The world of work continues to change and, with people living longer, the pension age is likely to continue to creep up too. So what options do people have to protect themselves in an increasingly precarious pension environment?
1. Working longer
The pension age is already set to increase to 68 in 2028. It’s 66 at the moment and it was 65 up until 2013 and will go to 67 in 2021. But that’s unlikely to be the end of it. Last year the British treasury speculated that the pension age there could rise to 70 by 2060. Even worse, pension provider Royal London has forecast that people starting work today might have to work until they are 81 if they are to enjoy the same living standards as those retiring on full workplace pensions today.
John O’Connell of pensions consultants Trident Consulting believes this trend might be driven as much by workers and trade unions as by governments.
“You can’t just tell somebody who is earning €50,000 a year that they will have to survive on the €12,000 a year state pension just because they have turned 65. There will quite likely be legal actions as well as intense press from trade unions in relation to this.”
2. Total contributions approach
State pension entitlement criteria are also set to change. As and from 2020 a new total contributions approach will replace the current averaging system for pension qualification. This means that the level of pension people receive will be directly proportionate to the number of social insurance contributions made by them over their working life. A total contributions requirement of 30 years contributions for a maximum pension will be introduced. This means that a person with just 15 years contributions will receive a state pension of just half the standard rate of €12,000 a year.
3. Greater innovation and simplicity
With interest rates and bond yields at historic lows the options for pension scheme members seeking a low risk return on their investment are few and far between.
“There are no easy options for pension savers”, says John O’Connell.
“People who want very low risk are going to get zero return. The industry is going to have to develop solutions to that and there will be much greater innovation in the years ahead. That might involve investment in infrastructure projects or baskets of other investments.”
Fortunately for investors this greater level of innovation will be accompanied by greater transparency according to Peter Feighan of Davy Stockbrokers.
“The Pensions Authority is very keen to reform and simplify the system and reduce the level of complexity that it presents to scheme members”, he says.
“For example, at the moment there is a wide range of scheme structures on the market and the Authority is looking at reducing this possibly to just two.”
4. Auto enrolment
The introduction of a national auto-enrolment pension scheme is now seen as inevitable by most industry commentators.
“We are going to see the introduction of some form of mandatory pensions arrangement”, says Feighan.
“This is very much an objective of Minister Leo Varadkar. His predecessor established a working group on it in the Department of Social Protection and that work continues. It will probably mirror the scheme in the UK and that did have a positive impact on pensions coverage in that country.”
5. International portability
While EU regulations are leading to improvements for pension scheme members throughout Europe the IORPS I and II directives promise even greater benefits in the years to come. The evolution and development of the single market for financial services will allow citizens in one EU member state to purchase a pension product in another.
It will thus also allow for much greater flexibility for those who move between countries during their careers.
“This will allow for portability of pension schemes within the EU”, says Peter Feighan. “People will be able to move from country to country and keep their pension.”