Government faces tough task to avoid pensions time bomb

THE Government faces an uphill struggle to avoid a pensions time bomb, a top expert has warned.

Irish Association of Pension Funds chairman John Feely said thousands of those in defined contributions schemes are probably not saving enough. While it is impossible to be precise, Mr Feely said anecdotal evidence suggests that people typically in defined contribution schemes are not putting enough money into them.

To ensure an adequate retirement income someone under 30 needs to be putting away between 10-15% of annual salary if they want to have two-thirds of their basic salary on retirement. Someone over 40 who gets involved in pension cover would need to put up to 24% of their annual salary aside to make up the lost ground of earlier years, he said.

“That’s an awful lot of money and most people cannot afford to set that kind of lump sum aside given their other commitments,” he said.

But the problem is wider than that. Increasingly, individuals will have to fund their own retirement schemes as the market shifts from traditional defined benefit plans to defined contributions.

Early next year, Personal Retirement Savings Accounts will be introduced to catch the huge numbers of people in private sector jobs not on pensions. An estimated 60% of people in the private sector do not have pensions and only 50% of the total working population have pensions when the public sector is included.

About 85% of those in the public sector have pensions provided for them by the State.

Overall, Mr Feely said the situation at present is stable for pensions even if there is underfunding in some defined benefit plans. However, with individuals due to become more accountable for their own retirements, then they will have to persuaded to save.

That will be the real challenge because up to 60% of those working across the private sector do not have a private pension. Those in defined benefit schemes are well protected, even if some schemes have been undermined by the stock market crash. About 3,000 such plans exist. Expensive to run, this type of plan is out of favour and has declined by 7% in the past three years. That trend will continue.

In the years ahead, defined contribution pensions and PRSAs will become the norm. If the State is to deliver the kind of plans envisaged it will have to go on an advertising blitz to persuade the large numbers in the work place to buy into saving for their retirement. While PRSAs may look like the answer they may not tun out to be the solution in the long run if people refuse to take charge of their own retirement plans, he said.

“There will need to be a very strong focus on creating consumer awareness, given that it will increasingly fall on the individual to plan their own pensions,” said Mr Feely.

His warnings follow the announcement of a planned overhaul of the British pensions market by the Blair government. The pensions environment in Ireland and Britain are similar. Pensions Board chief executive Anne Maher said it would be looking closely at the tax reform advocated by the British government.