Could you survive 50 years post employment in financial comfort?
There is a €440 Billion hole in the Irish State pension purse.
In 2013, Time Magazine ran a story about how new science was driving up life expectancy. In fact, this story has been doing the rounds, not just in Time but in Government circles, in parliaments, across the health sector and beyond.
While much focus has been placed on housing, hospital waiting lists and the so-called fiscal space in the recent Irish general election campaign, surprisingly little has been discussed €440bn hole in the State pension purse.
For every citizen in the State, the black hole matters since it from there the State pension is paid out. Already the signs of how strained the system is appear in the form of rising age limits at which one can draw on their State pension entitlement (due to rise to 67 and 68 in stages in the coming years). There are even some calling for this to be raised to age 70.
But the State pension is a small sum of money and as many people could live far longer in retirement than ever before, it is unlikely to bridge a yawning gap between it and rising expenses. This is especially the case with very high end-of-live care and medical expenses.
Working on retirement is one option although this can impact the State non-contributory pension recipients over certain amounts. And even if successive Governments raise the amount pensioners receive, it is unlikely to be sufficient to cover costs. Governments are fighting an uphill battle; the ratio of workers to pensioners will rise to two-to-one in 2055 from about five-to-one today.
Private pension provision is a must
About 50 percent of employees have a private pension arrangement more must be done to encourage uptake and participation.
Education is a key ingredient in an overall strategy but that is just the start. But education alone is not enough, there MUST be widespread reform.
The idea of a Pensions Minister has been floated. But what a Pensions Minister would actually do is another matter. What a Pension Minister should not become is an enforcer for the pension industry. Instead, s/he should lead the charge on tearing down the opaque culture of the existing pension industry and make it fully transparent, especially when it comes to fees.
Among pension scheme trustees, there are massive knowledge gaps understanding fees and their impact. But this is not just an Irish problem. Recently, Dutch pension fund PGGM which has €186bn under management announced that it is to cease investing in outside money managers, including private-equity firms, that don’t fully disclose their fees. The fund is echoing similar concerns across the US where there is a realisation that managers are over-compensated.
Present costs are far too high.
Examining the total costs to the individual, using a fully inclusive pension calculator, I estimate that anywhere up to 60% of an individual’s fund growth would be taken by a manager. In real terms, this could equate to hundreds of thousands of euro over a 35 year period. It is this issue, the costs issue and the fees issue that any Pensions Minister would need to tackle before any automatic enrolment were enacted in law.
If reform of costs and fees does not happen before auto-enrollment, the pension industry will become a legally enshrined gravy-train that will serve nobody except a very select few.