OECD sounds warning about design of Ireland’s pension system

Defined-contribution schemes put too much risk and responsibility on individuals, it says

The OECD says  policymakers need to ensure that consumers receive appropriate financial advice for retirement.

The OECD says policymakers need to ensure that consumers receive appropriate financial advice for retirement.

 

Ireland has become increasingly dependent on defined-contribution pensions as a source of funding for retirement, figures from the Organisation for Economic Cooperation and Development (OECD) show, which has warned that such schemes put too much risk on the individual and their design needs to be improved.

There were 13 OECD countries in which assets in funded pensions represented more than 50 per cent of gross domestic product (GDP) in 2015, up from 10 in the early 2000s, according to the intergovernmental economic organisation.

Ireland is one of these, with assets in funded pensions accounting for some 56.4 per cent of GDP, up from 42 per cent in 2000. This is significantly lower than in Denmark (205.9 per cent) or the Netherlands (178.4 per cent), but far greater than Germany (6.6 per cent) or Luxembourg (2.8 per cent).

Retirement finances

This increase in funded pension arrangements mostly comes from defined-contribution (DC) pension arrangements, the OECD says. In DC schemes there is a direct link between contributions, assets accumulated and pension benefits. However, in its Pensions Outlook 2016, the OECD warns that while DC schemes have important advantages, they put more of the risks of saving for retirement, such as investment and longevity risk, and decision-making, in the hands of individuals.

“Defined-contribution pensions offer some advantages in the current environment of ageing populations, low growth and low interest rates but, as individuals bear more risk and responsibility for managing their retirement finances, we certainly need to focus on improving their design,” said OECD secretary-general Angel Gurría.

The OECD suggests that the design of DC schemes could be improved by promoting low-cost retirement savings instruments; establishing appropriate default investment strategies; and promoting the supply of annuities and cost-efficient competition in the annuity market.

Ireland is one of only six countries, along with Canada, Finland, Israel, Portugal and Turkey, where DB plans accounted for more than 50 per cent of the total assets of the funded pension system in 2015.

But, while defined-benefit (DB) or final salary pensions still account for more than 50 per cent of the total reported assets of the funded pension in 2015, at some $78 billion (€72 billion), compared with $47 billion in DC schemes, the number of DB scheme members continues to shrink, down from about 230,000 in 2001 to about 140,000 as of 2015.

Plans frozen

The cost of providing for employees’ retirement by offering a fixed portion of their final salary, often as much as two-thirds, has led many companies to close, or to freeze, their DB schemes. The Pensions Board recorded that 164 DB plans were frozen and 58 in wind-up at the end of 2014 in Ireland. However, as the OECD notes, the shift to DC brings another set of risks and these are largely been borne by the individual.

In its report, the OECD also warns that policymakers need to ensure that consumers receive appropriate financial advice for retirement.

“Measures need to be put in place to ensure that the conflicts of interest that advisors face are mitigated and that advisors are adequately qualified,” the OECD said, adding that attention also needs to be paid to ensure the “continued accessibility and affordability of advice, an area in which technology-based advice can potentially play a role”.

Last month, pensions consultancy Mercer also sounded a warning about the sustainability of Ireland’s pension system when it said that a heavy reliance on the State pension is dragging it down.