On the 13th November, 2017, Paul King, Acuvest’s Business Development and Client Manager, was published in the Irish Examiner. This extensive piece takes a frank look at the pensions landscape in Ireland. Read on below for the full text. #independentadvice
The warning signs are there: people need to get pension savvy. Ger Deering, the Pensions Ombudsman, called out the problem recently when he said that many workers were leaving it too late to work out their pension entitlements thus short changing their pensions as they neared retirement.
Mr Deering pointed out that with longer life expectancy, 86 and 88 for men and women respectively, there was never a greater need for people to have sufficient benefits in place to make that longer retirement a more comfortable place.
Paul King, Business Development and Client Manager at Acuvest, an independent pension scheme management and investment advisory business, said that while living longer means greater planning efforts when it comes to pensions, it also points to people working longer.
Ireland’s economic think-tank last week reported how workers should stay in their jobs for another four years before they get their pensions, he said. This would have brought the retirement age up to 70, not ideal for those hoping to hang up their working shoes in their mid-60s. But the Department of Employment Affairs and Social Protection quickly shot down the suggestion stating there are no new increases planned. Nevertheless, existing plans to raise the State pension age to 67 in 2021, and to 68 in 2018, remain in place.
King added: For the pensions manager, there is now the pressure of ensuring that staff who will work longer but also live longer in retirement have adequate funds to ensure peace of mind and the freedom to continue living the lifestyle they wish. For the company pension scheme, forecasts can be fraught with challenges because how can you prepare for uncertainty?
Thinking about this from a retirement planning perspective highlights one of the key reasons why defined benefit pension schemes are increasingly seen as unaffordable from an employer’s perspective.
“Continuing to pay someone who has worked for 40-odd years a pension of half- to two-thirds of their salary (a typical Defined Benefit, DB, promise) for a further 20 to 25 years requires either very deep pockets or consistently strong returns from investment markets. And let’s be frank, both are increasingly difficult to find in today’s uncertain world.
Hence the move to Defined Contribution schemes or PRSA’s in most companies today. At a personal level, we all want to live as long, happy and healthy lives as possible and having pension savings can make the process a much smoother one. Think of these pension schemes as a type of Retirement Savings Account into which both you and your Employer will pay a certain amount of money every month and when it comes to retirement the size of your pension correlates to the amount of money that has been saved and the investment return achieved less any expenses.
The key message is that it is important to familiarise yourself with pension options. Think about questions concerning the type of pensions on offer, the charges, the tax benefits on offer, have a “what if’s” plan and marry the idea of saving for the future early on in your career.
There are a myriad of reasons why employees fail to grasp the importance of pension planning. For a start, there are real life matters to contend with. You want to save money for that retirement pot but aren’t there school books and uniforms to be bought? That family holiday still had to be paid for and there’s car insurance, a monthly mortgage, bills and other overheads that take precedence over pension planning month on month. And let’s not forget the overhang of a recession since 2008 which put a severe squeeze on household savings.
Savings nest egg
But everyday distractions should not detract from the importance of a nest egg. Employees in companies over a certain size are likely to have a Defined Contribution, DC, pension scheme as part of the overall remuneration package. The likelihood of this scheme is that employees contribute monthly with the employer matching those contributions up to a certain level.
Employers need to get a better grasp on communicating these schemes to employees, said King. Younger workers aren’t thinking about retirement but that’s no reason why they shouldn’t be well informed on the pension scheme that is on the table and how it is more beneficial to start saving from a young age.
The benefits of being in a competent company scheme is that there is someone looking out for your interests. The trustees of the scheme will be reviewing fund performance quarterly on your behalf and ensuring that the fees are value for money. Also a company scheme is also likely to have lower fees than an individual Personal Retirement Savings Account (PRSA). From an Irish perspective, there is room for improvement where pensions are concerned. Currently, just 41% of our working population is covered by a private pension scheme. This puts the state pension fund under enormous strain.
There are models overseas that we could learn from. Automatic-enrolment, AE, is one such example. Five years in operation in the UK, some eight million people have been brought into workplace pensions with that figure projected to reach as many as 17m by 2031. But could it work here?
With the right system place, it could, said King. The government has signalled support for AE, which involves people being automatically signed up to a pension scheme and having to actively opt out of such an arrangement. The OECD has cited this type of pension scheme in its recommendations on encouraging an uptake in pensions. Also, there already is a framework in place to facilitate AE as under the Pension Amendment Act 2002, all employers must provide employees (not in pension scheme or excluded employees) access to a Standard PRSA.
Looking at pensions from a European perspective, efforts are underway to make the landscape easier to understand and more accessible for everyone. Take the new pan-European personal pension product, or PEPP, for example. The European Commission designed this proposed scheme with younger workers in mind. According to the commission, just 27% of Europeans between the ages of 25 and 59 have enrolled themselves in a pension product.
The question must be asked why the EC, knowing pension participation is low, can be boosted by a new class of product?,” said King.
“Consumers are not blind to the fact that pension packages are available to them and that independent advice can be readily sought on such matters if desired.According to the EC, the problem is choice. The commission believes PEPP is more inclusive form of pension planning because they can operate across country boundaries thus making them more competitive and attractive for savers.
King believes progress in pensions should include a greater understanding of schemes across all age groups.
When it comes to advising, liaising and conducting yourself with employees on company pension information remember, as an employer you have responsibilities, he said. There is no point offering a scheme that you aren’t confident offers your employees value for money, an appropriate set of fund options and most importantly that you feel confident you know how to monitor that it’s delivering the type of outcome in retirement your employees expect. The employees you are addressing have one question: what’s in it for them? It’s your responsibility to ensure that the scheme is well managed and that the information they receive is fair, clear, unbiased and straightforward. Only then can an honest and helpful conversation on pensions take place.
Paul King can be contacted by email at firstname.lastname@example.org or by telephone 01 6344520 for company pension scheme advice which is jargon-free and easy to understand. For more market analysis and expertise follow Acuvest on Twitter @AcuvestIreland and Acuvest.ie for ongoing blogs and pension updates.