MoneyTimes - June 20, 2012

Posted by Jill Kerby on June 20 2012 @ 09:00





Do you work for a company that has a defined benefit pension scheme and are you a member of that scheme?


If you are, you may want to consider carefully what has just happened regarding these retirement schemes and how the latest announcement by the Pensions Board could affect your own retirement.


First, a defined benefit pension has traditionally meant that the worker/member of can expect to receive a retirement pension that represents a portion of their final salary and their years of service/membership.  Some schemes provide for 50% of final salary multiplied by service years; the most generous schemes offer two thirds final salary multiplied by years of service.


For example, if your final salary at age 65 is €50,000 and you have a full service record of 40 years (the maximum number the Revenue will allow for claiming tax relief on the money you and/or your employer contributes), then your defined benefit scheme will produce a retirement income for life of €25,000.  If you only worked 20 years for the company, your pension will be €12,500.


Some companies index this pension upward based on the consumer price index, so it increases slightly in value every year. Others do not.


If your employer offered a DB scheme that was the equivalent of two thirds final salary multiplied by the years you belonged to the scheme and you earned €50,000 at retirement and you had 40 years service, you could expect a final pension income of €33,333.


Civil and public service workers belong to the state defined benefit pension scheme which offers up to a 50% final salary retirement income and while this pension will include the contributory state pension that many private sector workers also receive in addition (but not always) to their private DB pension, up to now most state employees have retired before age 65 and with fewer years service.


The vast majority – now 80%+ - of Irish defined benefit pensions are in deficit (for several years). Poor stock market investment returns, poor investment strategies and artificially low interest rates have all contributed to the insolvency of schemes.


In addition, the cost of providing an annuity – by buying bonds on the open market – has gone up as the euro crisis has progressed, pushing schemes further into insolvency. 


In recent years, the Irish Pensions Board, which regulates and supervises private pensions, has told companies with DB schemes to come up with ways to get their schemes out of the red. 


The vast majority have been unable to do so, despite a number of moving deadlines.  Irish DB schemes have until 2023 to get the shortfall in their funds back on a sound footing and meeting all their obligations to their members, but the Pensions Board wants them to tell them how they will do this by December 31st. If they cannot, or their plan is not sustainable, they may have to wind-up their scheme and pay out whatever is left in their fund to their workers, which can then be turned into retirement incomes by those workers at (usually) age 65.


And that is the nub of the problem.  If a company, whose DB scheme is currently in deficit (that is, does not have sufficient money to meet all its pension income promises) and is wound up on the order of the Pensions Board, not all the members of the scheme will be treated equally.


Under current DB pension rules, existing pensioners, whose retirement income is paid directly from the fund (and not from an annuity that has already been purchased for them) get first dibs on whatever money there is in the fund. This could mean reduced benefits.


Then, if there is still money left over, the worker members of the scheme will have their share of the fund calculated - a transfer value – that can be used to create an income of some kind for them someday. It is likely to be much less than what they could have expected if the scheme was fully funded. 


The deferred pension members – those workers who left the company but understood they would get a reduced service pension at retirement – are at the bottom of the wind-up process.  If there is no money left after existing pensioners and worker members get their share, they could end up completely empty-handed, no matter how much they paid into the scheme.


If you suspect your defined benefit pension scheme is in deficit – and you may not know this since annual statements to members only confirm what the scheme you can expect to get at retirement, not the current transfer value – then you should urgently speak to a pension trustee or your trade union representative.


If you are an existing pensioner, you need to know what will happen to your current income if the scheme is wound up. If you are a worker member, you want to know what the transfer value is for your share of the pension. If you are a deferred member, you also need an up-to-date transfer value.


Young workers especially should be prepared for a shock if your scheme is seriously insolvent and it is a candidate for winding-up. “They are as likely to get a pension at retirement as the Irish football team has to win the European Cup,” a pension expert and actuary told me last week. “They are providing a pension for people who retired many years ago, or in the next few years.” 

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MoneyTimes - June 13, 2012

Posted by Jill Kerby on June 13 2012 @ 09:00


As I write, the international news agency Reuters was reporting that the Spanish government would seek EU/IMF/EU assistance regarding its failing banking system. 


Both the Spanish government and EU immediately denied the rumour, but so did our government deny the rumours back in 2010 (and subsequently the Portuguese and Greek governments) before we were forced to joined the Troika club.


If Spain does become the fourth country to exit the global debt markets and seek a bailout due to their banking crisis, how would it affect us?


No one knows for certain, but if the Irish government is unable to borrow on the bond markets in 2014 when our bail-out programme ends, and Spain is now beholden to the Troika for multi-billion loans, we will have to compete with them for what is left of the new €700 billion ESM super loan fund. (It is supposed to be open for business from 2013.)


Will there be any money left for us? From 2014 we will still have a c€20-25 billion budget shortfall to cover between what we raise in taxes and what we spend; Spain’s debt problem (and Italy’s) is sufficiently great already to suck up every penny of that new fund.


Anyway, talk about bailing out failing European banks and failing economies the size of Spain’s is just silly.  There isn’t enough ‘real’ money in Europe’s coffers to bail out Spain even if every EU citizen, and especially German citizens, were willing to do so. 


A more realistic approach should be to accept that this great debt-fuelled crisis is probably going to run its course and hope that you don’t get run over in its wake.


Last March 14th this column (look it up on www.jillkerby.ie) discussed the merits of concerning yourself less with the EU/ECB/IMF and instead starting a Family Union/ Family Central Bank/Family Monetary Fund that might provide a home made bail-out, lending and borrowing facility for you and your loved ones.


That ‘Build an Ark’ idea has rung a few bells with many of you and some of you tell me that the generations are beginning to talk to each other about the debt, borrowing and spending problems within their family.


They now accept that if taxes go any higher, state services get any thinner, jobs get scarcer and if the euro were to fail and was replaced by a exchange devalued Irish punt, their family, at least, would be better prepared for the consequences than the family down the road that hasn’t taken any action.


Last week, in his Daily Star column Eddie Hobbs (see www.eddiehobbs.com for his wider views on the EU crisis) offered some practical  advice to the Ark builders amongst you: 


“Do not exceed home regulator deposit guarantee levels for deposits regardless of bank credit rating. Buy some gold, at least equal to 10% of your Euros. Shift some cash out of Ireland and out of Euros. Expect an eventual tax surge on financial assets to finance debt write downs.“


You’ve read it here before, coming from other experienced financial advisors, but when I spoke to Eddie after reading this column he told me that he has never been so pessimistic about the inability of the eurocrats and politicians to stop the debt juggernaut that is now roaring down Europe’s interconnected financial highways.


Why not call a family conference – it’s always worth meeting with grandparents, and sisters and brothers and perhaps those young people in the family who may be out of work or thinking about immigration. 


Ask everyone what they think about doing a confidential ‘wealth, skills and resources’ audit.  Find out if there’s any interest in making a few preparations to review and safeguard everyone’s savings (and debt), education funds, healthcare, pensions, property resources. 


One reader has reported that her entire family is now helping in the ‘family allotment’ which is located at one of her sister’s homes and parents and children are now tending a big collective vegetable garden where they will also raise chickens for the family egg supply.


A good family advisor - a solicitor, accountant or financial advisor can offer advice and practical assistance if you think the ‘build an Ark’ idea has some merit and might work for their family.  If financial assistance is part of the Ark, it should be arranged by legal contract and perhaps within a trust arrangement. Savings that move to “safer” offshore destinations (‘safe’ being a moveable feast of a word these days) will need to be declared to the Revenue authorities.


Of course the financial Ark can come in many guises and can draw in family (and friends) who live further afield. 


Responding to my March 14th article, a reader wrote to tell me that his older brother, who is now an American citizen “and is very well-off, has agreed to look into legally sponsoring my two eldest who are just finishing college. If they can’t get work here, he will support them for up to three years, which I think is the requirement of the immigration authorities for family sponsored entry to the US.”


Hopefully, a family Ark will help prevent your young people from having to sail off on their own.  But it will need time to lay the groundwork, open the lines of communications, work out a strategy of everyone’s needs and concerns and overcome the natural reluctance that we all have to discuss private and intimate financial matters with others, even if they are your closest relations or friends.


Time might be running out, say the financial experts I speak to, though they all hope they’re wrong about that, and wrong about where they think the great debt crisis is going.



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Question of Money - June 10, 2012

Posted by Jill Kerby on June 10 2012 @ 09:00

No danger with bonds but beware a euro exit

CC writes from Dun Laoghaire: I have €70,000 in An Post savings bonds and €40,000 in prize bonds. In the event of the bank guarantee being "called in" (save us all!) would both amounts be honoured, or would these be viewed as belonging to one institution, in which case would there be a shortfall of €10,000?

All state savings products continue to be 100% guaranteed by the Irish State, so the €100,000 bank deposit guarantee that applies to banks, building societies, credit unions is not relevant to you.


That said, if Ireland defaulted on its debts and/or we were to leave the euro and revert to our own currency, I don’t believe it is unreasonable to expect that the State would honour its contract with its own people regarding the money that the people lent the State in exchange for these savings products.


However, if we did return to the punt as our currency, your savings and prize bonds would most likely no longer be denominated as 110,000 euro but as 110,000 new Irish punt and that the new punt would not remain at par with the euro for long. A devaluation would mean that the value of your savings products  would purchase far less goods and services than if they had remained denominated in euro.



Going Dutch

JG writes from Dublin: I recently queried RaboDirect about whether my deposit and investments with them would be considered Dutch euro in the event that Ireland reverted to the punt.


They replied that “This is an unlikely scenario” but “If this situation did arise it would depend on the legislation that would be adopted by the Irish Government to resolve the issue.” They added that they comply fully with Central Bank of Ireland codes of practice, “So if new legislation is passed by the Government to affect all banks operating in Ireland, RaboDirect could potentially fall within the remit of that legislation.” In other words, RaboDirect could come under Irish legislation and deposits could be devalued similar to any Irish Bank.


I would imagine the same would apply to other European Banks registered in Ireland. I do not think this is generally understood.


I have pointed out many times over the past two years that no one is entirely certain what the outcome would be to euro deposits in non-Irish (but Irish licensed) banks if Ireland left the euro and reverted to the Irish punt.


Neither those banks that operate within the eurozone – like the Dutch-owned RaboDirect, nor NIB, the Danish owned, but non-eurozone bank that operates here - have been able to give equivocal guarantees that all deposits would remain in euro.  You’ve now received a similar reply.


If you are concerned that the money you placed with RaboDirect with the idea that it would remain a euro deposit might revert to punts, you could try and arrange to open an account with them in Holland.  NIB customers can open savings accounts with their Danske sister bank, Northern Bank in Northern Ireland.


Do your homework before you shift your savings to another jurisdiction or into another currency other than the euro. You will need to satisfy money-laundering regulations and there may also be transaction costs and a potential tax liability. You must declare any offshore account to the Irish Revenue.



Offshore options

RK writes from Dublin: I recently retired. I have €100,000 lump sum savings and a €100,000 tracker mortgage. I am considering paying off €50,000 of the mortgage in the fear that if the euro collapses, which now seems increasingly possible, my debt could be doubled and my savings halved. Is this wise in your opinion? Experts differ in their views about what will happen with debt and with savings in the event of a collapse. What is your opinion? Is there any point in holding some euro in cash if the notes originated in Ireland?


I’m a big fan of paying off mortgage debt sooner than later. No matter how difficult your financial position may become, at least the roof over your head is your own (or in your case, most of the roof if you just pay off half of the remaining loan.)  Before you do anything, however, check with your lender to see if making a capital payment forfeits your right to keep the tracker for the duration of the loan.


Sorting out euro debt contracts will be a nightmare for any country that leaves the euro and you are correct to wonder if, assuming the worst does happen and we leave the euro and revert to the punt, your mortgage will remain a euro denominated liability.


One way to mitigate the risk is not to leave the remaining €50,000 in an Irish-based savings account after paying off half your loan. Moving it to a ‘safer’ eurozone country (where it would still be worth more than the devalued punt even if that country reverted to its own currency some day) means that you will not suffer as great a loss in the spending value of your original savings once you repatriate it back to Ireland.


This, of course, also assumes that whatever offshore bank you choose (and its guarantee scheme) survives the fall-out of any country leaving the euro or that currency controls are not introduced that might keep your offshore money marooned.  Meanwhile, absolutely no one knows whether your Irish euro in the ‘safer’ offshore bank (or Greek or Spanish euro) will be singled out for different treatment if these countries revert to their own currencies.


I don’t have much faith in the long-term survival of the euro but I don’t expect it to collapse in the next few weeks or months. I think the EU technocrats will try more desperate measures to save it before that happens.


That should give everyone some time to consider their options, to get some expert advice and then to do what they believe needs to be done to protect their financial interests and those of their families. (See comment).








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Question of Money - June 3, 2012

Posted by Jill Kerby on June 03 2012 @ 09:00

Safe havens give peace of mind over euro fears

AW writes from Dublin: I have an instalment savings and a deposit savings account at An Post that I use to pay for my son studying in Britain.  I am a single mum - working hard to keep my job and just about hanging on.  I was horrified to read your reply.  Please could you advise where would be the safest place for my meagre savings?


It certainly wasn’t my intention to horrify anyone but if Ireland were to stop using the euro or the eurozone broke up, reverting to individual national currencies again would almost certainly result in devaluation of euro savings in Irish financial institutions. 

The difficulty for everyone who has their ‘precious’ savings here in Ireland, or in Greece, Portugal and other weaker, peripheral eurozone countries is that no one knows for sure if the euro is going to survive or not, or exactly if a country may exit the eurozone club.

Only you can decide the amount of risk you are willing to take with your money in An Post, which is under state guarantee. However, it is possible to open a euro deposit account in another eurozone country.  Germany is considered the strongest one of all, and if the eurozone were to break up, the new deutschmark is still likely to be the strongest new currency.  With your son going to college in the UK you could also move your money to Northern Ireland or the British mainland and not have to worry any more (after the initial currency exchange transaction) about the up and down movement between the euro and sterling.

Moving your savings to any new institution, and especially if you are a non-resident depositor is subject to their terms and conditions and to money laundering regulations. You could end up sacrificing a higher deposit return. Also, you are obliged to declare any foreign account on an annual tax return here and to pay Irish deposit interest retention tax on any return you earn.



Silver lining


TF writes from Navan: I wonder what is your opinion about investing in silver. Are there any silver dealers in Dublin? And how can one be sure if the silver is genuine?


Silver is both an industrial and precious metal. Like gold, it has a very long history as money, as well as having widespread use in jewellery and fine tableware production.  It also has many industrial uses and this is why its price tends to be more volatile than the price of gold.

The euro price of silver has fallen by over -14% in the past year, a reflection of the slowing demand for the white metal, whereas the euro price of gold – while also volatile - is nevertheless up over +16% in the past year. Gold, unlike silver is seen as more of a hedge against the growing uncertainty about the strength and sustainability of the euro, dollar and pound. All three are being intentionally debased and devalued by central bankers in order to prop up failing financial institutions and repay their country’s enormous debts.

Do your research carefully before buying silver and gold. Check www.goldprice.org for live and historic prices of an ounce of silver (and gold) in various currencies. Compared to its brief, all time euro price high of €32.71 on April 22, 2011, silver, at €22.62 as I write (28/05/12), a fall of 33%, looks like a bargain.  But if the global economy keeps slowing it could keep falling in price, perhaps even returning to the c€10 an ounce it cost five years ago.

Neither silver nor gold are the bargains they were at the peak of the paper money credit boom. It takes an extra €13.09 or 136% more euros to buy an ounce of silver now than it did in 2007 and an extra €764, or nearly 157% more euro to buy an ounce of gold.

The goldprice.org price charts tell us absolutely nothing new about the precious metals themselves, whose intrinsic nature never changes. They are what they are. But they do show how many extra paper euro, dollars or pounds that it now takes to buy an ounce of these rare and precious metals.

Finally, only buy silver and gold from reputable bullion or coin dealers. Goldcore.com are well known bullion dealers in Ireland and are the European franchise-holders for the Perth Mint Certificate programme of Western Australia. I purchased gold and silver certificates from them in 2006.




Crash Course


MMcI writes from Dublin: I read with interest your recent article with on dividing assets across banks. I have a large amount on deposit in one bank following the sale of a house in 2004. I naively thought the deposit was covered by the ELG. I have been renting since, so I am terrified now that if the event of a crash I could lose "my house"!  I am arranging to move funds now but would welcome your advice on moving over €100,000 to Rabobank. I am desperately trying to figure out the credit ratings schemes but these do appear to have the highest at present. Also, what about moving some money to KBC Luxembourg, Deutsche Bank and/or DZ bank.


The Eligible Liabilities Guarantee Scheme covers specific short and long-term eligible bank liabilities, including on-demand and five year term deposits, but you need to check to make sure that your deposit and your Irish bank qualify to participate in the scheme before you commit your funds. Under the current scheme, which lasts until end December 2012, a three year deposit made on June 1, 2012, for example, will be extended to June 1, 2015.


RaboDirect bank is not one of the ELG participating banks listed here: http://finance.gov.ie/viewdoc.asp?DocID=7049&CatID=78&StartDate=1+January+2012 . However, all deposits up to €100,000 in RaboDirect are covered by the Dutch deposit guarantee scheme.  Luxembourg and German banks also offer a €100,000 deposit guarantee.


European banks are being regularly downgraded by the main credit agencies.

Rabobank’s long term rating, which was AAA up until last year, is now an AA from Standard & Poor’s and Fitches and Aaa by Moody’s. Deutsche Bank’s long term rating from the three agencies is now A+, A+ and Aa3. KBC, a Dutch bank is rated A-, A- and A1 from S&P and Fitches while KBC Bank Ireland only has a Baa3 and BBB-rating from Moody’s and S&P.


In the event that Ireland were to go off the euro, having some of your savings on deposit in the ‘strong’ core eurozone members like Germany, Austria, Holland and Luxembourg would shelter you from the inevitable devaluation of any new Irish currency.





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