Pension challenges: what the experts say

The future of pensions in Ireland has become an increasingly thorny issue, due to challenges of an ageing population that’s living longer, the gradual demise of defined-benefit (DB) schemes and the future arrival of an auto-enrolment pension system. It’s a topic with a lot to digest, and below we’ve asked representatives from four companies and institutes for their perspective on the challenges the pension question poses.

Joanne Roche, director, KPMG Ireland

“One of the main challenges we foresee is the need for the roll-out of good-quality, low-cost advice to individual pension savers. With the increasing proliferation of DC [defined contribution] schemes, the shift is towards an onus on the individual to manage his/her own fund from an investment and taxation perspective. The level of responsibility will depend on the product chosen through early, middle, and late retirement, reinforcing the need for quality advice.

“By contrast, in occupational defined-benefit schemes, which are increasingly the preserve of the lucky few, the oversight and investment management role is taken by trustees, with a largely predictable pension income.

“Separately, the funding challenge for the State, employer, employees and self-employed is ever-present and well-documented. One sector for whom headwinds will be felt strongly is the small- and medium-enterprise sector. The proposed contribution requirements under auto-enrolment for employers and staff are set to pose additional financial pressure on this already challenged segment.

“In our response to the recent Government consultation, we advocated for the design of a tax system flexible enough to accommodate the needs of entrepreneurs and those with atypical career structures for whom pension funding occurs in a ‘lumpy’ fashion. This group needs a ‘you don’t use it, you don’t lose it’ approach to pension tax relief at their marginal rates. While auto-enrolment is expected to be challenging to implement, international experience shows it will result in increased engagement and better retirement outcomes for those not yet engaged with pensions.”

Danny Mansergh, head of Member Communications, Mercer

“Huge change is coming to pensions in Ireland in the form of auto-enrolment, new State pension qualification rules, tighter regulations resulting from the [EU] IORP 2 II Directive, the possible advent of multi-employer master trusts, possible changes to tax relief on contributions and moves towards simplification of the pension regime. Through all of the change though, the likelihood is the focus for individuals needs to remain on the problem of building up, through adequate contributions and sensible investment, a big enough account to meet their retirement needs.”

Joe Hanrahan, head of Personal Financial Services, Investec

“The demise of defined-benefit schemes and growth in defined-contribution arrangements means employees endeavouring to accumulate a decent pension fund must now take notice of investment markets. DC arrangements, unlike their predecessor, don’t provide a promise of a pension. Instead, the fund can potentially be used to purchase an ‘annuity’ [a pension] and the size of this is determined by factors including bond yields and life expectancy. How much is invested, for how long and how much it costs to invest in your pension are critical in determining the size of the fund at retirement.

“Since 2011 [Finance Act], members of DC occupational schemes have an automatic entitlement to avail of ‘ARF’ options. An ARF is an approved retirement fund and is, in essence, a post-retirement investment fund in the member’s name, allowing them to retain accumulated capital and remove the compulsion to purchase expensive annuities. It also means the ARF can be passed on at death to a surviving spouse. On subsequent death, the ARF crystallises and this capital can be passed to children, with tax consequences. So, rather than facing a ‘dead end’ with a traditional pension, members can keep their fund, invest the proceeds to provide income and regard the fund as a constituent of their family balance sheet.

“An understanding of the individual’s own balance sheet, family circumstances, health, investing experience are all vital ingredients in determining their retirement option. And let’s not forget, we are living longer. This impacts negatively on the cost of a pension but is also relevant for a potential ARF holder who is about to take on investment market risk and where the threat of ‘bomb-out risk’ could escalate. For employees in DB schemes where no automatic option exists to avail of the ARF option, the temptation to take a ‘transfer value’(TV) to a DC arrangement – which allows for the ARF option and the flexibility and succession issues this provides – is becoming prevalent. Forgoing a future defined benefit in return for a TV requires careful consideration and must be assessed case by case.”

Bernard Walsh, head of Pensions & Investment, Bank of Ireland

“With over a million private-sector workers having no retirement savings and a substantial number with inadequate savings, the governments of the future are facing a very real pensions crisis. As the ratio of people in full-time employment to those retired falls, the social-welfare pension system will come under huge pressure.

"The Government's Roadmap for Pensions Reform sets out their proposed strategy, including the introduction of an auto-enrolment or mandatory pension scheme. They face a challenge in agreeing on a working model and rolling it out to the public. Scheme members will get to choose how they want their money invested. It is proposed this will be a DIY process without advice – however, this could lead to a scenario where members struggle to fully understand the various investment options, leading to the risk of poor decision-making.

“They are also suggesting there are too many small schemes and propose to amalgamate them. This could lead to a loss of control but may also lead to reduced costs. Most funds have enjoyed healthy returns – a typical managed fund saw gains of over 50 per cent over the period of the past five years. We would view investment markets as being late-cycle, which could present challenges if volatility inevitably increases. We have seen some nervousness in stock markets in recent weeks. It is vital pension savers understand how their money is invested and they have an appropriate level of diversification.”