Defusing the pension time bomb

The Government’s recently published “National Risk Assessment 2019” identified Ireland’s rapidly-ageing population as a significant risk to a number of essential areas. There is talk from some quarters that the State pension will eventually disappear due to rising costs. Is this simply scaremongering from those with skin in the game, or should people be fearful for the future of a cherished benefit?

Aisling Kelly, senior healthcare consultant at Mercer, says she is not of the opinion that the State pension is in danger of disappearing but admits “there is a very clear issue around sustainability and its adequacy over time”.

“This was reflected in the recent Budget where we saw a failure to increase the weekly pension for the first time in a number of years,” she points out.

Kelly agrees the amount of the State pension is not a huge sum compared with even an average salary. “It’s not great but it is a good safety net for people. Over time, if that’s eroded and it comes under increasing pressure, there will be a challenge there.”

Other areas in the National Risk Assessment document gave rise for concern and one of these is healthcare. Like the pension problem, this is very much linked to longevity.

“The ESRI report from 2017 looking at the demand for healthcare showed significant gaps emerging by 2030, which isn’t that far away,” Kelly says. “The Sláintecare reforms are certainly heading in the right direction but with these significant gaps in demand already building, it will prove difficult to fill them.”

An ageing population will also suffer from more serious and chronic diseases, further placing pressure on health services. “Mental health and wellbeing will be another significant piece of that, and it’s worth bearing in mind that this is significantly impacted by people’s financial wellbeing,” Kelly adds.

Technical pensions specialist David Boylan of Davy says the pensions roadmap released by the Government last year clearly states that the first pillar for anyone’s retirement will be the State pension. “That’s the commitment that they’ve given,” he says.

Yet a closer look at the figures contained within the risk assessment make for stark reading. In the next 40 years, there will be just 2.3 people of working age for every pensioner. There are already measures being taken to address this, one of which is pushing out the State pension age; eligibility for the payment is currently 66 and will rise to 68 by 2028. “The Government has said they will review the age of the State pension on an actuarial basis and a mortality basis on a five-year rolling timescale, so that suggests it could go up again,” says Boylan.

He adds that the new total contribution approach has been brought in to replace the old “averaging” system, meaning that people will now need 2,080 contributions in order to qualify for the full State pension. “This is equivalent to 40 full years of PRSI contributions, although there are credits obviously for people who have been ill, or have taken maternity or paternity leave, for example.”

Auto-enrolment is another way the Government is attempting to manage the situation, and Boylan says it’s clear they’re hoping this will help people supplement the State pension. “After all, €12,900 isn’t a lot of money when you go from working and earning a full-time salary.”

Unnecessary panic

Tony Doyle, head of retirement planning at AIB, notes that other factors can affect the ratio of working people to those of pensionable age, such as migration, and he cautions against unnecessary panic.

“People need to look at the broader picture. It does need to be managed carefully and responsibly but I don’t think people should be worrying about it unnecessarily at this point in time.”

The State pension was originally established for people to receive when they could no longer work, Doyle notes. He believes increasing the age of eligibility makes sense.

“When I began working, the State pensions came through when you were 70, and the average life expectancy was 72. People are now retiring at 66 and living another 20 or 25 years – you can see the immediate problem. We are simply linking the pension age to longevity,” he explains.

According to Doyle, however, it may time for a rethink of how pensions are operated.

“As we are saving for our pensions in euro and paying them out in euro, could that money be used for the betterment of our society? These are questions that need to be put on the table.”

Bernard Walsh, head of pensions and investments at Bank of Ireland, doesn't believe fears around the State pension are scaremongering, and notes that the OECD has already said Ireland's State pension is "unsustainable".

“The cohort who is retiring now won’t have to wait till 68 to get the State pension and a lot of them have decent pension pots accumulated up to now. But longevity is a big factor, and all the estimations are that life expectancy will continue to increase. A girl born today has an even-money chance of living to be 100 years’ old.”

Panic surrounding the so-called pensions time bomb is not to be dismissed as mere axe-grinding, warns Walsh.

“It’s not scaremongering, it’s a genuine issue and cause for concern, and one that a lot of people are sleepwalking into,” he says.

“The advice is still to start early, consider putting in as much as you can and ensure that your money is invested wisely.”