A private pension for everyone finally looks set to be on the way given the Government’s recently expressed commitment to the introduction of auto-enrolment in Ireland by 2021. But can it solve the biggest challenge facing Government and savers alike – the inadequacy of our pension savings?
Ann Prendergast, managing director and head of State Street Global Advisors Ireland, agrees that there is just not enough money going into pensions.
“Coverage is completely inadequate,” she says, noting that just 40 per cent of adults in the private sector in Ireland have access to a pension.
"Even where we have coverage, it's about the inadequacy of that coverage," she adds. Indeed research from Irish Life some years ago revealed that the typical DC member is set to retire on a pension of just 17 per cent of their final salary, while an OECD review of some years back found that the average fund size for a defined contribution scheme member was just over €100,000 – hardly enough for someone to live on for 20 years or more.
For Mairead O’Mahony, DC and financial wellness leader with Mercer, the inadequacy of our contributions is partly about ignorance when it comes to people and their finances, and not learning enough about their money in school.
“We need to spur some form of financial fitness revolution,” she says.
“If you leave that to people they’ll find a reason not to do it (investing in a pension),” agrees Prendergast, adding that financial literacy is quite low, and pension planning is a “scary thought for people”.
Taoiseach Leo Varadkar’s intention to press ahead with auto-enrolment then, which will see everyone working in Ireland automatically enrolled into a pension scheme by 2021, is to be welcomed – even if it has taken quite some time to get to this stage.
"We would welcome anything that increases people's provision for their retirement," says David Malone, head of operations with the Pensions Authority.
Ireland is not quite leading the charge however.
“Other countries have moved faster than we have,” says Prendergast, noting that in the UK, Nest, the workplace scheme set up by the government back in 2011, is already giving people pensions “who otherwise wouldn’t have had access to before”.
O’Mahony would also like to see a firmer commitment, in the form of legislation, but agrees that Varadkar’s intention to have the first contributions paid in to the new auto-enrolment scheme by 2021 is at least “movement” on the issue.
It’s understood that the scheme will operate on an opt-out basis, which means that people will have to decide to opt out of it, rather than leaving people opt in themselves. This should boost coverage.
However, it’s not yet clear whether or not employers will be obliged to make contributions – in Australia for example, their scheme started with employers making a minimum 3 per cent, but will increase to 9 per cent by 2019.
But it’s something that could be looked at again down the line.
“Just getting them into the scheme is really important and you can build on them from there,” suggests Prendergast.
However, much of the detail remains to be inked out. What type of product will we see used for example, a trust or a PRSA type contract?
“There is a danger that we forget the structure of the trust size model,” says O’Mahony, noting that these structures can leverage economies of scale, and allow a small employer to “combine their six hairdresser workers with Musgraves’ thousands of employees”, for example.
But for O’Mahony, the clincher would be the better standards of governance in a trust.
“An individual investing in a PRSA contract is pretty much on their own to oversee it,” she says, whereas the trust model has professional trustees sitting on top whose duty it is to make sure they’re acting in the best interest of the members.
Privatisation of risk
This focus on the individual providing for their own pension has been a key feature of global pensions in recent years, as the move from defined benefit, or so-called final salary schemes, to defined contribution schemes, which are ring-fenced individual pensions, gained pace.
Indeed as O’Mahony notes, the switch to DC is “all but complete”. While there are still 677 DB schemes in existence, only 11 per cent of those schemes are still open to new members.
“And no new DB schemes are being opened,” says Malone.
This has led to the privatisation of risk; previously the risk was borne by the government, and the employer. Now it’s increasingly down to the individual to not just provide for their own retirement, but to plan and invest for it.
“The responsibility was pushed onto people but we haven’t created the infrastructure yet to support them in it,” says O’Mahony
But the dynamic is now shifting again.
“The shift to DC passed the onus all the way over to the member; that’s what we’re kind of pulling back from a little bit,” says Prendergast, noting that the shift, as evidenced by low contribution and engagement rates, was “too large a leap” for most people.
But when it comes down to it, pensions are about three things: how much you set aside each month, what you invest in, and what age you start saving at.
And this is something the industry can do better at helping people with.
“If you take those three decisions away from people all they have to think about is when to retire,” says Prendergast.
A changing working life
The other major change in the pensions world is demographics; we’re living longer, but with poorly funded pensions our working lives will have to change too.
“It’s inevitable that we’re going to work a bit longer than we think,” says O’Mahony, adding that we need to start thinking differently about our working lives.
“I think if we could abolish the notion of one day you’re working, and one day you’re retired, we would have smoother paths into retirement,” she says, adding that we need to think perhaps of accumulation and decumulation differently, and about “whether or not the two can overlap”.