Irish pensions: A constantly changing landscape
James Kavanagh, managing director at Trustee Decisions, says now is the time for 'joined-up' thinking in Irish pensions.
The time has come in Ireland for a National Pensions Commission made up of experienced industry professionals to advise and work with the government on a new pensions initiative. The government would do well to hear this call. Why?
First, there are relentless changes brought to bear on pension benefit and funding rules, social welfare rules and taxation rules that are having a negative impact. All of these have a bearing on private and social welfare pensions without having "joined-up thinking". This constant attack on pension plans is resulting in massive confusion for the country and for those individuals who are trying to plan and save for their future - whether self-employed or members of occupational pension schemes who will in the end look to the state to support their retirement. This is highlighted by recent research showing that only 30% of Irish adults understand basic personal financial concepts as surveyed by the Irish Association of Pension Funds, while just over 56% of people aged between 50 and 64 years do not know how much they will retire on, according to the Society of Actuaries in Ireland.
Second, the implementation of the public and private pensions levy since 2009 and 2011, respectively, to support the future funding of civil and public service pensions and jobs has curbed people's desire to consider investing more for their future. This is a simple fact, with many individuals arguing that any incentive to invest more is merely being diluted by the levy. In response to the point that the private pensions levy is being used to provide jobs as per the government, it is noted that, if anything, the unemployment rate as recorded by Eurostat has increased from 14.5% in June 2011 to 14.9% in June 2012.
Third, add this to the National Pensions Reserve Fund (NPRF), which was established in 2001 to meet as much as possible of the costs of Ireland's public service pensions from 2025, which was last valued at €116bn in December 2009. The NPRF has been depleted from €24bn (at its highest) to €13.4bn (December 2011). Much of the funds have been used to recapitalise AIB and Bank of Ireland, and the government quotes its shareholding to be nearer €9bn.
Fourth, a new scheme for public servants announced in 2009 does not yet have any members, as the legislation has not been enacted to facilitate it, and there is no evidence of the pension liabilities being re-assessed since.
Never was there a time when individuals needed to take ownership of their retirement plans or for the government to support them with positive initiatives. The economic downturn has seen private pension fund assets fall in Ireland from €86.6bn in 2007 to €72.3bn (as at December 2011). During this challenging time, employers have worked very hard to maintain their compensation packages by way of pension benefits to members, but it has not been easy for employers, employees or trustees.
As a result of new funding standard rules issued by the Pensions Board, which has resulted in a large number of schemes winding-up - for example, AIB, Independent Newspapers and even IBEC - employers have to spend unanticipated and large amounts of fees on this, as well as seek advice on how to re-engineer new schemes while it is estimated that more than 15,000 employees will now not benefit from a state pension until the age of 68 years as opposed to 65.
I applaud employers for their efforts in working through the current difficult environment, especially those with defined benefit schemes, but we need a more holistic and practical approach in dealing with peoples' pension funds and their future. Trustees are very much aware of their prudential functions, but we are forced to work with a constantly changing landscape, and whatever the government's strategy - if there is one - there appears to be a confused agenda on how to motivate people to save for their future and not depend on the state. A new National Pensions Commission should be established to take account of the new emerging pensions landscape.
James Kavanagh is managing director at Trustee Decisions