Irish Pensions Magazine Spring 2014
22
Expert Opinion
Positive Change is Needed
by Niall O’Callaghan
P
ensions have been in the news quite a bit in 2013.
Much of the focus tends to be on the problems facing
defined benefit schemes as they struggle to provide
the benefits promised or on large pension payouts to
senior executives.
The recent government announcements on changing
the priority order on how the assets of defined benefit
schemes are distributed on wind-up was welcome and
will help bring some greater equality for members who
have yet to retire although for some it is too late and for
others it may be too little.
However, as we face into 2014 perhaps the biggest
challenge facing pensions is our attitude as a nation
to saving for retirement (only 50% of the working
population of Ireland have a pension saving of any kind).
It is understandable given the negative press associated
with pensions and the lack of a clear and supportive
Government policy on pensions but is it leaving us, as a
country, exposed to the economic consequences of our
changing demographic?
As we all know, Western Europe is aging; by 2050 there
will be only 1.8 workers to every retiree versus a current
level of 3.5. Ireland’s population is also aging albeit at a
slower rate. This demographic shift is one of the biggest
challenges facing Western Governments and has broad
reaching social implications. People will need to work
longer; the cost of providing public healthcare services
will increase dramatically; long-term care requirements
will increase as people live longer in ill-health. This
problem is very real and it is happening now. The scale
of the financial impact dwarfs that of the Banking crisis.
Planning for an aging population includes many aspects,
spanning sensitive matters such as immigration and
social policy, but at the heart of any solution must lie
the government’s pension policy. It was this challenge
that led former Minister for Finance Charlie McCreevy
to set up the National Pensions Reserve Fund in 2001.
Unfortunately, in the last five years all of our focus has
shifted from this very real, and very large, long-term
problem to the more immediate challenges created
by our banking crisis. The treatment of our Pensions
Reserve Fund is symptomatic of the government’s
current approach to retirement savings in general.
The need for balance
This focus on short-term finances is completely
understandable. There is no point saving for the
future if you cannot put bread on the table now, the
critical piece that is missing, however, is balance. The
longer term population aging and associated social and
financial implications have not disappeared; in fact they
are now just a little further advanced. What has changed
is the focus of our Government. The complete focus on
the short-term needs to stop, we need Government to
also consider the future and what type of retirement the
current working generation and their children will be
able to afford. It is the current 30 and 40 somethings who
have borne the brunt of the burden of the Banking crisis
that are the very ones who will also bear the burden of
the aging population unless immediate action is taken?
3 changes to pension policy that will help
position Ireland to better deal with the
challenge
1: Reduce the levy for2014 back to 0.6% and cease
the levy completely at the end of 2014 as originally
promised.
The Government’s use of pension levies is just wrong,
it sends out completely the wrong message to people
saving for retirement, people who are facing up to
the fact that Government will not be able to support
them to the same extent as they support current
pensioners.
2: Radically simplify the current Defined Contribution
(DC) pension system so that there is only one type of
DC pension scheme with one set of rules governing it.
At present there are 9 types of DC pension scheme with
a myriad of different rules. This will have the double
positive effect of allowing people to understand more
easily their pension and also significantly reducing
the cost of administering/advising on pension.
This could be achieved quite easily if policymakers had
the appetite to do so. Until pensions are simplified, it
will always remain very difficult for people to engage
with and understand their pension.
3: When the economic environment supports it, the
government should introduce a (soft) mandatory
system to nudge people towards increasing their
savings for retirement.
By having a system that people must opt out of as
opposed to opt into will dramatically increase the
number of people with pension savings and the amount
of pension savings they have. A word of warning here,
however, there is no point in introducing a (soft)
mandatory system until such time as levies are stopped
and the system is simplified and all the unnecessary
costs of providing pensions are stripped out.
If taken, the above actions will go a long way towards
putting Ireland in a more secure position for the future
and allow the current generation of workers face into
old age with much greater security and confidence.
Article Author
Niall O’Callaghan
IAPF Council / Partner
Mercer
* This article was published in the Irish Times on January
2nd 2014
