.
For DB members, however, these plans might include an increase in employee contributions or a reduction in benefits.
Pension pot: How big?
It’s the perennial question, and one that most of us shy away from calculating. And no wonder, given how frightening the reality can be. Pension experts typically advise you to aim for 50 per cent of your salary in retirement, but reaching this can be beyond many people’s capacity.
Take the example of 40-year old Raymond, who is saving almost €400 a month towards his pension, thanks to contributions of 3 per cent from himself, and 6 per cent from his employer.
This means he is salting away almost €5,000 a year towards his retirement – but it’s still not enough.
Even when his State pension of €11,976 is factored in, he will still face a shortfall of more than €3,000 a year – and a lot more if the contribution from the State is reduced.
“I don’t think many people will get there. People will need to look more creatively around this, and perhaps commit to working two days a week,” advises Ian Mitchell of the shortfall or “funding cliff” many people are likely to face.
If you are still some years away from retirement, while it may be a painful process, figuring out whether you are going in the right direction with your pension may end up saving you a lot more severe pain once you reach retirement.
And remember that all contributions – at least for the moment – are eligible for tax relief, at either 20 per cent or 41 per cent, depending on your tax bracket, and up to the relevant age ceilings.
Auto-enrolment: Employers put you in automatically
To paraphrase a saying, if people won’t come to pensions voluntarily, then pensions might just have to be brought to them.
This is the philosophy behind auto-enrolment, whereby employees will have to opt out of rather than opt into a pension scheme.
Employers would automatically enrol employees into a scheme, and make contributions on their behalf.
It is expected that such an approach will be recommended in the forthcoming OECD review, due to be published in the first quarter of this year, and will become formal Government policy thereafter.
The concept is not new, and has been adopted in Australia and New Zealand.
Last October Britain introduced it in a move described as the “biggest shake-up of pensions for a generation”. But does it work?
Well, it certainly helps. Take a look at Australia’s experience.
It introduced auto-enrolment in 1992. Since then it has increased pension coverage from just 40 per cent to 92 per cent.
Employers initially had to contribute 9 per cent of salary to the scheme, rising to 12 per cent to be phased in from July 1st of this year.
But while it may have succeeded in vastly increasing pension coverage, it wasn’t necessarily an easy transition.
David Harris, managing director of Tor Financial, who has been assisting the OECD with its review of the Irish pension system, notes that the scheme was met with “initial resistance” from employers, particularly given that it was introduced during a recession.