Private workers are left with nothing to look forward to but working until they die, writes James Fitzsimons
If you are out of work or finding it hard to pay the bills, pensions may be the last thing on your mind. Unless you are already on a pension or shortly to go on pension, it's not your number one priority and that is understandable. But if you are finding it difficult now, imagine what retirement will be like if you have nothing put aside. Nearly a million people in this country have nothing other than the State old-age pension to rely on when they retire.
Forty years ago, it might have been enough to get by. It's not today and it certainly won't be in the future. You will live longer than expected and advanced medical care will make your life better. That might seem like a good thing, but it all costs money.
As of today, there are two types of pensions -- the one that will give you financial independence in retirement and the one that will not. If your pension is not enough, maybe you can work till you die. If you are lucky enough, you might have sufficient savings and investment to make up what you need.
Last year, the Minister for Social Protection Joan Burton said she recognised that the pension industry is in trouble but it cannot be fixed now. Other financial pressures have the country in its grip.
By that I assume she meant it would be more important to bail out the banks and developers and to make sure we keep public servants happy.
Any attack on public-service pensions is always met with derision and accusations of jealousy. The fact is that public-sector pensions cost too much.
At the lower end of the pay scale, it is true that the pensions are small and don't provide for a lavish lifestyle. But they are 10 times better than the state pensions that the rest are expected to live on.
But the pensions paid to the high earners are mad and they cannot be justified. There is no equivalent in the private sector, and even if there were, they are paid for out of private--sector profits and not lumbered on the taxpayer who has no say in the matter.
Public-sector pensions are a form of defined-benefit scheme. The pension is based on the final salary of the employee. The big difference between public-sector and private-sector schemes? Private-sector schemes are funded. A fund is built up over the career of the employee. Defined-benefit schemes became less popular in the private sector a long time ago because they became too expensive and placed an unacceptable burden on the employer.
They have been retained in the public sector because there is no one to say 'stop'.
When the downturn hit, many pension funds were devastated. If pension funds are properly organised and controlled, they should not fail to provide what they set out to do.
Over time, equities tend to make the highest returns; they are essential to build up a fund in the early years. The sooner a person starts to fund for retirement, the better.
As a person gets older and the fund has been built up, it is usually transferred to safer investments, to avoid disappointment should a financial catastrophe strike. But there is always some financial risk. Financial derivatives were used to maximise return and control risk.
Public-sector schemes are largely funded on a pay-as-you-go basis. Nothing is put aside during the employees' career. Instead, the pensions are paid from tax revenue. When everyone else's pensions were affected by the global downturn, public servants claimed that theirs were not because they had no fund to be affected. The fact is: they had put nothing aside. And that is what their pensions were worth: nothing!
But they won't accept this. It's not as if the rest of us would claim that they shouldn't have any pension.
But things have changed. In a country where we are forced to borrow €20bn a year to run the public service, nobody can claim their pensions are safe.
The financial crisis wiped out 80 per cent of the value of most defined-benefit schemes in the private sector. Employers are legally liable for the shortfall. But if they are broke they can get off the hook. Pension trustees can face criminal prosecution for failure to maintain the value of the pension funds.
In January, Ms Burton signed into law legislation that would allow pension trustees use sovereign annuities to help get a better return from pension funds that could not pay what they promised.
Sovereign annuities are riskier investments. They pay a higher investment return because of the risk of default.
If the pensioner accepts them, they also accept that the fund might be wiped out and, if so, the employer is off the hook. This only applies to private-sector funds. The public sector is protected from this because there is no fund.
It doesn't make sense. Maybe when we were financially sound it was easier to ignore it. Now that we are broke, something needs to be done.
Public servants recruited since 1995 pay pension contributions. But these contibutions are totally inadequate to provide the pensions they get, especially those at the top.
Last year, Brendan Howlin, the Minister for Spending, reformed public-sector pay and pensions, but only for new recruits.
The Government came to power with a plan to provide universal pension coverage for all, including private sector and public sector. If public-sector pensions are fair and then why not provide them for all, including the private sector? The type of pension that is provided for public-sector workers should be provided for all workers, replacing the State old-age pension, which is grossly inadequate anyway.
Following which, the State only provides for those who have nothing. Public spending is out of control and waiting for global recovery to fix it is dumb.
The private sector has borne the brunt of the financial crisis. It was bad enough when external forces wiped out so many pension funds that prudent workers built up. It was criminal when the Government robbed these same funds of €500m a year to pay for its own waste.
They have feathered their nests, they have secured their jobs and now they will stand idly by as private-sector workers retire with nothing but higher taxes to look forward to. It's about time this Government got its finger out and did something for the people who put it in power.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning.