Jill Kerby

PENSION AUTO-ENROLMENT SHOULD NOT BE LONG-FINGERED

If there was a single piece of money advice you’d like to pass onto your children, grandchildren or just a young friend, what would it be?  To avoid debt? To earn your money before you spend it? To spend wisely by buying assets, not liabilities?

These are all terrific, timeless recommendations. But in this month of January, in this New Year of 2018, in this Ireland where the reality of our rapidly ageing population can no longer be dismissed (“we still have one of the youngest populations…”) there actually is a singular message that needs driving home: 

Start a pension today or end up working forever.

Every January, Irish Life, the country’s largest life assurance and pension provider gathers its chief department heads together holds a wide ranging media briefing for business journalists. I’ve been attending for more years than I care to admit.

The event is a PR opportunity – especially in ‘good’ years, as 2017 was for investment fund performance and growth – but it’s also an opportunity to raise some more warning flags about the state of the nation’s financial wealth and health, especially about pension coverage and contributions:

-       Private pension coverage has fallen to 47% in 2017 from 51% in 2009;

-       In the last five years the number of over 65’s has grown by 100,000 compared to just 44,000 people aged 15-65. In 20 years they will increase in number by 70% to make up over 20% of the population. This rate of increase is twice that of the EU average.

-       Four out of 5 working adults say they are not saving enough for retirement. Only 1 in 4 have a specific target income (and only one in three of them are over 45.)

-       The state pension is the number one source of income for 39% of women surveyed and 31% of men, but it only represents about a third of the average industrial wage.

-       84% of adults would welcome the introduction of an auto-enrollment private pension scheme with only 1 in 10 leaving it up to the government to choose the pension fund manager.

-       75% would like to have some emergency access to their money, especially, said 62% if some of the fund could be used to help with a deposit on a house.

-       Meanwhile, about 50% of those with a private pension are ‘confident’ they are ‘on track’ for a retirement income while, perversely, 1 out of 6 who have no pension ‘are confident’ they too ‘are on track’.

There are delusional people everywhere. Thinking you’ll have a comfortable retirement if you have no private pension confirms this, though some people do already (or will) own other assets that may provide income and capital at retirement or may even be certain of a substantial inheritance that may see them through their non-working years.

For most of us, retirement will have to be funded by deferred income in the form of voluntary tax-efficient pension contributions into an occupational or personal pension; market growth on those contributions (which hopefully include those of their employer); their obligatory PRSI contributions into the state pension system and hopefully, some other personal savings and assets accumulated over their working life.

Which is why Irish Life, which reported last week that their average customer’s contributory pension fund value is worth just c€120,000, fully supports the idea of the auto-enrolment system that would involve both workers and employers. 

Interesting, the survey found that the new pension may have to be called something else –the word ‘pension’ doesn’t inspire interest or enthusiasm, but they point to the successful introduction of unconventional auto-enrolment models in Australia (‘The Super’), New Zealand (‘Kiwi Saver’) and the UK (‘Nest’) as the models we too should be adopting here.

There’s never a good time to start a pension – there’s always a more pressing financial priority, like paying off student debt, putting together a down-payment for rented accommodation, let alone a first home. But every year that a young worker avoids paying into a pension scheme is another year of lost investment opportunity.

Pension funds work best when compound interest – the effect of time on money - is allowed to do its magic. Consistently contributing a percentage of your annual income into a well diversified, well-managed and lowest cost pension scheme, growing even at a relatively modest rate, but ideally from the moment you start working, means never having to worry about being able to retire.

Auto-enrolment can’t happen soon enough, though, being Ireland its roll-out will take longer than it should. The people surveyed by Irish Life in 2017 are overwhelmingly – 84% - in favour of it. The company claims that employer organisations they’ve met, are too.

 All that’s missing is the political will.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.