Pension crisis can still be averted

IT is not too late to avert a full-scale pensions crisis, Goodbody Stockbrokers has said, but any recovery depends on swift action by the Government in the coming months.

The firm also urged the Government not to increase the mandatory drawdown on Approved Retirement Funds (ARFs) past the current 5% mark; to reinvigorate pension savings.

ARFs are being used more as retirement income and the annual mandatory drawdown percentage of these funds was increased, last year, from 3% to 5%. Although not confirmed, speculation has been mounting that the drawdown percentage is likely to rise in the coming months. This, according to Brendan McGinn — director of pensions at Goodbody Stockbrokers — would be “detrimental”.

“More and more people are relying on ARFs to boost their pensions and any proposal to increase the rate of drawdown on these will be highly detrimental to their long-term benefits. If you have a pension pot that has to last 20 years, or so, in an uncertain financial climate, you shouldn’t have to eat into your capital at higher rates,” he said.

In a report into Ireland’s pensions sector, Goodbody said it isn’t too late to save the industry, but noted that Government needs to act.

“We need to act now and Government policy of disincentivising private pension provision in recent years is dangerous and counter-productive,” says Goodbody’s chief economist, Dermot O’Leary.

“Disincentivising the private sector from funding their own pensions is a double-edged sword for the public finances, as it means those private sector workers will be dependent on the state pension when they reach retirement age,” he added.

Mr O’Leary said that Ireland’s young population means that the country has a demographic advantage.

But that won’t last, as Ireland’s population grows older. “Investments in the National Pensions Reserve Fund (NPRF) had put us a few steps ahead in dealing with the aging population issue, but the banking crisis has removed that advantage. While the NPRF was meant to have capped pension costs at 6.35% from 2025 onwards, the fact that the fund has been tapped for the bailout means that these costs could rise to 13% of GNP over the same timeframe,” he said.