Ireland is certainly not the only country worried about pensions.
All over the developed world, ageing populations and falling birth rates presage challenges ahead. Indeed, these are likely to hit earlier elsewhere than in Ireland, where the birth rate just about tips the lowest end of the population replenishment rate.
It isn’t all doom and gloom either. “The greatest challenge facing our pensions system – increased longevity – is also the greatest gift we could hope for, 20 more years of life,” says Declan Hanley, head of financial planning at Davy. “And people aren’t just living longer, they are staying healthier longer too. Yes you’re going to need to take more control of your finances and manage your own retirement, but I think that’s a good thing.”
Ireland’s progress in relation to longevity is particularly striking. “If you were born in 1950, you had a life expectancy of 66. By 2012, that was 88,” says Hanley. “That’s an incredibly short space of time when you consider the evolution of humankind over millennia.”
A lot of that was to do with catching up with other European countries, so the pace of increased longevity here has slowed somewhat. “But it’s still 20 more years of good life, where you are well and enjoying what is now called the ‘third act’,” he says.
How well we enjoy that third act depends greatly on the approach we take to funding for retirement income however, and, from a societal perspective, to which countries we look for guidance.
“There is a kind of spectrum involved in pensions globally right now. At one side you have a very paternalistic view of things, where everything relating to your pension is done for you. On the other side of the spectrum, you are very much left on your own,” says Nigel Aston, managing director and European head of defined contributions at State Street Global Investors.
Australian model
At the uber-paternalistic end is Australia, where a “hard compulsion” system has been in place for the past two decades. Under this system, pension contributions are taken from income as it is earned, much as income tax.
“People have gotten used to it. Australians say they kind of like it because it saves them from themselves. Like anywhere, the problem was that people knew they should save for retirement because retirement is long, but it’s also far away and instant gratification trumps longevity. But now in Australia, apart from some issues in relation to transient workers, part-time workers and women, pensions coverage is complete,” says Aston.
On the other side of the spectrum is the US, where there is no compulsion on either employer or employee to do anything in relation to pensions. “In the US you have to rely totally on yourself,” he says. Unsurprisingly, pensions coverage is poor.
Ireland and the UK have traditionally been somewhere in the middle, relying mainly on tax incentives to encourage participation. But studies have shown that anywhere such incentives are used, coverage sticks at around the 50 per cent mark. In Ireland, as of earlier this year, it was just under that, at 46.7 per cent.
The other issue with tax-driven incentives is that they are unfairly weighted in favour of wealthier workers who pay marginal rates of tax, over those on lower incomes and lower tax rates.
But whereas Ireland and the UK have traditionally had similar systems, four years ago the UK changed tack. The introduction there of automatic enrolment into pension schemes for workers in 2012 has significantly boosted pensions coverage there.
“It came in at a time of financial crisis in the UK so there was some push-back from employers who thought of it as an additional tax burden, but the authorities got around that by phasing in contributions at a rate of one per cent per employee, and one per cent per employer, to be phased up to 8 per cent by 2018. And it has already brought in an additional five million people into retirement planning who were not involved before. It has been an amazing success,” says Aston.
Workers have the option to opt out of their pension scheme, but initial fears that they would have proven unfounded. “That’s the power of inertia. Less than 10 per cent have opted out,” he says.
Safety net
The other big global pension trend also moving centre stage here is for governments to withdraw from anything other than the basic safety net of a state pension, he says.
“In the UK this has led to a slightly conflicted approach whereby people take a hands-off approach while saving for retirement but all of a sudden, when they retire, they have some quite big investment decisions to make,” says Aston.
“It means having everything done for you, including not just auto enrolment and auto escalation (indexation) and, probably, being put in a default fund. There is no decision-making for the individual to do at all at the funding stage. But at retirement, the opposite happens and it’s all down to you. And that happens just at a time in your life when you are already making huge changes. All of a sudden you now have a series of questions to answer about how long you expect to live that require you to be part actuary, part fortune teller and part accountant.”
It’s an issue Brendan Kennedy of the Pensions Authority sees at first hand. “A woman I met recently asked me to help with a letter she had received from her pension scheme asking her to make decisions on foot of her recent retirement and listing investment options open to her that she couldn’t understand,” says Kennedy. “I don’t blame her. It took me, the Pensions Regulator, a few hours and a calculator to try and figure it out.”
