Battered by a 'perfect storm', the industry is finding it ever harder to persuade people to save for their retirement – and the Government isn't exactly helping matters. By Peter Flanagan
DO you have a pension? If you do, do you still make regular payments into it? The answer to these questions for a lot of people will be a resounding 'yes' but a growing number of people aren't involved in saving for their future.
The knock-on effect on the pensions industry has been brutal, to say the least. In 2007, the Irish pensions market was worth a little over €2bn. Today, it is closer to €850m and still declining.
In this environment, Nigel Dunne has the unenviable task of running the Irish and international arm of life and pensions business Standard Life.
A near 'lifer' with Standard Life, he took over as chief executive for Ireland and its international business in 2010 and has confronted a slumping market.
"We are focused mostly on the individual pensions market and it has shrunk quite dramatically," he said.
"The decline has been across pensions investment products sold in the life-products sector – and that is just the new business on its own.
"The big problem, though, has been getting people to continue to pay premiums into existing plans. That is an issue as people pull back from that, so we've seen a decline akin to the property slump.
"We've been hit with a perfect storm because the last 10 years' market performance hasn't been great, so people's returns haven't been what they want.
"There has been a continued erosion of the tax benefits of having a pension, while the government levy of 0.6pc on pension funds is dipping into savers' assets – so a lot of things have come together," he says.
The Irish have a particularly strange relationship to pensions. As most people know by now, we were particularly wedded to property as a retirement fund for years and bank shares as well. We all know how that turned out.
Seeing how so many people have been ruined by the crash, Mr Dunne, as you'd expect, believes that it is more important than ever to have a private pension.
"You hear about the pension timebomb but it is a very real thing. This generation will rely more than ever on the State for retirement and we need to tackle that, but we aren't seeing evidence of any change," he says.
"Look, as an industry we play a role in this too. We have to come up with solutions and give customers value and the returns they want."
One of the problems is that a pension is an abstract thing people get in 10, 20, 30 years' time. It's an abstract thing that has little tangible value when a person is still young and Mr Dunne takes a novel way of getting around that idea.
"We try not to use the word 'pension' because the word itself has some issues. We try to treat it as a 'tax-efficient savings vehicle'. The downside is you can't touch it but it will do better for you over time.
"There was a time when you stopped working at 65 and drew your pension but that's not the case any more across most professions.
"State pensions are being pushed out – who knows how far they are being pushed out or whether they will they be cut in the future. That's just the way it is and we have to deal with that."
One of the things preventing the industry dealing with the issue is, in Mr Dunne's eyes, state policy. He has a point.
The previous Government imposed a levy of 0.6pc on pension funds two years ago, while this Government is talking about reducing the tax relief on pension contributions in next month's Budget. That would be a disaster, he says.
"As it stands, we would be advising anyone on the higher rate of tax not to put money into pensions. A pension is essentially a tax-deferral system.
"You get tax relief on the way in and then pay tax on the way out, so there would be no merit in getting 20pc relief on the way in and paying 40pc tax on the way out. It's just pointless."
As for the levy and dealing with the broader pensions' timebomb question, he is equally blunt.
"There's nothing very clear about how we'll do it. Pushing out the pension age doesn't do much long-term, it just delays the problem.
"Social Protection Minister Joan Burton is talking about auto-enrolment but you can't really force someone into a pension either.
"I would like to see the Government let things settle and give the industry and customers some certainty. The cap on pensions is probably fair enough but it needs to be at a level that would still make it attractive for people to pay into them as well," he adds.
One of the challenges faced by the country is how to get people back out spending – but an equally important challenge is saving smartly.
It is clear now that some people are so focused on making extra payments when they would be better off investing in other types of savings. To that end, Standard Life has launched a series of new products in an attempt to boost customers' understanding of what they are investing in.
"We have a product now called 'MyFolio', which aims to get the balance between risk and reward for clients. There is a choice of five funds, ranging across the spectrum in that regard, while our Global Absolute Return Strategies Fund is performing very well at the moment.
"It's about educating the client and having them understand what they are investing in. That is crucial in our business."
Standard Life is performing well in a shrinking market here, but there are undoubtedly a number of players that are struggling. Mr Dunne sees consolidation as inevitable but points to Irish Life's position as a possible reason why there hasn't been much M&A activity in Ireland.
He explained: "There are too many players, I think. A couple of new firms have come and gone but none of the established ones have and in any other business I think you would have seen at least consolidation. It may be the historic sales that are keeping them going because it isn't new business.
"Look at Irish Life. It's very profitable, with a strong balance sheet – but what is the appetite to buy an Irish life-assurance company when there is little new business and such negativity around pensions. It probably doesn't look the most attractive in that regard."
His comments on the market probably explain why Standard Life won't be moving to buy any of its rivals in Ireland. The numbers don't make a case at the moment. Still, Standard Life Ireland had a decent year. In a market down about 9pc, it beat the market. Is that enough though? After all, as part of a much bigger group, it has to contribute regardless.
"Yes we do, but the international business helps in that respect. We now have around €3bn in assets under management on that side and we are growing that business.
"We opened up in Singapore recently and the vibrancy there is remarkable, so it will be good to have that bolted on."
The life and pensions industry hit the headlines for the wrong reasons last month when a government report claimed that fees could take out up to a third of a person's pension.
Mr Dunne accepts that criticism but defends the industry's fee structure.
"I think that report had some pretty extreme numbers but there are three main parts of the business which demand fees: investment management, administration and advice.
"The standard rate is about 1.5pc of a fund for that service, so to justify that a fund needs to be making cash, plus the margin and something above that.
"If we get the returns, this issue goes away, but we have to get the returns."
Mr Dunne is 20 years with Standard Life and two years in the top role in Ireland. At 46, he is still a young man. He must have plans beyond his current role – but if he does, he is keeping them to himself.
"I've no aspirations to move abroad but the thing that will keep me here is growing the group.
"I'm looking to build the business here and internationally and that will keep me busy for the foreseeable future."