Why workforce mobility can mean less stability

It will come as little surprise to discover that the importance of a pension in a package of employee benefits is inversely proportional to age.

For twentysomethings entering the jobs market and facing into four decades of working life, retirement could not be further from their minds. For someone in their late 30s or early 40s, reaching a stage of life where planning for the future is important, pensions come more sharply into focus.

As competition in the jobs market heats up, especially in sectors such as IT, benefits packages are intended to meet the needs and desires of a varied workforce. Perks can range from gym membership and bikes-to-work incentives to more practical initiatives, such as health plans and pensions.

Some commentators believe pensions still don’t get the attention they deserve at an earlier stage of working life.

"After your salary, pensions should always have been an important factor in picking an employer, staying with an employer or moving to a new one. Effectively, it's putting away your earnings now for earnings at a future date," says John McInerney, senior pension consultant with Standard Life.

Bigger employers are best placed to offer recruits a menu of benefits, albeit with some limitations around how they can be structured. McInerney fears that younger people are more concerned with short-term gains rather than looking at the bigger picture.

“I have a real concern that people would be more interested in how many days they get off per year, or whether their prospective employer offers flexitime, rather than concerning themselves with what is probably the most important part of their package after their salary: their pension,” he says.

Some employers, such as Standard Life, offer to pay a pension contribution of 9 per cent of salary to contract workers. This is a non-contributory pension, which means the contract employee isn’t obliged to make a matching 9 per cent pension contribution to avail of it.

Defined contribution plans

What can be said with certainty is that the type of pension offered nowadays will be a defined contribution (DC) plan rather than the older model of defined benefit (DB) schemes, whereby organisations promised to pay a guaranteed percentage of an employee’s salary for the rest of their lives beyond retirement.

Figures from the Pensions Authority show that the number of DB schemes in Ireland stood at just 703 by the end of last year, a steady decline from 2,557 in 1991 and 1,541 in 2003. This fall has a number of reasons, but mostly it has happened because companies can no longer afford them. Most DB schemes are closed to new members, and many are frozen, but, according to the Pensions Authority, they represent by far the greater part of pension savings.

According to McInerney, those lucky enough to be in fully funded private-sector DB schemes can find it’s the only reason to stay in employment.

“I suspect there are people out there who hate their job, would love a change, and reckon they could earn more money elsewhere or have a more flexible job, but won’t leave their current job as they don’t want to give up their DB pension scheme or the pension benefits that they are building up,” he says.

In the past, DB schemes played a useful role in managing older staff out of the workforce, but that won't be a viable option any more, says Nigel Aston, head of European defined contribution at State Street Global Advisors (SSGA).

“The new retirement and workforce pattern is entirely different, where people have an average of 11-12 jobs, and typically more than one career,” he says. “You’ve a variety of savings and benefits that will contribute to several different defined contribution plans.”

What is exacerbating the problem is that many DC plans won’t be sufficient to cover an individual’s needs as they live longer in retirement. Personal Retirement Savings Accounts (PRSA) pensions were introduced in 2003, but initiatives to encourage participation in these schemes have had mixed results, and employers are not obliged to make a matching contribution. This often meant employees had little incentive to avail of them. In Ireland, just 27 per cent of people surveyed by SSGA said they were confident or very confident of meeting their retirement goals.

PRSA increase

Pension Authority data shows there was a slight increase in PRSA participation during 2014, with the total reaching 226,605, compared with 215,892 in the previous year. Pension experts expect that the Government will step in with some kind of mandatory or auto-enrolment scheme, expected when the Universal Retirement Savings Group makes its recommendations.

“Employers will obviously have reservations about a mandatory pension system, and the requirement for an employer to contribute themselves, but it looks like it will arrive on our shores at some stage,” says McInerney, who adds that the UK has introduced these schemes with some success.

Faced with this scenario, Aston believes there is an opportunity for employers to take a more proactive role in helping employees prepare for retirement more effectively.

“I think there’s an opportunity for employers to help individuals to become more aware,” he says. “We’ve seen quite a lot of success in the US around ‘wellness’ programmes. I don’t necessarily like the term, but it involves helping individuals to have a broader understanding of their financial position and to become savers rather than spenders, and to look ahead.

“There’s an awful lot of days lost to stress due to finance. If employers are a good source of support to workers, you get a more productive and happier workforce.”

Exercising control: How to stay flexible

In a world of greater workforce mobility, individuals are going to need to take much greater control of their own pension arrangements rather than relying exclusively on their employer to do it for them. The good news is that this is not as difficult or intimidating a task as some might believe.

“Notwithstanding that there are myriad rules to bear in mind when it comes to moving pension funds from old employments, and the pros and cons of doing so, it has never been easier to move your old pension scheme into your current pension arrangement or a pension arrangement that more closely meets your needs,” says John McInerney of Standard Life.

“With the advent of the PRSA, in theory you can move through your career from employment to employment and contribute to your PRSA from your first contribution at 20 to your last contribution in your 60s.”

As a rule, the closer people get to retirement, the more they want certainty rather than risk. Those with money to invest in a pension, investment or savings product can now choose from multi-asset funds, such as Standard Life Myfolio, Irish Life Maps or the Aviva Dynamic Multi-Asset Fund. These plans are often managed with different levels of risk.

These kinds of funds aim to target specific levels of volatility in particular asset classes, and when markets start to display levels that exceed the target, investors can throttle back by disinvesting from equities and going into cash.

Employers can play a role by helping employees to have a broader understanding of their current and future financial position, and to identify a broadly defined pension goal to work towards.

“Retirement is not a cliff edge. In the new world, it’s more like a dimmer switch that you turn down slowly over time,” says Nigel Aston of State Street Global Advisors. “It’s a much more flexible, fluid and unpredictable world. The challenge for companies and individuals is to come up with plans and benefits to help manage that unpredictability,” says Aston.

“When you talk to people even in their 50s about what retirement looks like and how they would like to spend their money, people don’t know what their employment status or their health is going to be – and you can multiply those uncertainties by at least a factor of two when they consider their spouse.”

Aston advises pension planning that envisages more than one possible retirement scenario. “Having an investment thesis that will broadly get you to the right point is better than having something accurate, for a situation may change. Who knows what people are going to be like when they’re 65? We’re trying to come up with solutions that get you broadly in the right direction but retain a degree of flexibility.”