In 1916 average life expectancy in Ireland was 53. Fast forward a century and it is estimated that one in every four babies born in 2017 will live to 100. Good news overall, with one major exception: pension schemes.
All employees who joined the public sector before January 1st, 2013, have entitlement to a final salary Defined Benefit (DB) pension while newer joiners have a Defined Benefit entitlement based on career average salary which is worth less.
In the private sector, things are more uncertain. Although all workers are entitled to have access to a pension, fewer than half actually do.
This is particularly worrying because of a number of crucial elements: falling interest rates, as well as increased longevity mean the cost of providing pensions has sky-rocketed in the past two decades.
Living longer but living better?
“We should celebrate that people are living longer and that for many, those extra years will be lived in relatively good health,” states Alistair Byrne, head of European DC Investment Strategy, State Street Global Advisors (SSGA). This positive trend does have very significant implications for society, including the greater likelihood that many people will work for longer – a trend already under way, for example with rises in State pension ages.
Research conducted by SSGA indicate many are comfortable working beyond traditional retirement ages. “Perhaps not full time in the occupation they have had for most of their career – but potentially part time, or in a new role that is less demanding, or something they have always wanted to do, adds Byrne. “The income this provides makes a big difference in ensuring that people’s retirement assets can last their lifetime.”
Mairéad O’Mahony, Partner, DC & Financial Wellness Leader at Mercer, is a little more sceptical. “The fact that we are living longer is clearly great news for our overall wellbeing but bad news for the cost of providing pensions,” she states. “The longer we live, the longer those pensions need to be paid for.”
When calculating the future costs of pension provision and accumulating a retirement fund, longevity plays a very important role. "A key factor in those calculations is that the pensions that have been promised will have to be paid for much longer and or a retirement fund will have to last for a longer time than was the case previously," states David Malone, Head of Operations at the Pensions Authority. "According to the CSO, by 2060 life expectancy for males aged 65 is set to increase by 4.2 years to 87.6 from its current rate of 83.4, while for females the increase is projected to be 4.5 years to 90.8 from its current rate of 86.3."
Given the shift away from Defined Benefit to more individualised pension savings, this longer life expectancy creates the very real risk of “bomb-out”, ie retirees running out of money in their 80s or 90s, possibly when they need it most to fund increased healthcare needs.
Increased longevity could cause major problems for State finances. “Today we have five workers for every pensioner; by 2050 that will fall to 2:1,” says O’Mahony. “Given our pay-as-you-go model for public sector and State pensions, and in the absence of any policy change, that means that future generations will bear the brunt of our increased longevity through increased taxation.”
The future for the pensions landscape in Ireland?
For several years now Irish retirees have come principally from defined benefit schemes, playing little or no part in contribution and investment decisions. As these traditional pensions models disappear, individuals must increasingly shoulder the burden for pension savings. “The reality is that most Irish people will probably fall short of their retirement income needs and this realisation will unfortunately hit when it’s too late,” says Ann Prendergast, Managing Director, Head of State Street Global Advisors Ireland.
Auto-enrolment
So what are the alternatives? Prendergast sees potential solutions abroad. In the UK, for example, non-pension policyholders have been encouraged to save either through compulsion or auto-enrolment. “The UK established the National Employment Savings Trust (Nest) and began auto enrolment in 2012 on a phased basis to automatically sign people up to a pension scheme. If they opted out they were automatically opted back in again!”
The most recent Retirement Confidence Monitor Survey from the the SSGA found that 80 per cent of Irish defined contribution members said "they would be in favour of automatic enrolment". Successive governments have also publicly backed an auto-enrolment strategy, including an Taoiseach, Leo Varadkar, who outlined his plans for a universal savings plan earlier this year.
Compulsory private pension saving
As shown in the annual Melbourne Mercer Global Pension Index, the most successful retirement saving systems in the world are generally designed to make compulsory private pension saving. (This is the case in both the Netherlands and Australia.)
‘A ticking retirement time bomb’
What’s needed now is radical policy changes and fast. “Without substantive policy change, Ireland is facing into a ticking retirement time bomb,” warns O’Mahony. “Best estimate of our pension savings shortfall is about €560bn, or twice our annual GDP, growing as our population matures.”
Given the challenges faced, time is of the essence. The sooner mechanisms for greater levels of pension saving, both public and private, are introduced, the better.
“We need to see greater engagement from government in encouraging individuals to take ownership of their own financial wellness,” states O’Mahony. “State-sponsored campaigns similar to those for mental health or road safety, and early intervention at primary and secondary schools, can also raise awareness and kick-start the necessary behavioural changes needed to address the long-term savings gap.
“I also think we need a greater focus from pension providers in creating an engaging, consumer-friendly experience to encourage individuals to engage with their financial wellness and to save more.”