By Frank Conway
When Leo Varadkar, the Minister for Social Protection claimed that the State Pension was unsustainable, he wasn’t being a sensationalist, he was being a realist.
The State pension is unsustainable in its current form.
But then again, the State pension has probably been unsustainable for some time which is why the rules around qualifying for the maximum benefit have changed a lot in recent years. The earned credit threshold means that we must all work a lot longer before we are entitled to the full amount, which works out at about €12,000 annually.
So, what does Minister Varadkar say? Well, noting that new really!
But that’s not really the problem. It’s a well worn path of the pensions industry to cry about the low levels of pension participation. Why wouldn’t they, they have a real vested interest in increasing the money under management in pension plans. More money in occupational pension plans, in DB and DC schemes, in PRSA’s, in AVC’s, in SSAP’s, in BOBS, in ARFs and in AMRFs the more money the industry stands to make from fees and charges.
The real problem is not the lack of participation by half of the population. The real problem is the pensions industry itself. Broadly, it has failed them! It has failed them through high fees, through low returns and through complex language that make the entire pensions experience about as much fun as navigating the Wild Atlantic Way in a pair of oversized clown shoes.
That is the real problem!
A majority of people that I talk to are aware of their financial needs in retirement. Some have made private provision, many have not.
None exhibit a devil-may-care attitude to their long term financial security. Quite the opposite!
Many are struggling families that work hard, are taxed high and pay extraordinary sums of money for childcare, transport, health and life insurance and mortgages and rent.
All too often, there is very little money left over when all of the bills are paid.
Where State can make a difference
As the State authorities set about to ‘review’ how to tackle the lack of private pension participation and even develop some recommendations to increase them, they need to think carefully and be smart.
Minister Varadker could choose to box clever and put the cat among the pensions pigeons by:
- Tackling high fees.
- Simplifying pension language.
- Developing a comprehensive financial education framework.
For starters, the State authorities must tackle the culture of high administration fees that drain enormous sums of money from working families. These are fees that end up in the coffers of over-paid ‘advisers’ and overseas fund managers.
Using an actuarial calculator developed by Eugene Daly of Ablata.com, someone earning €50,000 a year and putting away 10% of their earnings into a pension (50% company match, factoring for economic and wage inflation between aged 30 – 65, 6% average annual growth), between €250,000 and €300,000 is siphoned off in high fees (that number is the difference between a 1.5% OCF and a 3.5% OCF). This is money that could have been held onto by individual savers and ultimately put to use in local communities up and down the country instead of being re-directed to overpaid fund managers in London and New York!
Were the State authorities to challenge this high-fee culture, it would make an enormous difference to the financial well being of millions of citizens. In fact, it is perhaps an area the state itself could take a central role in, bypassing the expensive private market route favoured by vested interests.
But the State shouldn’t stop there. Tackling fees would be central to the long term success of encouraging higher levels of participation but the state would also need to create greater appeal to the masses.
This could be done through financial education.
For starters, there should be a ban on the overuse of acronyms in the pensions space, there are too many. In fact, there are so many acronyms, even professionals working in the pension industry struggle to list them and explain them to prospective customers. Usually, customers just end up nodding their heads in faked agreement. This is no way to build trust. It’s little wonder so few people get involved in a pensions discussion in the first place.
Additionally, there needs to be a comprehensive programme of financial education launched that simplifies the whole area of money. It really isn’t that complicated. Most people have a fairly good intuition about money but many find the language of money off-putting. And any comprehensive programme of financial education must begin at primary school using simple concepts and analogies to explain some basic money principles. Such a strategy should be built on the pillars of financial knowledge which have been developed in the Irish market by MoneyWhizz. And, this financial education programme should be segmented and evolutionary to include content that increases in complexity and education to benefit children as they grow. And, the education process should not stop there. It must continue right throughout adult life.