Irish playing on European stage
First impressions, as one walks through Dublin, that Ireland is a young country demographically are spot-on. Sure, population ageing is an issue – as it is in most developed countries – but the abundance of young people on the streets tells that the problem is nowhere near as acute as elsewhere in Europe.
Of a total population of just over 3.5m, 414,000 are currently over 65. That figure is forecast to rise by about 7% by 2006, climbing to just under 600,000 by 2016. At the moment there is one pensioner for every five people in work; looking much farther ahead to 2050 the ratio will have reduced to just 1:2. The government estimates the exchequer cost of maintaining the current levels of pension and healthcare provision will rise by about 7% of GNP, equivalent to a sixth of prevailing levels of taxation.
The financial services industry has also been riding the crest of the economic wave, with new business rising sharply – up in 1998 alone by 50% on the previous year. Personal pensions have been big business, and so have short-term fund-based plans. Irish people are steadily gaining a liking for equity investments, there having been enormous interest in the flotation of Telecom Eireann.
Enthusiasm for equities is not unqualified though. According to a Swiss Re survey over half of Irish adults agree that it is a good idea to make investments based on stocks and shares. But then 78% say that on balance they prefer safe investments with low returns rather than risky ones with high returns. While this demonstrates the need to interpret research with care, it also suggests that effective investment is creating a bit of a dilemma for the Irish who are traditionally cautious when it comes to finance.
The savings emphasis over the last few years looks set to remain, for the government is busy re-drawing the pensions map as part of its drive to shift more responsibility to individuals. Last year it introduced approved retirement funds allowing people, with certain restrictions, to self-manage their accumulated funds on retirement. These will be followed, in 2001, by ‘personal retirement savings accounts’, a new generation of personal pension plans aiming to increase penetration, particularly among the lower-paid. Akin to, but not duplicating, the UK stakeholder model, these will be simple, flexible products from a wide range of providers. While no firm rules for fund management charges have been set, the government is expecting providers to offer substantial improvements.
These developments undoubtedly represent a real challenge. But pensions reform is just one of a host of factors that will make the next few years a pivotal time for the industry. The economy is set to slow a little, which will increase competitive pressure. The hesitant pace of industry consolidation should accelerate, with more company mergers and withdrawals. Life companies will have to administer and weigh the impact of a change, from January next year, in their taxation, from an income less expenses basis to an exit tax at the standard income tax rate plus 3% on maturity or encashment. From September, consumers will benefit from commission and expense disclosure. This leap in transparency will notch up consumerism in Irish financial services, and indirectly will force the pace of consolidation.
The penetration of technology is growing apace. Around 600,000 adults will be on-line this year, so electronic access is increasingly an important component of distribution strategy and indeed may play a key role in the viability of the new personal pensions. But the e-way is more than customer sales and service: it is about leveraging technology across the whole business and outside it too, embracing suppliers, distributors and partners. Irish financial services must rapidly join the e-revolution.
But perhaps the most important factors to be dealt with come from outside the immediate industry. First there is the spectre of new entrants. Emerging strong brands are looking to expand beyond their core business. Swiss Re have found that consumers rate financial services lower than other sectors in respect of fair dealing and service (the Post Office and credit unions came top).
Then there is the threat from the outside Ireland. In the same survey almost half of respondents said they would be prepared to buy a life policy or investment plan from elsewhere in the Euro-zone. While this is a longer-term possibility, it underlines that the Irish financial services industry is now playing on a European stage.