Maximising a pension has never been more topical. Pension fund managers struggle to get the right mix of assets in place while stock markets take a battering. Meanwhile, the newly retired can only look on in horror at the tumbling price of annuities on which they must depend for their retirement income.
No wonder then that these issues, and the more fundamental one of what age people should be retiring at, were at the centre of last week's annual conference of the Retirement Planning Council of Ireland.
A decade ago, there was a belief that new technology and the surge in personal wealth among the middle and professional classes (especially in the US and Britain) would mean that by the next millennium we would all be retiring to the south of Spain at age 50.
The economic reality (and volatility) of world markets and demographics - which has resulted in skilled labour shortages - means that most of us will probably need to keep working longer. Our increasing good health also probably means that many of us will probably want to.
Maximising retirement benefits is now the priority, not minimising the working years.
The Retirement Planning Council is a non-profit organisation that helps industry and organisations prepare their employees or individuals for retirement in a holistic way. Yet because of this week's grave warnings about global recession it isn't surprising that much of the focus at the conference was on the immediate financial crisis that many Irish pensioners are facing, especially concerning the purchase of the pension annuity that will produce their retirement income. About 30,000 people retire in this State every year, yet the average occupational retirement income is just £5,000. Fewer than 15 per cent of pensioners have an income greater than £200 a week. These are ESRI figures dating back to 1994, quoted last week by one of the conference speakers, but that level of income is hardly different today, except in one regard - it may be even lower.
The culprit is low interest rates which have contributed to the drop in yields from government gilts, the conventional asset that underpins most annuities. Annuity rates - which are already affected by the pensioner's age, indexing in line with inflation, payment guarantees, and whether a spouse's pension is also being purchased - are now being eroded by low interest rates. The problem is compounded by the fact that once a person retires they are legally compelled to buy an annuity - regardless of how appalling the rate of return or their ability to live off savings or other assets until interest rates pick up again. The pensioner whose company has guaranteed them a pension that reflects their years of service and final-year salary (i.e. a defined benefit pension) has less to worry about than the employee who has been contributing to what is known as a defined contribution pension scheme and must rely on the investments and performance of the stock markets for a good pension. The huge fall in equity markets will have done those final values no good in recent weeks - especially if the pensioner's money has been mainly invested in unit-linked equities. (Ideally, the existing investments will have been transferred into safer cash and gilt funds over the last few years to avoid just such a catastrophic fall.)
Because annuity values are so closely linked to interest rates and investment performance, the annuity issue is one that needs immediate and major reform, product innovation and a greater understanding of existing options and benefits by pension scheme members and pensioners, says independent actuary and consultant Mr John Edmonson.
He noted in his address to the conference last week that there have been some new developments in the annuity market in recent years to help ease the annuity rate hardship that has descended: the introduction of "impaired life" annuities means that someone with a reduced life expectancy can get a higher return; the new deposit-type annuity that pays a reduced income for life but pays back the fund at death is another welcome development, though it seems mainly aimed at people with impaired health. There is also some prospect that higher-yielding fixed-interest stock (perhaps from mainland Europe) will provide fractionally higher annuity returns and that more index-linked stock will come on stream in Ireland to raise rates. "The structure of gilts - a set combination of income stream and capital repayment - also makes it harder than it need be to match assets and liabilities. Providers might find it easier if gilts could be stripped into their constituent parts (income and capital). This could be attractive to the market for a range of purposes and is already done in the UK."
Touching briefly on indexing, with-profit and unit-linked annuities, with their associated risks and rewards, Mr Edmonson believes that a combination of all these ideas, plus the recommendations in the National Pensions Policy Initiative (NPPI), will be needed to properly tackle the wider problem.
The NPPI suggestions include kitemarking the annuity features of a pension product so that the pension scheme member is fully aware of the prospective retirement income early on; deferring the purchase of an annuity up to age 75 and then allowing a partial drawdown of the pension fund as income; allowing the purchase of a temporary annuity for up to five years, and an equity release system which allows the pensioner to use their residence to help them supplement their pension income.
Finally, he asks: "Is an annuity needed at all? It may well be that as our general standards of living rise and more people benefit from other assets such as inheritances, many can afford to take on more risk themselves. This should enable a certain amount of equity exposure be borne into retirement and get rid of any need to make `once and for all' decisions at age 65."
Meanwhile, the Retirement Planning Council of Ireland has also just published The Retirement Book, by author and journalist Anne Dempsey, which takes a very comprehensive look at the many issues faced by retirees. Not only does it look at the financial issues, such as making the most of investments, reducing tax and knowing about entitlements, but also at the emotional and social problems of having an extra 2,500 hours of time on your hands each year. Aside from providing lots of tips and suggestions with how to cope with the change (separate chapters deal with leisure time and higher education) it also looks at the challenges of the very elderly.
The Retirement Book, by Anne Dempsey, 205 pages, costs £10.95.
