David Begg: Millennials simply will not have enough to live on when they retire

As the great American playwright Tennessee Williams once said "You can be young without money but you can't be old without it."

Pensions is a boring topic – at least to anyone under 40. At 50, the topic becomes mildly interesting and at 60 it is riveting. Unfortunately, there is a worrying gap between what people expect their pensions saving to provide and what the actual outcome is likely to be.

Frankly, the current pensions landscape in Ireland presents a picture which is not sustainable. Considerable reform will be necessary.

This week the Pensions Authority published proposals for reform in the form of a consultation paper. The Minister for Social Protection said he is likely to introduce an auto-enrolment scheme to provide for an income-related universal supplement to the State pension.

The sustainability of what are known as defined-benefit (DB) occupational pension plans first came into question in the 1970s but their demise and replacement by defined-contribution plans accelerated after the dot.com stock market collapse in 2001/2002.

The main difference between a defined-benefit and defined-contribution scheme is that the former requires an employer to fund a specific pension promise to an employee, usually to fund up to half-pay, less social welfare benefits, on retirement. The latter involves no specific employer commitment and a person’s pension depends on the amount of pension the money his/her pension pot can buy on retirement.

In effect, changing from DB to DC changes the risk from employer to employee, and ultimately to the State because no developed country can allow its elderly population to fall into poverty and indignity in their final years.

One consequence of transferring risk to employees via a defined-contribution scheme is that contributions tend to be much lower than for defined-benefit schemes with the attendant risk of pension inadequacy in retirement. And even where it is possible to accumulate a decent level of funding, a person retiring with a DC pension only is confronted by complex choices which they may not have sufficient information to make.

Risk and uncertainty

They can buy an annuity to secure a guaranteed income or take the chance they will not live long enough to exhaust the fund at the chosen draw-down rate. Unfortunately, annuities are now very expensive.

Risk and uncertainty cannot be removed from pension planning and defined-contribution schemes and personal retirement savings accounts (PRSAs) are highly vulnerable to poor investment decisions.

However, the most important concern must surely be that less than half the population have any kind of second-tier pensions provision at all. In May, the CSO published statistics indicating only 47 per cent of people in employment have pension coverage. This is compared to 51.2 per cent in 2009, suggesting the recession has had a negative impact. This data must be treated with some degree of caution insofar as it is based on the Quarterly National Household Survey and people may not provide absolutely correct answers. Nevertheless, as a trend, it is going in the wrong direction. Moreover, if one considers that occupational pensions coverage is over 90 per cent in the public sector, then private-sector coverage is on average lower than the CSO figures.

The first pillar of mandatory social insurance pension, the State pension, will remain central because of its role in preventing poverty in retirement. About 90 per cent of elderly people receive a social welfare pension and these pensions account for 62.7 per cent of their income.

Ireland is unique in having a very large number of pension schemes. There are 140,000 defined-contribution schemes alone which account for more than half of all pension schemes in Europe. (The Netherlands by comparison has only 400 schemes for a population of 16 million.) Small DC schemes, with 50 members or fewer, make up 99 per cent of all DC schemes and 48 per cent of all active DC membership. This situation cannot be in the best interest of members generally as schemes are usually expensive and do not always deliver the best outcomes including costs for members; bargaining power; and adequate oversight of governance by the Pensions Authority. It is doubtful upwards of 200,000 trustees is optimal.

In addition there are multiple pension products, designed essentially to do much the same thing as pension schemes, but with no overall consistency regarding incentives, benefits and drawdown options.

Mandatory participation

The truth we have to face is that relying entirely on tax-incentivised market solutions has not provided the pensions coverage or adequacy citizens need.

Whatever about the baby boomers, the next generation definitely will not have enough to live on in retirement. For this reason, State intervention is necessary and the Minister’s announcement about auto-enrolment is welcome. That said, thought needs to be given about how to implement it without putting additional burdens on people and to whether to allow an opt-out or make participation mandatory. I favour the latter as the only way to ensure people start to save early enough to have a realistic prospect of a comfortable retirement.

Another consideration which will give an impetus for reform is the forthcoming Institutions for Occupational Retirement Provision directive (IORP11) from the EU.

Providing for a sustainable pensions regime requires a balance between security and viability in circumstances of fragility and uncertainty about the future. It also involves issues of gender and intergenerational fairness. It would be good if we could arrive at some consensus as a society about these questions. Hopefully the consultation paper will stimulate a conversation.

David Begg is chairman of the Pensions Board and was general secretary of the Irish Congress of Trade Unions between 2001 and 2015