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'The State pension wasn't designed to support the lifestyles people have in mind'

Within the complex landscape of pension investment, auto-enrolment provides a compelling case for increasing and encouraging pension take-up, writes Jerry Moriarty.

Jerry Moriarty IAPF

“PENSIONS” – A TOPIC that can often be met with a glazed eye by the young professional, or with a flutter of panic by the 40-something employee.

I’m unsure why planning for sustainability and longevity regarding our finances is something that so many people close themselves off to, but there’s a common assumption that pensions and planning for retirement is something that can be put off, and off… until, well, some other time.

The CSO Quarterly National Household Survey 2015 reported the most common reason cited by people for not having a pension was not being able to afford one (39% of workers), but the situation is not that black and white because in the same report just over 22% of workers said that they had simply never got around to it.

Pensions system

However, there are other issues at play. People can be overwhelmed at the complexity of the pensions system and are unwilling or unconfident to find out where to start. While others have an element of suspicion and mistrust around pension investment and how it all works.

But the fact remains that a national ‘long finger’ has been put on this issue, in that investment in individual pension funds been diverted or procrastinated upon by many, in the private sector in particular, and the notion that ‘the government will look after me in retirement’ has sustained the public mind for so long now that, simply put, Ireland is facing somewhat of a pensions crisis in the next 20 years.

With an ageing population a growing reality, the cost of retirement provision to the State is set to increase significantly in the coming 15-20 years. The State pension was never designed with the intention of supporting the sort of lifestyles that people have in mind for their retirement – full of leisure and travel and good health to indulge in personal projects.

It was designed to keep people out of poverty, a lifeline for those who had not managed to accumulate private financial provision for themselves during their working lives.

The State pension is paid for from taxes – an aging population means there is a dwindling tax-paying labour force from which to draw a payment for the retired. It’s basic economics to reason that the input will soon no longer be able to support the output required in terms of state pensions.

Something needs to be done

At a State level, we’ve had multiple policy papers, recommendations and reports conducted into what needs to be done. The most popular solution mooted to date has been the idea of introducing ‘auto-enrolment’.

This is a savings scheme into which all workers are automatically enrolled, with the availability of an opt-out option after a certain period. It can take many forms, but one popular form (and a format which has already enjoyed success in Ireland) is an ‘SSIA’ type scheme, where the worker, employer and State all contribute.

The biggest draw in terms of a scheme of this nature is that no one stakeholder carries all the financial pain, the cost is spread among all contributors. International experience has shown the popularity and success of this approach, with the consensus being that most people choose to remain in the scheme even when given the ‘opt-out’ option.

So how would it work and what would it mean for the average worker?

The Government’s recently published Pensions Roadmap suggested that it would start in 2022 and apply to all workers over 23 earning more than €20,000. Employer and employees would pay 6% each of earnings with the State adding 2%. Further details will be published shortly.

Government must do all they can to gain public and stakeholder opinion on the best ways forward in devising and rolling out an ‘auto-enrolment’ system in Ireland. The whole point of such an undertaking, is to encourage public and individual pension investment and ‘buy-in’. Therefore, it’s imperative and wholly conducive to that outcome, that people feel they have had a contribution and an input into its development.

Work will also need to be done in order to identify the key demographics that are likely to take up such a scheme ie young professionals who don’t see the relevance of a pension scheme at their stage of life, entrepreneurs who might deem paying into a personal pension pot the least of their financial priorities, middle-income working families who have very stretched finances and don’t have the time or wherewithal to begin questioning their retirement needs into the future, let alone navigate a complex system of investment.

Maturation options are a key consideration of any amendments to our national framework

While there are many opinions on the optimum level of financial provision that a savings fund should return, with some reports suggesting that a pension should provide up to 50% of your income level, we would strive for a much more fundamental goal.

Given the challenges and frankly, crisis, coming down the line in terms of pension provision, we would like to see a drive to encourage as many people as possible to start up a savings plan that will return any level of income that is greater than the current State pension. This has to be the main goal – to get people thinking ahead, and to provide the infrastructure and the support to then help people save at any level towards their retirement.

Within the complex landscape of pension investment, auto-enrolment provides a compelling case for increasing and encouraging pension take-up, given the pressing national need for increased individual and group investment in this regard.

Jerry Moriarty is CEO of the Irish Association of Pension Funds (IAPF).

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Jerry Moriarty  / IAPF

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