Retirement planning is a habit of a lifetime

Despite a year of change, pensions need more planning than ever before, writes Laura Slattery

Last year was another turbulent year for pensions as the practice of saving for the long term threatened to create financial crises in the short. It was a year when public confidence in pensions took "a serious knock", says Ms Anne Maher, chief executive of the Pensions Board.

It wasn't all bad news. The National Pensions Reserve Fund (NPRF) set aside to fund future social welfare and public service pensions recovered a large chunk of its deficit. After devastating losses of almost 19 per cent in 2002, managed pension funds generally had a less bumpy year.

But in many cases the damage had been done, as during 2003 up to two-thirds of defined benefit occupational pension schemes failed to meet Government solvency requirements.

At the beginning of the year, the launch of the Personal Retirement Savings Accounts (PRSAs) looked like it would prove the most pressing matter for pensions regulators. The Government wants to increase the percentage of workers with their own pension - and thus not rely completely on the proceeds of the NPRF - from 50 per cent to 70 per cent by 2006. The question last year was whether PRSAs help them do this.

First of all, the battle seemed to be about convincing the insurance and banking industry that PRSAs were lucrative enough to sell. Then the real hard work started, as the Pensions Board tried to convince members of the public who were not members of an occupational pension scheme that PRSAs were attractive enough to buy.

A €500,000 advertising campaign launched during National Pensions Awareness Week sought to bring pensions into the realm of shopping centres, buses and universities.

A Central Statistics Office survey due in the first quarter of 2004 should shed some light on whether the campaign, the launch of PRSAs and mandatory access to pensions in the workplace rules have had any effect on the numbers of people with pensions.

But it was the controversy over the minimum funding standard for defined benefit occupational pension schemes that pre-occupied the industry during 2003.

Defined benefit pension schemes guarantee employees a pension that equals a proportion of their final salary for each year of service. Under the minimum funding standard, employers are not allowed rely on long-term investment returns to pay for the future pensions promised to staff.

However, some argued that they should be allowed to do just that, especially as the funding rules required that schemes with a shortfall get back on track within three-and-a-half years or else cut the value of the retirement benefits pledged to members.

Pensions experts pointed out that the stock market had just gone through an unprecedented period of heavy losses. Pension funds would eventually right themselves, they said, without employees having to lose out.

In the Social Welfare Bill, it was announced that schemes that could not meet their liabilities could have 10 years to recover the deficit. Last month, the Pensions Board agreed to extend that deadline in exceptional circumstances. "What we are trying to do is give schemes that are getting into difficulty a chance to avoid situations where they have to decrease their benefits or close down altogether," said Ms Maher.

In 2004, the board will examine whether to change the nature of the funding standard completely. A consultation document will be issued in May.

"On the whole, we've been pleasantly surprised that Irish employers seem to be fairly committed to their defined benefit schemes," Ms Maher said.

From the point of view of workers, defined benefit equals good, while defined contribution equals not-so-great - but a good deal better, of course, than no pension at all.

The adequacy of people's contributions to their pensions was highlighted during 2003. The Irish Association of Pension Funds (IAPF) scared a few people in July by releasing a report saying that the one-in-three scheme members who belong to defined contribution schemes were at risk of receiving a lower- than-expected pension.

The average contribution rate of 10 per cent of salary was simply not enough, it said.

But tell the average worker they need to double their pension contributions to have a comfortable retirement and the most common response will be "yes, but I can't afford to do that right now", as more immediate needs pull on their pockets.

"There are people who want to save for their pensions, but cannot afford them," said Ms Maher. "It's clearly a problem."

Next year, the Pensions Board will look at the possibility of introducing tax credits that would benefit low-income workers. The current system of tax reliefs favours the better-off, who can claim relief at their marginal rate.

Another plan is to look at how money growing in Special Savings Incentive Accounts (SSIAs) can be transferred into pensions on maturity in a tax-efficient manner.

For the IAPF, the situation was clear. If contribution gaps are not bridged early on, people will have to put up with a low pension or extend their working lives past the standard retirement age of 65.

An increase in State pensions age, as suggested by a Society of Actuaries report, was off the agenda, according to the Government. Nevertheless, the Minister for Social and Family Affairs, Ms Coughlan, announced that she would explore the possibility of providing enhanced payments to people who defer their pension beyond 65.

However, it is likely that any proposed measures will not be introduced for decades to come, proving once again that planning for retirement is a long-term, lifetime kind of business.