Government must act to prevent a serious pension crisis
Changes to pension policy needed to encourage people to save for retirement
‘As we all know, western Europe is aging; by 2050 there will be only 1.8 people of working age supporting each person in retirement versus a current level of 3.5. Ireland’s population is also aging albeit at a slower rate. ’
Pensions were in the news quite a bit in 2013. Much of the focus was on the problems facing defined benefit schemes or on large pension payouts to senior executives.
The recent Government announcement on changing the priority order on how the assets of defined benefit schemes are distributed on wind-up was welcome and will help bring greater equality for members who have yet to retire.
As we face into 2014, perhaps the biggest challenge facing pensions is our attitude to saving for retirement. Only 50 per cent of the working population of Ireland has a pension saving of any kind.
As we all know, western Europe is aging; by 2050 there will be only 1.8 people of working age supporting each person in retirement versus a current level of 3.5. Ireland’s population is also aging albeit at a slower rate.
This demographic shift is one of the biggest challenges facing Western governments and has broad-reaching social implications. People will need to work longer; the cost of providing public healthcare services will increase dramatically; long-term care requirements will increase as people live longer in ill-health. This problem is very real and it is happening now. The scale of the financial impact dwarfs that of the banking crisis.
At the heart of any solution must lie the Government’s pension policy. It was this challenge that led former minister for finance Charlie McCreevy to set up the National Pensions Reserve Fund in 2001.
Unfortunately, in the past five years our focus has shifted to the more immediate challenges created by our banking crisis. The treatment of our National Pension Reserve Fund is symptomatic of the Government’s current approach to retirement savings.
This focus on short-term finances is completely understandable. There is no point saving for the future if you cannot put bread on the table now. The critical piece that is missing, however, is balance.
The longer-term population aging and associated social and financial implications have not disappeared; in fact they are now just a little further advanced.
What has changed is the focus of our Government. The complete focus on the short-term needs to stop, we need Government also to consider the future and what type of retirement the current working generation and their children will be able to afford.
Changes to pension policy that would help Ireland to better deal with the challenge:
1. Reduce the levy for 2014 back to 0.6 per cent and cease the levy completely at the end of 2014 as originally promised. The Government’s use of pension levies is just wrong, it sends out completely the wrong message to people saving for retirement, people who are facing up to the fact that Government will not be able to support them to the same extent as it supports current pensioners.
2. Radically simplify the current Defined Contribution (DC) pension system so that there is only one type of DC pension scheme with one set of rules. At present there are nine types of DC pension scheme with a myriad of different rules. A simplified structure would have the positive effect of allowing people to understand their pension and also significantly reduce the cost of administering/advising on pensions.
Until pensions are simplified, it will always remain very difficult for people to engage with and understand their pension.
3. When the economic environment supports it, the Government should introduce a (soft) mandatory system to nudge people towards increasing their savings for retirement. A system where people must opt out as opposed to opt in will dramatically increase the number of people with pension savings and the amount of pension savings they have. A word of warning here, however. There is no point in introducing a (soft) mandatory system until such time as levies are stopped, the system is simplified and all the unnecessary costs of providing pensions are stripped out.
If taken, the above actions will go a long way towards putting Ireland in a more secure position for the future and allow the current generation of workers face into old age with much greater security and confidence.
Niall O’Callaghan is a partner and head of defined contribution pensions at benefits consultants Mercer