Pensions timebomb - Crisis looms due to funds free-fall
Excluding the public sector, almost half of all workers are in contribution schemes and they have seen the value of their funds fall over the past three years as equity markets plummeted. Last year, the average Irish pension fund fell by 19%.
The stark fact is thousands of people will be forced to exist on pensions worth less than half their original values unless contributions to schemes are dramatically increased.
Most people on Defined Contribution Plans are, as of this moment, faced with the worrying reality that their pension will be worth less than 50% of their pre-retirement pay.
The Society of Actuaries recommends that workers aged 30 on a salary of 30,000 should now be paying 10% of their salary into a pension rising for a 45-year-old worker on €50,000 to 30% to ensure they can retire on a pension equal to half their salary. At the moment, the average pension contribution is only 10%.
This situation is facing workers mainly in the private sector and the only way to make real financial provision for retirement is to supplement their pension fund with increased contributions.
Last month, Ark Life the life assurance and pensions provider owned by AIB Group warned that under-performance in the stock markets over the past three years has set the scene for a major pensions timebomb.
Defined Benefit Plans are not affected but all other personal pensions, including Defined Contributions, could be seriously undermined.
Another difficulty has been the growth in the number of people going into Defined Contribution Plans in the last 10 years or so.
A decade ago, such schemes represented less than 15% of the total occupational pension funds but now about 32% of pensions are Defined Contributions.
The Personal Retirement Savings Accounts which will be available in about a week's time is being promoted by the Government as a pension solution for those without any plan but could compound an already volatile situation.
Because they are Defined Contributions, industry sources believe they will drag the market down to a common denominator.
Even before their appearance, Personal Retirement Savings Accounts were criticised by Eddie Hobbs, the finance spokesman for the Consumers Association of Ireland, as being "doomed to failure".
At the moment, less than 50% of Irish workers have pension cover and there is a certain amount of scepticism about the Government's ability to sell schemes, because of their complex nature.
While they are a low-cost option and it will become obligatory for employers to make arrangements for employees who want to take them up, a greater awareness of the importance of having a pension plan will have to be created.
Given the huge number of workers without a plan, that in itself will be a considerable task.
However, no matter what the success rate in attempting to get people to start investing in schemes, it will not, ultimately, help to any great degree to defuse the pensions timebomb.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
