100 years and more of pension complications

In 1908, David Lloyd George, the then chancellor of the exchequer in the UK and Ireland steered through — against considerable opposition — a revolution in social welfare.

The idea was simple and yet radical: That people in their old age, unable to work, should have a modest stipend and not be a burden on their families. Ireland benefited from this also, and more than 170,000 obtaining some pension, the 1908 act providing for means testing.

Since then, pension provision has evolved massively. Pensions are in principle a fairly simple thing: You put aside a sum of money on which you can draw for future needs. The problem arises in that it is inherently an act of forecasting.

Consider the elements involved. You need to first forecast how long after retirement you are likely to live. Then you need to forecast how much income you will need for each of these years. Then you need to forecast how much time there is until you retire, and by how much you expect each sum of money you put away to grow in the period.

Most people under-provide for their pension, which means a significant burden then lies on the State. The Pensions Board provides a pensions calculator which I suggest would horrify most when they plug in their details. The reality is that we are under-funded in all pension areas.

The issue is complicated by the fact that we have a mixture of pay as you go pensions and traditional pension savings. And even within that there are shades.

One split is on defined benefit (where at retirement you get a set percentage of your final or average lifetime salary) and the pension fund is supposed to have enough in the savings pot to meet this.

The other is defined contribution (where the pension is in effect determined by how much, if any, is in the savings pot). And then we have pay as you go pensions, in the public sphere, where payments are in effect paid out of current tax revenue. All these are in crisis.

In the realm of public sector pensions there was a report in 2008 by the comptroller and auditor general that looked at the future liability of the State for public sector pensions. This found there was a “contingent liability” of some €100bn. It does not mean the State owes €100bn, but that, based on a certain forecasts (how many pensioners will live for how long and at what rate their pension needs will grow) a sum of €100bn would be needed if one wanted to invest at a particular rate of return to obtain an income stream that would meet this.

How to deal with the existing public sector pension bill is a problem, but at least the Government has taken steps (reduced entitlements, longer waiting times to benefits, increased contributions) for new entrants.

In the private sector we have seen the massive destruction of wealth and pension funds have not been spared. Up to 80% of defined benefit schemes are estimated to be in deficit. We have seen defined benefit schemes being closed to new entrants, and where such schemes do exist we have seen cases such as Waterford Crystal where the fund was not able to provide its warranted requirements.

A further complication is that the Government has refused to implement EU requirements for a pension protection fund.

The UK government also refused and was forced to implement same only after a long legal battle. Thus in addition to the public sector pension overhang, the Government faces a large bill, possibly running into the hundreds of billions should, as expected, the European court rules that it was in breach of its requirement to have put a pension protection fund in place.

The last thing the Irish State needs now is additional financial strain, but it is highly likely that this will be forthcoming.