We need to provide a safety net for workers faced with insolvent pension funds, writes David Begg
The topic of pensions to all except those who make a living by selling them is excruciatingly boring - until you reach 50, when suddenly it becomes a riveting question.
It is natural enough that it should be so because to a young person retirement is such a remote prospect as not to be worth considering. Unless there is a company pension scheme in operation, people have other priorities for their money.
But without adequate pension provision many people enjoying a good standard of living today face an old age of deprivation and want.
There is a national target to achieve pension coverage of 70 per cent for people over 30, agreed by the social partners and Government. The figures just published by the Central Statistics Office (CSO) are very disappointing as they seem to indicate that progress towards that objective is painfully slow. They show that just 52.4 per cent of people aged between 20 and 69 now have pension coverage compared with 51.2 per cent two years ago.
The introduction of Personal Retirement Savings Accounts (PRSAs) was the main instrument intended to achieve the 70 per cent target, but it does not seem to be very effective. Admittedly, the CSO cautions that there may be some confusion on the part of respondents to its survey as between occupational pensions and PRSAs, thus understating the true position.
Nevertheless, the figures are not good, and unless they improve by 2006, when the pensions strategy comes up for review, radical action will have to be taken.
The thinking behind PRSAs is good in principle. It is aimed at making it easy for people to save and making it compulsory for employers to facilitate them by establishing the PRSA and making deductions from wages if requested to do so. It is particularly aimed at people with modest incomes. The problem in practice is that where a conventional occupational pension plan does not exist the PRSA alternative does not provide sufficient incentive.
People on modest incomes are not likely to have much discretionary cash, and are not likely to demand the establishment of a PRSA. Moreover, in these days of high mortgages keeping a roof over your head is a higher priority for a young couple than providing for retirement. The incentive of a tax offset is also much more of an incentive for people on higher incomes. The bottom line is that experience in Britain and the US clearly indicates that PRSA-type pensions only work if the employer also contributes.
If the level of pensions' coverage is a worry then the quality concealed by those CSO statistics is of more concern. A few years ago most occupational pension schemes were what are known as Defined Benefit (DB) schemes. Basically, this meant that you knew exactly what pension to expect when you retired, usually two-thirds of final salary with 40 years service.
The global stock market collapse changed things utterly. Billions were wiped of the value of pension funds invested in equities. Actuarial evaluation of pension funds in the aftermath revealed huge funding deficits. Many employers, some of whom had cut back in funding in the years when return on investments was good, were faced with huge liabilities on their balance sheets (exacerbated by a change in accounting standards known as F517).
Being either unwilling or unable to grapple with these deficits, employers where possible moved towards Defined Contribution (DC) schemes. This means that a person on reaching retirement will received only that pension which the money in the fund can sustain (usually through the purchase of an annuity). Effectively changing from Direct Benefit to Direct Contribution schemes transfers the risk from employer to employee.
There are many people working today in expectation of a good pension who may be in for a severe shock on reaching 65.
While some employers may have acted badly in not living up to their funding responsibilities where they could afford to, others have been placed in severe difficulties by the pension scheme deficits.
What really maddens me is the failure of the so called investment fund managers to protect the interests of their clients.
Perhaps they could not have anticipated the fall in the markets in the beginning of the slump but why did they continue with the same equity portfolios without shifting to bonds or other forms of securities to stem the losses? Even with the improvements in markets all Irish pension funds failed to match the average recovery, according to a recent report by Hewitt and Becketts.
If all they can do is make money when markets are good and lose it when they are bad, then it is hard to see what purpose they serve. Anybody could do as much.
The actuaries are not much better. They singularly failed to anticipate the impact of demographic change on pension funds. The fact that people can expect to live longer in the future means that pensions will have to be paid over a longer period and will cost more. The money available in pension funds on a person's retirement will not, therefore, buy an annuity to provide as good a pension as heretofore.
No doubt these observations will bring a storm of criticism on my head but the fact remains that the pensions industry has very little accountability to the ordinary man and woman who pay handsomely for its services through their pension contributions.
So what is to be done? First of all we have to wake up to the reality facing us. This demographic time bomb in the form of pensions' inadequacy is more important than many other things we in the trade union movement dispute with employers about. Secondly, if the pension coverage via PRSAs does not reach the 70 per cent target by 2006, a mandatory scheme of contributions by employers and employees will have to be considered.
In the meantime the forthcoming budget should be used to target incentives to save for pension PRSAs on the lower to middle income earners. The Government should also look for creative ways to incentivise SSIA savers to convert their money to pensions when it matures. Congress has also asked the Minister for Finance to explore the possibility of the National Treasury Management Agency selling annuities with a view to reducing the administrative costs associated with individual transactions through the insurance industry. We also need legislation, as is being considered in the UK, to provide a safety net for workers faced with insolvent pension funds.
Ireland has made some good decisions in the area of pension provision, most notably through establishing the National Pensions Reserve Fund. The problem, however, is this will not deal with the issues I have sought to highlight in this article. It is a complex area and no doubt there will be difficulties with some of what I am suggesting. But from where I stand I see an impending crisis, and it is the duty of Congress to draw attention to it and to campaign strongly for reform.