If you’re like Garret or Gaybo you might dodge pensions time bomb

POLITICIANS are geared to think only as far as the next election. They go into liquidation if they lose their seat.

A personal political legacy is extremely rare, as most political careers are readily forgotten. Therefore, any plan for 2050 is long on aspiration and short on detail. This aptly describes last week’s national pension framework.

The backdrop to this pronouncement is that people are living longer and leading more active lives in retirement. Life expectancy for someone who retires now at 65 has increased to 81 years for men, while women can linger until 84. Add this factor to our demographic bubble. The majority of us are middle aged. For every retiree now there are currently 5.6 workers. By 2050 for every retiree there will only be 1.8 people at work. This double whammy means the proportion of our national income that we spend on the elderly is going to treble from 5.5% to 15% of GDP in four decades.

Only 54% of Irish adults in the workforce over 30 years of age have a pension. This drops to less than 25% either for those working in catering and tourism or employed seasonally or part-time. If you retire today, with no private pension, savings or other assets your income through the OAP is €230 per week, or €11,976 per annum.

Notwithstanding additional state supports such as medical cards, free travel and other fringe benefits, you probably couldn’t thrive on this. You definitely couldn’t afford to stay in a private nursing home. All statistics show the rapid increase in those living well beyond 85 years.

These statistical trends ignore the financial earthquake that has hit the pension sector over the past three years. The global credit crunch has caused massive wealth destruction within our €60bn pension funds. They are invested in equities (shares in publicly quoted listed companies), property and government gilts/bonds. All bar the latter have taken a hammering. At the lowest point this investment pool was reduced to €30bn.

On average pension fund values are reduced by 40%. Being a pension trustee is a nightmare with 90% of pension funds in deficit and 80% unable to meet the statutory obligations of their liabilities.

Bank of Ireland’s staff pension fund is in deficit to the tune of €1.5bn, which is greater than the total market value of the bank. AIB’s pension deficit exceeds €500m. Numerous semi-state companies such as Aer Lingus and Forfás have reported serious deficits. Waterford Crystal workers, who lost their jobs, found their pension fund went bust. Pension scheme rules state that the overriding priority is to pay existing pensioners before refunding existing workers their contributions. Schemes with generous defined benefits are no longer sustainable.

The Government’s plan fails to address the pending urgent crisis in existing occupational pension schemes. If a lot of these are not restructured as defined contribution schemes, they will have to be wound up within the next few years.

The Government has decided to increase the retirement age in three increments of one year each, so that everyone now younger than 49 will have to work until they are 68 years old. This is in line with international changes and is not completely outrageous. Catherine McGuinness, George Hook, Garret FitzGerald, Gay Byrne, Ronnie Delaney, Tom McGurk, Jim Bolger and Ken Whitaker are, or were, just as formidable in their 60s. Ronald Reagan and popes got elected when they hit 70. Just because you don’t have your original teeth, knees, hips or hair doesn’t mean you can’t hold your own. Every organisation needs a blend of experience along with exuberant energy.

The Government is introducing a mandatory supplementary pension scheme (ie, beyond PRSI) from 2014 for all workers over 22 years of age. It is to be based on 8% of salary costs – 4% to be paid by the employee and 2% each by the employer and the Government.

In order to fund the latter, tax relief on pension contributions will be reduced from 41% to 33% for higher earners. Pension lump sums of more than €200,000 may be taxed in future years by up to 20%. The state pension is guaranteed to be 35% of the national average wage. Future eligibility for this will be changed from a yearly average of 10 years’ PRSI contributions (260 weeks) up to 20 years’ total contributions (520 weeks).

The new mandatory scheme has attracted most controversy. Hard-pressed employers, especially in small businesses, believe the scheme should not be compulsory. While employees can opt out, employers cannot. Our labour costs are already uncompetitive. Many fear that generous company pension schemes will be phased out, replaced and ratcheted down to the statutory plan. In the short term, the reduction in tax relief, along with the poor returns on existing pension funds, may deter younger workers’ participation in voluntary schemes prior to 2014. Criticisms are unavoidable with any blueprint that seeks to address our pension shortfall. On balance, they are broadly worthy of support. The fundamental flaws with this framework are the glaring gaps that have not been addressed. Of the one million workers who have no private pension provision, a large cohort is comprised of the self-employed. No proposals have been advanced, mandatory or otherwise, for these future pensioners who have probably made least future provision. This lacuna must be addressed before 2014.

The next vacuum relates to the obligations of the pensions industry. What is the base-line minimum level of return that fund managers must be obliged to achieve? It is not unreasonable that people are at least entitled to their money back. If they were instead to lodge the money into a bank or credit union they would achieve this and more. We don’t need yet another quango.

THE existing Pensions Board and ombudsman should produce an immediate charter to govern all schemes. This would include maximum administration and other costs, minimum guaranteed level of returns and impositions to place funds in liquid stable investments for a five-year period prior to maturity. Many pensioners now at retirement age are having to defer encashment of their approved retirement funds in the hope that they will improve in the next few years.

An Bórd Snip estimates the future annual cost of public sector pensions is €7.7bn. No provision has been made for these liabilities as they are paid out of current income in each year’s budget. The current actuarial cost to provide for this now exceeds €100bn.

This minefield needs to be radically reformed. The proposed severance of the link with current pay grades for new employees does not go far enough. The raiding of the National Pension Reserve Fund by the Government to bail out the banks completely undermines the credibility of prudent, independent financial planning. Legislation needs to be enacted to separate pension funds from political expediency and control. The scale of our future pension time bomb requires an all-party approach in the Dáil. A clear long-term course and a firm, continuous determination to adhere to it is fundamental to the future needs of the present working generation over the next four decades.