Pensions time bomb will go off as population ages, warns Ark Life chief
In both the short and medium term, the radical change in the investment climate has set the scene for serious under-performance of funds taken out since the late 1980s.
Back then, pension funds were based on two basic assumptions that have changed radically in the meantime.
Back then, markets were generating growth of more than 10% most years and interest rates were also paying double-digit returns for money invested in annuities.
In the past few years the loss of almost 50% in share values across the globe has seriously undermined the projected growth figures of the past and raised similar doubts about how markets will perform into the future.
In tandem with the sharp decline in share values, interest rates have fallen sharply, so that annuities are earning low single-digit returns at this juncture.
This dramatic change in stock market fortunes has both long and short-term implications for pensions and other investments.
Those who took out endowment mortgages in the late 1980s when the projections for markets were very bullish are also in trouble.
So in the next few years those who took out pensions back then, hoping to retire soon, could be looking at pension lump sums worth only a quarter of their initial projected value.
While the industry is slow to be so blunt, Ark Life managing director Billy Finn says the entire country, indeed the entire developed world, is sitting on a pensions time bomb.
Of immediate concern is the reality that those who thought they had been sensible in taking out
Defined Contributions pensions and other pension plans during the late 1980s did so under assumptions that have been seriously misguided.
As a result, the amount of money they thought they were saving will be at best less than half of their original target.
There seems little doubt about that, and privately some actuaries fear the figure could be as low as 25% of the original target.
In essence, this means that people will have to work longer than they intended or if they have no option retire on pensions that will be significantly less than what they thought they had lined up when they set up their plans.
For the same reason, those who opted for endowment mortgages would have done so on stock market growth assumptions that have been totally eroded by the 50% dip in global share values over the past three years.
Many of them now face the prospect of not having earned enough to pay off their mortgages. Those who were hoping to have a lump sum left over are destined to be disappointed for the same reason that the earnings assumptions were shot to ribbons by the collapse of stock markets over the last three years, according to Ark Life finance director Brian Woods.
Billy Finn, managing director, Ark Life, added to the gloom and doom by warning that the pensions situation is turning into a major time bomb.
Several factors are at play. These have been compounded by the huge slump in share price values that mosts analysts predict will not be recovered.
Going forward, growth in stock markets will be much closer to 6% than the 12% calculated for pension funds when they were made in the late 1980s, he said.
Furthermore, Mr Finn doubted that the introduction of Personal Savings Retirement Accounts would solve the impending pensions crisis.
Already he warned that a €7 billion gap exists in terms of the funding needs for pensions going forward in this country.
That's despite the €7 billion plus reserve which has been put in place under the National Pension Reserve Fund by the State to meet public servant and the State pension needs after 2025.
Experience in Britain, Australia and elsewhere has shown that those most in need of personal pensions plans in the form of Defined Contribution schemes or Personal Savings Retirement Accounts do not take them out.
The young fail to see the need while others do not have the motivation or feel they can afford to buy into a plan.
"There is no sugar daddy out there who is going to provide," warned Mr Finn, who fears the efforts to bridge the gap with PRSA's will not yield the desired results as the hoped for by the government.
The stock market meltdown may also prove to be another turn off factor going forward, he said.
As of now, 50% of those at work have pensions.
Excluding the public sector only 40% of those currently employed have pension plans.
The Government's aim is to boost the figure form 50 to 70%, but Mr Finn doubts this will happen.
In the end, the pension time bomb will continue to hang over, not just Ireland, but the rest of the world.
As populations age and as people also live to be much older, the bomb will go off and the State will have a major problem to deal with, Mr Finn warned.
