Saturday 16 December 2017

Companies and employees urged to act now over potential future gaps in pension savings

Reforms need to be planned and put in place urgently because public and private pension provisions are heading in the wrong direction at exactly the same time

Putting money away now could ensure sunny days in the years ahead
Putting money away now could ensure sunny days in the years ahead

Aisling Kelly

There is a significant sustainability issue in Irish pensions that requires action - and fast, the results of a new international study by Mercer shows

The Melbourne Mercer Global Pension Index, published earlier this week, ranks Ireland's pension system a respectable 10th out of 27 countries, with an overall C+ rating.

However, while we perform quite well on adequacy and integrity of the pensions system, we are awarded the lowest-possible grade, an E, for sustainability.

The ageing population, combined with the fact that fewer people have pensions, and, correspondingly, the heavy reliance on the State pension are the key factors influencing Ireland's low sustainability rating.

The ratio of workers to pensioners is set to fall from the current 5:1 to only 2:1 by 2055. A pay-as-you-go system for providing the state pension will not work well under those circumstances.

Without a coherent plan to fund the State pension, which is due to increase by €5 per week from March 10, the sustainability of the current approach must be called into question.

Also, recent figures from the Central Statistics Office point to a further decrease in work-related pension coverage, with just 47pc of employees having an occupational pension scheme in 2015, compared with 51pc in 2009.

Both public and private pension provisions are heading in the wrong direction at the same time.

Universal Retirement Savings

In 2005, a National Pensions Review report recommended consideration of a system in which employees are automatically enrolled by their employer in a pension but can choose to opt out. An OECD report in 2013 on the Irish pension system also suggested that a mandatory pension system be put in place in order to increase coverage and adequacy.

Indeed, the countries performing best in the Melbourne Mercer Global Pension Index (Denmark, the Netherlands and Australia) all have some form of mandatory or quasi-mandatory pension system covering all employees.

Building on the work of the Universal Retirement Savings Group, the Government is looking at the introduction of a universal retirement savings system to increase coverage levels and the adequacy of pension savings.

So an auto-enrolment structure, available to all employees in Ireland, is likely to deliver the best outcomes and allow for flexibility where necessary.

We are still awaiting a clear roadmap on how to proceed but one advantage of the delay is that we have the opportunity to learn from international arrangements and adopt their best features for Ireland.

Planning is required

Clearly, the introduction of a universal retirement savings system will not happen overnight. The new system must deliver clear, understandable, valuable benefits to workers and be easy for employers to implement.

Cross-party support for the development of a universal retirement savings structure is also vital, given the long-term nature of pensions.

Importantly, we need to move now to develop a roadmap and timelines for the introduction of auto-enrolment. It is likely that contribution rates, at least initially, will need to be modest.

However, taking guidance from countries such as the UK and Australia, the roadmap should include stepped increases to contribution amounts in the future. Alongside this plan, we should have clear targets and deadlines for increasing coverage - such as reversing the drop in pension coverage witnessed over the past six years.

Employers and employees can act

Employers and employees have a role to play while we await the introduction of a universal retirement savings system.

Employers who provide an occupational pension scheme should examine whether anything can be done to increase employee participation - looking perhaps at moving from voluntary to mandatory (or opt-out) enrolment and encouraging additional contributions.

Likewise, employees should actively consider their future pension savings and see whether they need to act now to address any future gaps.

The Minister for Social Protection Leo Varadkar has indicated that pension reform and the introduction of a universal retirement savings system will be a key focus next year.

This is to be welcomed but we need to deliver and implement a robust plan urgently to ensure employees are saving for their future. We're living longer and spending more time in retirement - acting now will help to ensure we can enjoy it.

Aisling Kelly is a senior consultant and pensions specialist at Mercer

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