Bridging the pension gap
This article was originally published in the Irish Times. Author Dave Phillips.
The National Risk Report 2019, published in August, highlighted that only about 35 per cent of people employed in the private sector were covered by a supplementary pension. “This suggests that a high percentage of the working population is not saving enough, or saving at all, for retirement, reflecting a significant risk both in terms of the funding and sustainability of pensions in Ireland,” the report warns.
This echoes findings from a 2014 OECD survey on Irish pensions, which suggested that “Ireland faces challenges on the financial stability of its pension scheme” and that while there is no blue-print for reform, changes were certainly necessary to come into line with pension schemes in other OECD countries.
“There are two major problems to look at,” says John Cotter, professor of finance and chair in quantitative finance at UCD. “The first is coverage – there are not enough people in pension schemes. CSO statistics have shown that there are less people with pensions now than there were 10 years ago.
“The second problem is contributions. The OECD has spent a lot of time looking at pensions in Ireland, and have calculated how much we should be putting away in order to support ourselves in retirement, so even if we have a pension, are we putting enough aside each month for it? The answer is definitely no.”
There is a major structural component to the pension problem, suggests Cotter, noting that countries where the government supports defined contribution schemes have a significantly higher rate of participation in saving for retirement. “We have a pension problem because of inertia,” he says. “If I offer you the choice whether you want to have a dinner on Friday night or do you want to put it towards the pension, you’re very likely to put the pension off until next week and then have dinner on Friday night. That’s human behaviour, so we’ve got to tackle it on that level, and that’s where Government comes in.”
Many OECD countries operate a ‘Save More Tomorrow’ scheme, which helps overcome the psychological inertia associated with pensions. The scheme essentially opts-in employees to pay a low rate of pension contribution from their earliest employment. As the employee continues through their working life, the increments of contribution increase relative to their earning, and over the course of their career they progressively put money aside, which is matched by employer and state contributions.
“When they introduced this in the US back in the 1970s, it was based on the idea that having a pension became automatic, that when you signed your contract of employment, you were also signing into a pension scheme,” says Cotter. “The only way out of that was to spend considerable time doing a lot of paperwork, so you were allowed to be exempt, but they made it very difficult for you. The effect was that you immediately got some kind of contribution going.”
While Cotter believes such a scheme is what is needed in Ireland, and plans for an ‘auto-enrolment’ scheme are promised for 2022, his advice is to get moving sooner. “The big advice is not to rely on Government, ultimately we’ve got to work and get the solutions ourselves. So that’s the big challenge, to fight against the inertia,” he says.
The challenge can be greater for people in self-employment and women, areas which need infrastructural support, according to Ann Prendergast, head of State Street Global Advisors Ireland. Research by the company last year showed that almost 70 per cent of retirees regret not engaging with retirement planning sooner.
“One of the most significant differences with self-employed people is the variation in income streams, meaning that it may be difficult to commit to a set contribution each month,” she says. “Infrastructure needs to be developed to support these needs, enabling greater variation and flexibility in contributions so that self-employed people will see possibilities that fit their individual circumstances, rather than barriers to retirement saving.
“Women’s pensions are up to a third lower than those of retired men, according to the latest of Employment Affairs and Social Protection’s proposals on auto-enrolment for 2022, which have suggested a lower-earnings threshold whereby employees will only be placed into a pension scheme when they earn above the threshold amount,” says Prendergast.
“We feel that no lower-earnings threshold should exist, as it could shut out a significant number of casual / part-time job-holders who are primarily women. Many women work part-time to be flexible in order to meet childcare needs, and to provide for this group, we would favour no lower-earnings threshold. This would go some way to widening participation and reducing the disparity.”
‘From the first pay packet’
For those in employment, the consensus is to start with pensions contributions as early as possible, and if you have no pension plan in place, then put it at the top of the to-do list. “Ideally, this is something you could do from the first pay packet, even if that is no more than to establish the habit of saving,” says Eugene Jackson-Ryan, associate client director at AIB Private Banking.
“You might consider the position that when you are young, you tend to be at your weakest earning capacity, yet you are likely trying to save for a mortgage, or set up a family, or plan a marriage. It is not easy to do all of that and save for a pension,” says Jackson Ryan.
“So a person might commit all early earnings to setting up house and family, and then in mid-thirties commence pension funding but at this stage it would need to be in the order of a third of earnings, increasing significantly by age 45 in order to retire at 65 on a reasonable pension relative to earnings. Forming the habit is crucial, you should always save some amount to keep the discipline, and then look to increase as affordability improves over time.”
Regardless of what stage you are starting a pension, the first port of call should be doing the calculations, suggests Jackson-Ryan. “On the website of the Pensions Authority, there is an excellent pensions calculator to help you work out your pension needs and cost. In addition to this, one can, of course, discuss the matter with a pensions adviser. It can seem confusing at first but engaging with someone can give you a better idea about things before you press go on anything.”