For years now, the Irish pension industry has been actively encouraging Government to take firm action against the ‘low levels’ at which Irish people have been saving for retirement. The ESRI is also a regular contributor to the debate.
By many calculations, roughly half of the population have no pension investments other than what they expect to receive from their contributory pension entitlements; this is about to change.
Government has now earmarked 2022 as the year where it plans to introduce ‘auto enrollment’. For those not familiar with the term, this is where a deduction is automatically taken from gross wages and invested on behalf of workers. The concept is simple; people need to be protected from themselves and their lack of pension planning so Government will do the auto-enrollment and investing for them.
The logic to auto-enrollment, according to behavioral economists suggests that once enrolled, workers are highly unlikely to take action to exit ‘auto enrollment’ in significant numbers. In other words, people are simply too lazy and won’t be bothered walking over to their HR or payroll department to fill out a form instructing HT / payroll stop auto-enrollment.
While the intention of Government is good, it has an enormous duty to citizens to ensure it trims the full cost of managing such money along with the various investment strategies employed by investment managers.
In his 2018 letter to investors, Warren Buffet lauded ‘The Bet’ which he won hands down. That bet of course was the 2007 wager that a virtually cost-free investment in an unmanaged S&P 500 index fund would over time, deliver better results than most investment professionals.
What Mr. Buffett was saying is the cost of investing money can be so high that any potential returns can be destroyed to a point where the investor gains very little in the long term, other than perhaps the original tax benefit provided by Government.
Here in Ireland, there has been a long history of investment fees that are opaque and completely out of kilter with modern fees arrangements. Too many pension investment fees have resulted in way too many mediocre returns. Additionally, the level of opacity on how fees are charged means that only seasoned actuaries really understand the true cost of management to the individual investor.
This high-fee culture is a legacy of the Defined Pension era. Defined Pensions are also known as final salary pensions. Regardless of their name, this was an era where few people were really concerned with the cost charged by investment managers to manage pension funds. This was because funds were simply replenished by those that funded them, be it Aer Lingus, RTE, the Irish Independent or even, the State. As long as employees retired on two-thirds of final salary and the money flowed, nobody really asked too many questions about the nitty-gritty of day-to-day management; nobody really cared!
But as more and more people live longer swelling the ranks of the retired, Defined Benefit pension arrangement were exposed. Many ceased being offered to new employees, many converted to Defined Contribution arrangements, handing lump sums and investment headaches to confused employees. Some schemes simply went bust!
I find it so sad when I talk with confused individuals that work hard and are suddenly presented with having to make highly complex investment decisions that will have massive life consequences in their post-employment years. This is typically what happens when a DB pension scheme converts to a DC and the investment risk is transferred from the employer to the employee.
But what is most concerning of all are the poor choices many Irish people face when it comes to their pension investment options. Without the faintest hint, many are often presented with sub-standard investments choices carrying inflated management and investment fees; these destroy investment wealth.
Here in Ireland, while the official 5 & 1 arrangement is often the fee structure presented to those doing the right thing by setting up PRSA or AVC or participating in an Occupational Pension Scheme through their employer, this is not the full picture. The 5 & 1 refers to the allocation rate; maximum allowable is 5% of the invested amount and 1% Annual Management Charge.
But how investments are managed will impact workers enormously. For example, if the investment is made in some bog-standard series of low yield funds without annual rebalancing, then growth is sure to be anaemic and the only real growth will come from the tax-benefits given by Government and the individuals own contributions. This by definition is not investing, it is saving and the value of any potential investment yield is lost to the fees charged by the manager. In other words, it just becomes a zero-sum game purely for the benefit of the manager, not the investor. In a nutshell, this is the reality for many Irish people investing in various pension plans at present.
This is precisely what Government needs to avoid if it is committed to convincing more workers that it really has their long-term financial well-being at heart. It cannot explore the simple 5 & 1 figures. Instead, it should force a radical new approach to investing here in Ireland, one that goes much deeper, one that looks at a head-to-tail trail of fees that have plagued pension trustees for decades and one reason why low-cost leaders including Dimensional and Vanguard have captured such a significant percentage of market share in recent years; their low-fees, high growth strategies create more wealth for families and workers.
Frank Conway is a Qualified Financial Adviser and founder of MoneyWhizz.org, the financial literacy initiative.
By Frank Conway
Research shows that children as young as age seven form lifelong money habits. Financial education content and apps can help them develop good money habits that will return a lifetime of benefits.
Many Irish adults struggle when it comes to the essential aspects of money. Like how credit cards really work. Or the real cost of buying a home…or a car. And when it comes to choosing the right protection policies, many struggle to identify their financial needs correctly.
With the rise in contactless payments, more and more adults are increasingly disconnected from making day-to-day money decisions. Not only do they not shop for better value, some don’t know where to start.
We are often tempted to group people into the ‘saver’ and ‘spender’ camp but this is just the tip of the iceberg. In fact, to really understand money, there are six key pillars; earning and income, saving and spending, credit and debt, risk and protection, investing and growing money and finally, financial decision-making.
In this context, savers and spenders are just opposite sides of the same coin, they are just one sixth of the complexity of money and if this were just the focus of any financial education programme, it would miss by a long-shot.
Money habits from age seven
Experts at the UK’s Money Advice Service believe that children as young as age three form an awareness of the significance of money. However, by age seven, many children are already forming money habits that can last a lifetime. The research was carried out in collaboration with a leading UK university a number of years ago.
In light of the UK study, MoneyWhizz (www.moneywhizz.org) set about to identify how best to provide financial education that was both engaging and relevant.
This is European Money Week, a pan-European initiative to support parents, families and educators to promote better money skills through better financial education.
Financial education can really make a difference in the lives of all our citizens. This is a major part of the financial education programmes developed for a wide array of age groups.
For many Irish people, the increases in life expectancy, the abandonment of final salary pension schemes and a whole range of other factors means that more and more, families are having to burden greater financial responsibility. It is essential they are supported through financial education to be better prepared.
Taking the first steps
Talking Cents is a new financial education programme that has been growing a popularity among primary school teachers across Ireland. With over 25,000 children now running this commercial-free programme, teachers and kids can engage with relevant and engaging financial education material and supports.
One important lesson we have learned over the years is that parents and teachers usually do not have the financial knowledge to teach children good money habits. In fact, in some cases, especially those that support secondary school teachers, it is the teachers that are often saying how much they learned from financial education classes provided in-school to students.
In a recent financial education school survey conducted among primary school teachers, a majority want more financial education supports, not less. All viewed financial education as a critical life skill; all wanted more help and supports to help them in developing a robust and modern programme of financial education to promote better money habits.
What teachers have asked for is more material that provides the basis for helping kids to develop critical thinking skills when it comes to money. In other words, they don’t just want to one-directional teaching process, they want a two-directional money discussion programme.
One thing we know about adults is there are many financial personalities.
People are no longer grouped into the narrow bands of ‘savers’ or ‘spenders’. That was a simple definition of how some people handled money. Today, we know that while some people may be great savers, they may also be terrible investors. And unfortunately, to really make the best financial decisions, people will need to make investment decisions more and more if they want their savings, and pension to grow.
So, how can a parent or a teacher teach a seven-year-old about money? Well, you start with the basics and work out from there.
A key feature of Talking Cents is it has been developed to provide discussion time about money between parent / teacher and children about money. But since children age seven and age twelve are very different, the is specific content for younger and older children.
The material provides a series of stories and also, a range of activities that support the development of important skills, like patience and planning. One simple activity is to give children pocket money and a series of colour codes savings boxes for short-term, long-term and medium-term savings goals. This simple activity encourages kids to consider time and planning their savings and spending activities.
The art of conversation
At one Dublin school teachers wanted more content, more discussion material and more resources. At first, my concern was that since the school was located in what might be referred to as an economically ‘disadvantaged’ area, parents might shy away from their kids being taught better money skills but this was not the case at all. In fact, the reaction from teachers was that parents from all backgrounds are eager for their children to be supported in the development of good money skills as they view it as a critical life skill and not a statement of their present situation.
In developing the Talking Cents financial education programme, the first objective was to make the content highly relevant and very engaging. To achieve this, I developed a series of storylines that children could relate to and feel comfortable discussing. Additionally, a key feature of the programme was the development of age segmented content. This was critical as the language of money for an eight-year-old is very different to that of and eighteen-year-old.
The reaction from teachers across Ireland has been fantastic with over 350 school teachers and 25,000 primary school students now running Talking Cents financial education.
Foreign banks say no thanks to Irish savers and borrowers
With today’s announcement that RaboBank is about to exit its online savings offers, it means over the last few years, savers and borrowers in Ireland have experienced a major contraction in options to save…and borrow.
RaboBank had an estimated 90,000 savings accounts here in Ireland. The Dutch bank said that it will pay any future interest up front to customers as it speeds up withdrawal.
RaboBank is not alone.
Last year, Tesco exited the Irish credit card market. Up to that point, it had offered one of the best deals to customers.
Since the credit crunch almost a decade ago, non-Irish financial services have exited the Irish market in droves. It began with the exit of Bank of Scotland (Ireland). This was the bank that had heralded the tracker-boom when it undercut Irish lenders in the late 1990’s and early 2000’s with cut price mortgages that are todays financial albatross around the necks of Irish banks.
Following the BOSI exit came the departure of Danske Bank from day-to-day banking activities and the closure of it’s branch network across the country.
Nationwide UK (Ireland) dumped its 14,000 Irish customers to ‘concentrate’ on its UK business.
Leeds Building Society have become inactive in the savings landscape and while it officially has a continued presence in Ireland, it advises those visiting its website that things are under review and it is no longer accepting new savings business from new accounts.
Ireland is a small market
All of the exits underpin the major feature of the Irish market; it is miniscule. And with the rise in capital and compliance requirements across the EU, there is very little ‘easy’ business nowadays. In fact, having a non-domestic presence is expensive and risky and without a hefty profit margin or the promise of one, the rationale for remaining (or entering) is doubtful and probably will no longer pass a basic risk assessment.
Other banks that exited include Bank of America and the MBNA card it offered and PostBank which was at one point seen as a potential rival to the likes of Bank of Ireland and AIB. But is lifted anchor and sailed east when the economic waters around Ireland got choppy in 2010.
Which brings is back to the plight of savers and borrowers.
At present, they have become persona-non-grate at non-Irish banks. They are likely to remain so for a long time to come.