Time to take stock of your retirement plans

The debate in relation to the State pension age was re-energised in recent weeks when it was revealed that the Pensions Commission would recommend a gradual increase to 68 along with some quite dramatic PRSI hikes for the self-employed. Whether either of those recommendations will pass the political palatability test is of little consequence. The fact remains that the pensions landscape is changing rapidly, as is the world of work.

The near overnight shift to remote working for a huge proportion of the population in March 2020 also ushered in new thinking in relation to the nature of work and where and how it gets done. Flexibilities hitherto regarded as unworkable have become the norm, and the likelihood is that career and working models will continue to evolve at pace.

At the most basic level, we will see many organisations adopt to a hybrid model where staff work part of the week in the office and the remainder at home or in another remote location. It is also likely that we will see an increase in part-time working and job sharing and a blurring of the line between the traditional and gig economies with individuals opting to combine a number of part-time jobs.

That new flexible approach will likely extend to retirement. Contrary to popular opinion, Ireland does not have a State retirement age. There is an age at which people become eligible to receive the State pension, but that is very different from a compulsory retirement age. Indeed, even if a retirement age is part of a contract of employment, an employer must still demonstrate that it is reasonable to enforce it.

The idea that the State will look after you when you need it for health, education and pensions is becoming more and more challenged

For some people, this may open up the possibility of working beyond the normal retirement age on a part-time basis in order to glide gradually into retirement rather than face an artificial and abrupt halt to their working lives on a particular birthday. And changes to the pensions system and society generally may make that a matter of necessity rather than choice.

"One of the facts that almost gets forgotten is that it is not so long ago that we had a general election where pensions was a burning issue," says Bernard Walsh, head of pensions and investments with Bank of Ireland. "People seem to have forgotten that. Maybe it's because we've all had bigger fish to fry with Covid. People are beginning to realise that the old patriarchal model of society is coming to an end.

“The idea that the State will look after you when you need it for health, education and pensions is becoming more and more challenged,” he says. “The welfare system is becoming more American and less North European. The State can’t afford it and the public will is against paying more tax. The State pension is moving to a lifetime earnings and lifetime contributions model. We are moving away from a full stop.”

The existing system for occupational pensions was built around an old societal model, according to Walsh. “You leave school, get a job, sign up for a pension, work there for the rest of your career and then retire and draw your pension. Then there was a recognition that some people work for themselves, and the government changed the system to allow people contribute a bigger percentage of their earnings as they grew older.”

But he warns people against taking the part-time option too early in their career. “If you turn the model on its head and if the shape of a career changes with people going part-time in their 50s just as they are reaching their peak earnings, they might struggle to fund a pension just at a time when the system is encouraging them to pay more in. They may leave themselves in a position where they haven’t put enough aside to fund their retirement.”

The pandemic has changed many attitudes towards working lives, according to Danny Mansergh, head of benefits and career with Mercer Ireland. "It has brought forward many things, but people say we were moving down that track anyway. The glide path towards retirement concept has been bandied about long before 2020. If the question coming up to retirement is to alter your working hours that can work for and against you."

On the positive side there are those people who are already quite well off. “You’ve got people who reach the age of 50 or 60, their kids moving out, they have good jobs, their mortgages are paid off, and they have good pensions,” Mansergh notes.

“The glide path for them is a lifestyle choice as much as a financial one. They can choose to slow down, maybe negotiate with their employer to work three days a week. They might decide to change jobs to one with fewer hours or even set up in business on their own. That’s a first world problem. All they have to do is ensure their pension pays out enough for them to live on even though they’re earning less.”

People are going to be working longer and looking at a phased retirement. Pension funds will become a more significant part of people's wealth

The choice may be complicated, however. "There are people who find the office a stimulating environment and if the choice is to continue working part-time but from home, an individual with a good pension fund may decide that full retirement is better than working from home in the spare bedroom," says Irish Life director of products Shane O'Farrell.

“In general, with the move to working from home there is not quite the same cliff edge,” he says. “It is now much more possible to keep people engaged beyond retirement age. It’s good for the people, and good for the organisation which doesn’t have to replace the person immediately and can prepare over time for their retirement. People are going to be working longer and looking at a phased retirement. Pension funds will become a more significant part of people’s wealth.”

There is also a dark side. “There is a cohort which is not going to be able to slow down,” Mansergh points out. “They are going to have to keep going because they have to. The glide path is great if you can afford it but not if you can’t. It can be a nice way of putting it for a lot of those people who are being forced to work long past when they expected to retire and when their employer expected them to retire.”

That is already a reality in America. “My colleagues in the US are dealing with huge cohorts of people who can’t retire because they can’t afford to,” Mansergh continues. “They are dealing with problems associated with an ageing workforce and a lack of opportunities for younger workers. I would be concerned about that coming down the track in Ireland. As a society, we haven’t properly focused on it yet.”

He contrasts the fortunes of the generation who retired before the global financial crash and benefited from all the good things that happened during the 1990s and early 2000s and those who came after them. “The generation after that bought homes at just the wrong time and many of them will be living with the consequences for the rest of their lives. And we are now looking at generations who can’t afford to buy a house at a time when it is very difficult to get social housing. Childbirth is happening later and later. People are having children in their late 30s or after, and that means they will have financially dependent children when they are in their late 50s or early 60s at least.”

People need to be far more engaged in how their pension fund is invested

And even when people want to stay on in work, they have to persuade their employer. "What is the employer's view?" he asks. "The concept of a standard retirement age hasn't gone away and there is a steady stream of court cases going all the way to Europe in relation to it. The employer has to have legitimate reasons to force retirement."

According to Walsh, people need to pay more attention to their pension funds if they are to avoid poor outcomes in retirement. “If there is only so much you can contribute, the only variable is growth,” he says. “People need to be far more engaged in how their pension fund is invested. A default strategy works well when it’s defaulting into what you are looking for. The eighth wonder of the world is compounding. That’s why people in their 30s need to contribute as much as they can.

“The value of their contributions will mount up over time. And as their circumstances change, they can’t allow themselves to be passive when it comes to retirement planning. You can’t leave it to others, particularly when your pension fund could be your biggest asset.”

He advises people to ask themselves three questions at least once a year. “What’s changed in my world? What’s changed in the world at large? What’s changed in the financial world – is there a better way of doing it that I need to be aware of?”

Mansergh says: “People have to start thinking early about the state of their pension. Fundamentally, the biggest question is if you have saved enough. A pension is the most tax-efficient way of saving. At some point you have to start putting more away if don’t want to have to work part-time later. At the base level, the State pension for a couple isn’t too bad provided you are in housing and don’t have to pay a mortgage or rent. If you are dependent on it and still have to pay for housing, you are not in a sustainable place.”

The good news is that people do seem to be taking their pensions more seriously. “We have seen an increase in the level of take-up of our webinars and events,” says O’Farrell. “And we have also seen an uptick in members increasing contributions. The fact that markets came back so strongly after the initial shock of Covid had an influence. A market recovery always gives people a good feeling about their pension fund. People had more time in the pandemic to think about things like this. A more critical factor was the use of digital tools to allow people easier access to content. That will continue into the future.”