Jill Kerby

THE PENSIONS FUNDING GAP IS GETTING WIDER

The dire financial legacy of the Celtic Tiger years for ordinary folk was greater than just lost jobs, negative equity mortgages and high levels of personal debt.

And while most Irish people are steadily reducing their debt mountains, the 2008 crash with surge in unemployment also had a devastating effect on the amount of deferred income being allocated to personal pension funds, according to the pension provider, Aviva. 

Our pensions gap – the difference between actual pension savings and retirement income expectations – has increased 38% since 2010. The same gap in the rest of Europe is just 6%.

According to Aviva’s latest Mind the Pensions Gap survey, the generation of Irish people who will retire between 2017 and 2057 are going to need to collectively save an additional €27.8 billion a year if they’re to enjoy a satisfactory retirement income to meet their perceived needs.

This means, on average, an additional €12,200 gross savings per annum or €1,017 gross per month. These figures take into account the payment of the State pension, but excludes tax relief on pension contributions.  About 47% of respondents believed they would need between half and 100% of their final salary for a comfortable retirement.

“This is the second largest savings gap per head of population in the eight EU countries included in the report,” stated Aviva. “The UK’s gap is the highest at €13,200 and Germany’s, at €11,600, ranks in third place.”

Given the existing level of personal debt, higher taxes, lower asset values and for younger workers, the high cost of rent and child-care costs, saving an extra €1,000 a month could be an insurmountable for many.

So do we need to lower our retirement expectations, or just be more creative about how we can match those expectations with financial reality?

First, this news about the financial pension gap widening isn’t as bad as the ‘average’ assumes.

As the Aviva survey shows, if you’re a 30 year old worker, your annual saving shortfall in 2016 is €5,100 gross (or €425 per month gross). It was just €2,500 gross in 2010 (€208.33 per month). (At 20 it is ‘just’ €4,400.)

At 40 the funding gap is currently €6,700 a year; at 50, €9,700 and at 60, the average Irish worker would need to put away €28,000 a year for five years to achieve 70% of their final salary level in retirement (including the current c€12k state pension.)

A younger worker, especially one with the decent employer to match their contributions could realistically fill the gap after tax relief is taken into account and even with only a steady 3% growth rate in their fund, could expect a satisfactory private/state pension income in 35-45 years time. But it would require them accepting that they still have to forego spending today in order to have the money to spend tomorrow – a very long tomorrow.

Essentially it means living within one’s means, and not on credit. Lifestyle adjustments, especially if the person aspires to home ownership, will be pretty drastic if they hope to have both a mortgaged home and a well-funded pension fund.  Even the latter might be interrupted if the worker also had to factor in years of costly child-care and education costs.

But will the government step in to bridge the gap between lifestyles that cannot include pension funding (due in part to their own policies) and a realistic retirement income for every retiree?

There is still no sign of it yet. Housing costs remain unaffordable for a large majority of young workers who have to pay higher spiralling rents or older workers who remain in negative equity or arrears.

There is still no universal pension scheme here – supported by Aviva – which would automatically enrol all workers and employers (public and private sector) who do not currently participate or operate an occupational pension.  Private sector workers continue to subsidise higher value, defined benefit pensions for public sector workers and politicians.

Nor is there any sign about how the government, as the third pension pillar, would help fund a universal pension scheme. There hasn’t been any government support for designating a portion of the hated Universal Social Charge to workers’ individual scheme funds.

Finally, there is no sign that the artificial manipulation of interest rates by Central Banks will end anytime soon, to allow fund managers a fighting chance to achieve real, balanced risk investment returns for pension fund members in the form of solid long term bond yields.

The reality today is that only a minority of well informed, prudent private sector workers who contribute sizeable amounts of deferred income into an extremely well run investment fund are going to enjoy a well endowed retirement in the future.

This is a crisis just as serious and just as great as the Irish health service or homelessness.  And it’s on its way sooner than you think.

(You can download a copy of Mind the Gap at www.mindthepensionsgap.ie )

Do you have a question for Jill?  Please email her directly at jill@jillkerby.ie or write c/o this newspaper.