New low-cost pension stirs up a storm

ON Monday The Pensions Board launches the names of the first six providers of their new pension plans known as Personal Retirement Savings Accounts.

Even before they get to market the new low cost pension, designed to encourage more people to buy personal pensions is stirring up a storm.

Earlier this week the Irish Society of Actuaries warned the PRSAs as they have become known, will hasten the shift away from the traditional defined benefit plan bringing with all the negative implications in such a change in pension provisioning going forward.

Defined Benefit plans guaranteed workers up to two thirds of their basic salary on retirement in most cases, but the PRSAs and the Defined Contribution on plans do not.

For that reason the obligation rests on the shoulders of individuals to ensure that they invest enough during their working life to ensure that they have a half decent pension on retirement.

According to the Actuaries they will not. Their latest survey says unequivocally that “most people will not have sufficient funds for pension of even 50% of pre-retirement income.”

Hammering home the point in case anyone was in any doubt the actuaries said: “contributions fall short of levels needed to secure financially safe retirement.”

The norm is that people should aim for 50% of their basic salary with the state pension included in that calculation, which is not exactly an over generous stipend at the end of one’s working life.

It is more than ironic that the warnings about defined contributions came just days before the new PRSAs hit the market.

PRSAs and defined contributions plans are similar in their make up and pay out what you and if you are lucky your employer puts into the plan.

The aim of PRSAs was to get more people into the private pensions net and the real danger is that, by the time this exercise is all over, the time bomb people are trying to prevent will have magnified rather than shrunk as a result of The Pensions Board initiative.

This is the problem. It is also clear from the figures put out yesterday by the Actuaries that the targets will not be met.

Even if we manage to move the figure up from 50% on private pensions to 70% the over riding conclusion is that the vast majority going into retirement will have less than 50% of their basic salaries to live on, and the actuaries include the old age pension in that estimate.

That surely is less than satisfactory in the broader scheme of things.

At this point is seems The Pensions Board is trying to maintain the fiction that workers generally are going to be better off as a rust of PRSAs.

As many suspected this will not be the case.

The introduction of PRSAs may lead to a wider coverage of workers in the private sector, and that has to be good, but it will also reduce the pension situation to the lowest common denominator.

Ann Maher, chief executive, The Pensions Board says employers will continue to offer defined benefits as an incentive in many cases, but their own statistics seem to conflict with that more optimistic view.

If we have gone from 15% of people on defined contributions to 32% in 10 years and to 50% of non public service workers over the same period then the claims that defined will be maintained in large numbers, while true, belie the sea change taking place.

Over three years it’s been argued that only 7% of DB schemes have been ended.

But that statistic does not take into account situations where employers have closed, not ended their DB plans, and offered new workers defined contribution pension plans.

Given the level of scepticism in the market or should that be cynicism about the defined contribution pensions route, the PRSAs may turn out to be a bit of a disaster in more ways than one.