Try to forget all you ever knew about pensions. I’ve been with the Irish Insurance Federation (IIF) three years. When I started working here I had no previous experience in the industry and no private pension provision. A little over two years ago I was asked to take a look at the Irish savings gap to see if our industry should be making specific or general policy recommendations to government with the aim of closing it.
I did a little research. I hooked myself up to the IIF ‘pensions calculator’, put in my current age (38), when I wanted to retire, the contributions I was willing to make, pressed ‘go’ – and the calculator started laughing. It estimated that I would be entitled to about half a euro a week on top of my State old age pension!
What if I had started at 18? Things started to look much brighter. Then I had a flashback to what I used to think about when I was 18. I can’t remember my retirement being much of a priority. In fact retirement had only come into my perspective following the birth of my first child. I cannot believe that my own experience at 18 - and for the following 10 years at least - differs greatly from that of the majority of the population.
At least I now understood that an adequate pension comes from saving enough for long enough. The solution I concluded was to somehow reconcile an adolescent’s view of the world with the necessity to begin saving for retirement when still a teenager. Impossible!
Then my two-year-old, Sarah, woke up from her nap and the solution came to me:
q A personal pension account is opened for every child in the country and the government deposits €10 a month into each account until the child (Sarah, for example) turns 18.
q Meanwhile, Sarah is taught about financial planning, including pensions, in her second level school. (This proposal has already been made to government and has received widespread public support.)
q Sponsor(s) (parent, guardian, godparent, grandparent and so on) may make additional contributions from NET
earnings to Sarah’s account of up to €50 per month in total over the same time period (ie, until her 18th birthday).
q For every €5 contributed by sponsors the government contributes an additional €1.
q Responsibility for making contributions to the fund falls to Sarah at age 18.
q On her 25th birthday she gets access to 25% of the current value of the fund tax-free only if she has been contributing 5% of earnings when working.
q On her 35th birthday she gets access to a further 10% of the current value of the fund tax-free provided she has been contributing 10% of earnings between the ages of 25 and 35.
q The remainder cannot be accessed until retirement, unlike the child trust fund in the UK, which gives all the money back.
q Sarah, along with every child in the country, automatically has a growing private pension fund from birth, which she can’t opt out of and about which she receives regular benefit statements;
q With schools, parents, government and industry all promoting the funding of these products private pension provision becomes the norm;
q Access to a portion of the fund at crucial times in Sarah’s life cycle helps foster a positive attitude to saving and a savings habit;
q Making the future secure for our children allows parents to spend more time and resources making the future more secure for themselves.
q The volume of accounts - 100% of the population over time - and the simplicity of the product will generate increased competition in the industry which in turn will promote competitive charging and value-adding customer services;
q Sarah and her cohorts will take financial responsibility for their retirement;
q State expenditure reduces over time because well financed pensioners pay tax, have private health insurance, and spend money in the economy;
q Ultimately this proposal removes Irish society’s dependency on the pay-as-you-go system, thus de-politicising pension provision;
q It paves the way for the incremental introduction of mandatory pensions for this new work force provided that: pay related social insurance (PAYG) is eliminated for this group – they cannot pay on the double; and a safety net is provided below which no citizen can fall.
Some criticisms and answers
q The fund values at 18 or 25 will be an insignificant addition to the pension at 65. To discuss it in those terms is to miss the point. This proposal is not initially about the size of the fund. It is about the development of a ‘savings habit’ at an early age, which if successful becomes the habit of a lifetime and consequently produces an adequate retirement income.
q What does ‘Pensions for Children’ do for the current workforce? For a start, 70,000 of these children join the workforce every year. Also, we cannot expect to develop a macro solution to the pension crisis without including those not yet in the workforce, especially as PAYGO assumes that our children will pay for our increased longevity and reduced dependency ratio. We cannot continue to pass an ever worsening problem on to our children. Critically, Pensions for Children allows parents (the current workforce) the facility to consider and fund their own retirement as they can see that their children are being well provided for. Parents will learn from the experience of their children. This in turn will reinforce the positive and necessary aspects of saving to both groups;
q It’s a novelty tax shelter for middle and upper income brackets. If it were, the sponsor contribution limits would be a lot higher than €50 per month.
q Some parents will afford maximum contributions while others will only afford minimum or none at all. Not everyone can afford maximum contributions, but does that mean you should abandon a scheme that gives 100% coverage and develops a national savings culture because some ‘rich kid’ doesn’t need it?
To develop a personal savings habit you need an individual product with your name on it, a kick-start from the government, support from Mum and Dad, understanding/education, personal contributions and a reward within a realistic timeframe. All of this must be contained within a simple product that is understandable to the overwhelming majority.
This proposal has been submitted to the Irish government in the IIF’s 2004 and 2005 pre-budget submissions and is currently being considered by the Pensions Board as part of our submission to the National Pensions Review.