Jill Kerby

ARE WE CLOSER TO A GREEK DEFAULT? OR MORE ‘MUDDLING” ALONG?

ARE WE CLOSER TO A GREEK DEFAULT? OR MORE ‘MUDDLING” ALONG?

Is Greece going to default on its next debt repayments to the ECB, the IMF and its EU state lenders, including Ireland?  Their next IMF payements are in May and June and then there are big ECB payments as well – over €4 billion in total.

It took some doing for the Greek government to meet the April 9th deadline to pay the IMF the €450 million it was owed. It had to postpone paying its own bills to Greek companies with whom it does business and “redirected” EU farm payments from the expectant farmers, to its own coffers.

Since then all Greek institutions with any cash on hand (like local authorities, or the social security fund that pays pensioners) are being told to turn those euro over to the Greek central bank…er, for safekeeping. (That’s akin to leaving your dog with the taxidermist when you go on holidays. Yes, you’ll get the dog back…)

If Greece does default on its troika repayments what happens to the euro? Will a Greek default cause other countries… gulp, like Ireland, to have to pay more for the billions we still borrow from the international, open “debt” markets, now that we no longer depend exclusively on troika loans?

And if the worst does happen, will the European Central Bank, as the Eurozone’s own bank of last resort, again promise “to do what it takes” to reassure international lenders that there will be no future defaults?

It is already, of course, printing €60 billion a month until the end of next year in order to prop up the floundering EU-wide economy and keep borrowing rates as low as they have ever been.

Frankly, the most important question to me (and perhaps to you) is what would happen to my euro savings, my investments, pension, job, etc…if Greece defaults.

I wish I had that definitive answer, because I would certainly share it with you.

Instead, I can only offer a relatively educated guess:  that either the troika will blink and write down a huge part of Greece’s debt by printing yet more euro…and/or Greece will default anyway.

I write this because the troika endorses the modern ‘too big to fail’ school of economics which means that no country (other than Greece, maybe) is ever allowed to leave the euro. However, I also suspect that the game of brinkmanship that the Greeks and EU have been playing since 2011 appears to have come to an end: the Greeks have emptied their piggy banks and found all the spare euros hidden down back of their collective sofas. They still don’t generate enough productive earnings or collect enough tax to pay their domestic or international bills.

The kindest thing an increasing number of commentators are suggesting is to encourage the Greeks to leave the eurozone and then negotiate fair, honest and generous bankruptcy terms – a massive debt write off. They can then try to slowly but steadily rebuild their economy from a clean slate with the help of lots of inward investment and trade.

Writing off a large chunk of Greece’s c€330 billion debt would leave the troika, which now accounts for most of these loans, with a big hole of their own and it would certainly impact on their future ‘rescue’ terms for the rest of us.

Interest rates might rise. The euro might fall further in value against other currencies. Already it is down 25% against the US dollar and c15% against Sterling, making travel to the UK and US. Imports are more expensive too though exporters (our current job creators) are happy enough.

So what can you do to protect your savings, wealth, pension against a Grexit?

First, don’t under any circumstances leave more than €100,000 in any single Irish or eurozone bank. Only that amount is guaranteed in the event of any domino-effect if Greek banks fail.

Next, bond yields:  they could end up going up if borrowing costs to EU countries (especially the weak, indebted ones) rise. Interest rates on retail borrowings could follow. This would be very bad for debtors, so you might want to try and avoid taking on any extra debt or reduce the debt you have.

High bond yields (interest) will push down bond prices, something pension fund managers might welcome since bonds underpin a lot of pooled pension funds we save in and are used to produce retirement incomes. However, falling bond prices will cause losses if existing bonds are traded/sold before maturity.

Confused?  This is macro-economics in full flight, so I’ll repeat for the 1,000th time – if you haven’t had a ‘wealth’ check, arrange one with a trusted, experienced, fee-based adviser.

You need to weigh up risk, your attitude to risk. Depending on your age, income, dependents, you also need to try and balance those risks with diversified assets – cash savings, shares, property, bonds and maybe a little gold (for insurance) – and as little debt as possible.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

FAIR DEAL FOR NOW…A NEW DEAL NEEDED FOR TOMORROW

Much of the financial worry of funding nursing home care for the elderly has been alleviated in recent years.

When my late mother-in-law needed such care back in 2002, Fair Deal, or the Nursing Home Support Scheme, did not exist. The c€57,000 annual cost of her care and expenses was funded by her bank widow’s pension and her assets – mainly the proceeds of her family home.

When she passed away, five years later, age 85, the bulk of her estate had been exhausted. After all the bills were paid, her sons and grandchildren shared what remained. For the adults, the relief was palpable that the money had not run out: family discussions had already begun on whether or not she could have remained in that particular, excellent facility if she could not longer afford to pay the home. Would our pooled resources been enough to keep paying the huge bill, even with top rate tax relief?

Under the current Fair Deal universal scheme, introduced in 2009, once the person has been assessed by the HSE and meet the criteria for residential care, any nursing home place in a public or private facility can be selected (subject to availability).

Under Fair Deal the successful applicant must contribute 80% of their income and 7.5% of the value of their qualifying assets the annual nursing home cost. The first €36,000 for a single person and €72,000 for a married couple is exempted. The asset contribution is capped at three years and if there is an income/asset shortfall, the state pays the balance of the annual bill. Assets that are not liquid, like property or land can be deferred and paid from the person’s estate after their death.

Here’s a typical Fair Deal example: An elderly lady, age 81 with income of €16,000 (state pension and deposit interest), a small house and deposit account, together worth €250,000. The weekly nursing home bill is €1,000, or €52,000 a year.

She will pay €246 out of her weekly income of €308 (€12,800 a year). She will also pay €16,050 a year from her assets (worth €214,000 after the €36,000 exemption is included) capped at three years. (Total -  €48,150).

If she lives three years her total nursing home bill will be €86,526 or c55% of the cost. The state’s contribution will be €69,474 or 45% of the total €156,000.

Her estate will still be worth €163,474:  €250k - €86,526 = €163,474. (For simplicity sake, let’s assume all values have remained the same for three years, including the nursing home charges, but in reality both they and the value of her property/savings will probably go up.)

If this lady lives six, not three years (typical residence is 3-4 years) her income contribution doubles to €25,600 but her asset contribution stays capped at three years. The total bill, however, has doubled to €312,000 and the State’s share is now 60% (€187k) and the lady’s’ is 40% (€125k).

Fair Deal’s budget will be in region of €1 billion this year. It has run out of money every year since 2009, usually by 3-4 months. Waiting times for residents/families – because no one pays entirely privately and assessments take time – also amount to three or four months

Is Fair Deal sustainable or even “fair” over the long term? 

No. The 2011 census reported there were 532,000 people in the state aged over 65; by 2026 that number rises to 860,000 and by 2046, to 1.45 million. About 4%-5% of the population will need nursing home care, or c38,000 in 11 years time and over 65,000 in 21 years.

A still unpublished review of Fair Deal (described as “the Achilles Heel” of the health service by the head of the HSE) is reported to recommend that the current asset contribution of 7.5% be raised to 10% per annum and for longer than just three years. Even the 80% cap on income is questioned.

Anyone who thinks they might have to avail of Fair Deal in the next few years should probably accept that it will require higher contributions. Inheritance expectations should be lowered.

Anyone nearing retirement – in their late 50s or 60s - should get their savings, pensions and assets reviewed and get a long term wealth preservation plan in place. Any state contribution to their long-term care is unlikely to resemble Fair Deal 2015.

Younger people may want to start lobbying for more creative savings, investment and inheritance options if society is to avoid inexorable funding crises when their generation is ready to retire or need long term care in 50 years time.

A combination of personal income/wealth and insured solutions, whether as a part of a Scandinavian-style social security scheme or an employer/private sector funded one is going to have to be considered, with everyone making a lifetime of probably compulsory ‘long term care’ insurance contributions.

It’s a discussion that we need to start right now.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

NO HEALTH INSURANCE? OVER 34? TIME IS RUNNING OUT

With just two weeks to go before the deadline for the introduction of Lifetime Community Rating, anyone who is 35 or over needs to decide soon whether it is in their long term interests to buy health insurance now, or accept a permanent cost ‘loading’.

After April 30th, if you are uninsured and over age 34, you will have to pay an additional 2% premium loading for every year you are over 34 for any health insurance you may purchase in the future.

Work the numbers yourself: a 38 year old who misses the deadline will pay an additional 8% (4 years x 2%) and a 50 year old will pay 32% more. If a health plan normally costs €1,000 their respective bills will be €1,080 and €1,320.

The health insurers, who have lost 300,000 customers since 2008, have been galvanised by the change to Community Rating, which up to now, let us all pay the some price for the same plan, regardless of our age or health. They are all now offering very low cost ‘entry’ plans for as little as €409 a year (with GloHealth). Low family rates are also available.

Many question whether they are worth it, even at this price.

The specialist healthcare broker, Dermot Goode of TotalHealthCare.ie partly agrees. The low cost plans do not cover all public hospitals; they require bills to be paid directly by the patient who must claim the amount back from the insurer and there are very limited outpatient benefits, including jumping the queue to see a consultant.  

“However, the low price membership (by April 30) does avoid the risk of lifetime loading, and the €75 a night public hospital charge (up to €750 for any 12 month period) that is payable by everyone except medical card holders.”

For higher benefits, says Goode, “you need to consider buying a more expensive, plan, usually costing at least €800 or €900 a year (€15.38-€17.31 per week). Not only will you access consultants and treatment faster, but in private as well as public hospitals.”

For under 34’s, in particular, these entry level policies are ‘good’ value in that this age group make very few claims regardless of the cost of their insurance. But even they need to understand that all health insurance plans impose waiting times for new members.

If you are under age 55, you cannot make any claim in the first 26 weeks of membership except for an accident or injury. Claims for pre-existing conditions cannot be made for five years. If you are aged 55-59, or 60-64, those initial waiting times rise to 52 weeks and for pre-existing conditions 7 years and 10 years respectively. If you are 65 or over, and a new member, those waiting time rise are 52 weeks and 10 years, respectively.

All new health conditions will be treated and benefits paid once you complete your initial “joining” waiting period is completed.

But Dermot Goode warns that if you remain on one of the low cost entry plans after your initial waiting period is over – assuming you have no pre-existing condition - and you then develop a serious medical condition, your plan may not pay for quick access to a consultant or allow you to be treated in anything but a public hospital. Even if you were willing to upgrade to a more expensive plan, the pre-existing waiting time (at least 5 years) will apply all over again.

He suggests that older people joining before April 30th buy the best plan you can afford. Even if you are healthy now, medical issues arise more frequently from your mid-40s onwards.

A week before Easter my husband had a medical emergency – his first ever - that landed him in St James’s A & E. Hours later, still waiting and getting sicker from a virulent infection diagnosed by the out-of-hours GP that Saturday morning, at 3.30pm I contacted the emergency A&E at the Blackrock Clinic. They told me bring him in ASAP (private hospital A&E’s keep ‘business’ hours only.)

Within 45 minutes two A&E nurses and the A&E consultant had seen him. Blood tests were ordered. An hour and a half later he was receiving a blast of intravenous antibiotics. He was sent home with more antibiotics but by Wednesday, he was still unwell and was admitted, treated and tested in a private en-suite room at the Blackrock until he was well enough to go home on Easter Monday.

The cost? €140 for A&E, €120 for the A&E blood test and a €200 excess payment for access to a ‘high tech’ hospital.

His Laya Healthcare policy costs less than €25 a week. It will pay €110 of the A&E costs. The €350 balance, not covered by Laya, qualifies for 20% tax relief. 

Our share of the final bill – which ran into many thousands - for seven days treatment and five nights in the finest private hospital in the country… will be €280. 

Buy health insurance.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

MONEY PRINTING COULD BE VERY BAD FOR YOUR RETIREMENT

The toughest ‘sell’ in the world of personal finance is …pensions.

The young never think they’ll be old some day and as they hanker after foreign travel, their first car and home and eventually children (and crèche fees), the funding of a pension that they can’t access for 40 years loses its appeal and urgency.

And unless the person joins an occupational pension scheme in which membership is automatic, there isn’t any legal compulsion to save, except for the state pension, of course, PRSI contributions being compulsory.

The ‘problem’ with pension membership and funding is universal in western economies. We are not alone in the shortfall of pension savings, even among the one million scheme members, made up of about 241,300 in defined benefit (final salary) schemes; 179,000 in defined contribution (DC) schemes, 338,000 public and civil servants in their DB schemes and the c250,000 self-employed and company directors in private pensions.

The start of European ‘quantitative easing’ just made pension provision more difficult.

I recently attended an investment conference hosted by the Irish Association of Pension Funds. Their members are employers who sponsor occupation schemes; the life assurance companies that manufacture plans, the fund manages of the salary contributions and the advisers and administrators of the company schemes. About €100 billion is under investment.

The conference was a real eye-opener, if only because the consensus of speakers and attendees appeared to be that the start of the €1.1 trillion worth of money printing that the European Central Bank began last month is going to make it even more difficult for employers, workers and their fund managers to produce decent returns to meet both contractual obligations to DB members and to achieve all pension members’ goals of a ‘reasonable’ retirement age and income.

Very simply, by printing €60 billion a month for the next 18 months, ostensibly to buy existing bonds from banks and to release capital that can be lent out to stimulate our stagnant economies, the ECB is going to drive the price of bonds higher (all that money chasing a finite number of goods), and push down the annual interest return (‘yield’) to those who invest in bonds – like pension funds.

Bear with me, dear readers:  Government and high grade corporate bonds that the ECB are now buying, are a form of debt.  Countries and companies issue bonds in order to raise money and over a typical 2, 10, 20 or 30 year period, agree to pay their lenders an annual return, or ‘yield’. The bigger the demand for their bonds, the less the country/company issuing them has to pay in the form of an annual yield. With the ECB as the guaranteed buyer over the next 18 months of €1.1 trillion worth of bonds the European banks already have on their books, the price of new bonds is going up and yields are falling.

Defined Benefit pension funds historically have loved bonds because of the certainty of the yield and the knowledge that they’ll get their capital back at the end of the 10, 20 or 30 years. It means they can plan better how to meet their promises to pay their retired workers a retirement income commensurate with their years of service and final salary.

But when central bankers embark on money printing on the scale the inevitable higher bond price and lower yields means it is increasingly difficult for companies to meet those service/salary promises, which is why so many more Irish DB pension schemes are now at risk of closure.

It also means that people who save in defined contribution pension schemes – where your final fund is only worth what you and the employer have invested and grown – cannot depend as much on safe bonds as a key investment asset and may have to take more risk by buying more stocks and shares, property and other hard assets, which have perversely benefitted from QE money, as their new owners, seek higher returns, pump up stock prices.

So what should you do if you are a member of a private company pension scheme or self-employed one?

First, fight the inertia.

At retirement, members of occupational schemes get their income for life mainly from the purchase of an annuity. Its value is dependent on the yield being paid by bonds. The steady fall of this yield (even before QE) means that retirement incomes are half what they were a decade ago.  This latest bout of QE is going to worsen this, the IAPF conference was told.

You need to find out not just what you portion of the company pension scheme is worth, but what your company plans to do with your pension contributions going forward. If you are a DB member, can the scheme survive? What extra risks might the trustees/fund managers have to take with your money?  How realistic is a retirement age of 65?

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.