Sustainability major cause for concern in Irish pension system says Global study.
A major international comparative study calls the sustainability of the Irish state pension into serious question. The 2014 Melbourne Mercer Global Pension Index (MMGPI) measures 25 countries’ retirement systems against the headings of adequacy, sustainability and integrity. This is the first time Ireland has participated in the MMGPI.
Ireland’s overall ranking was 11th place. However, our score in terms of sustainability ranked Ireland 20th out of 25 countries. The reason for our low rating on sustainability is twofold: a concern about Ireland’s future ability to meet the cost of paying pensions compounded by the issue of future expected improvements in life expectancy.
By the end of this year, Ireland’s national debt is forecast to reach approximately €203bn (111% of GDP). This figure is dwarfed by the cost of hidden state pension liabilities which are estimated at €440bn by the Pensions Authority. Anticipated improvements in life expectancy mean that, by 2060, there are expected to be just two workers for every person in retirement compared with five workers per pensioner today. Providing pensions for this aging population from Ireland’s existing finances will be a major challenge. Combined, these factors point toward a future where many Irish people will increasingly face the prospect of poverty in retirement.
Peter Burke, DC Consultant, Mercer said “The MMGPI findings highlight that future generations cannot be sure of receiving a State pension in line with current levels. Now is the time to reform the pension system so as to reduce the risk of future pensioners facing poverty”.
He added “The recent abolition of the pension levy is very welcome. Now we need to work on simplifying the pension system. Doing so is critical for the successful introduction of an auto-enrolment system that will allow everyone to save for their future with confidence”.
Jerry Moriarity, CEO of the Irish Association of Pension Funds commented “We believe pensions exist to provide a reasonable income in retirement for all workers. This concept needs to be robustly supported and incentivised by the State, with existing complexities eliminated to ensure the system is fair for all and absolutely sustainable in the long-term.”
Mercer, the Irish Association of Pension Funds (IAPF), the Irish Association of Investment Managers, PublicPolicy.ie and the Irish Brokers Association recently facilitated Ireland’s inaugural 2014 participation in the MMGPI. Niall O’Callaghan, DC, Leader, Mercer said “Like many nations Ireland and our policy makers are faced with the competing needs of an ageing population and achieving an appropriate fiscal balance. Our hope is that the MMGPI will provide an opportunity for debate and discussion about how best to reform and develop our pension system”. He added “Individual’s need to be able to fully enjoy their retirement and to have financial security. The MMGPI provides an extremely valuable benchmark for what we need to do to create a ‘best in class’ system that meets the needs of all pensioners”.
The MMGPI gives Ireland an overall score of 62.2, which is middle of the pack with an opening grade of ‘C+’, it is clear that there is a need for improvement before our pension system can be considered among the best in Europe.
Denmark continued to hold onto the top position in 2014 with an overall score of 82.4. Denmark’s well-funded pension system with its good coverage, high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations are the primary reasons for its top spot.
The MMGPI found again there is no perfect system that can be applied universally around the world, but there are many common features that can be shared for better outcomes for individuals. The MMGPI now covers 25 countries and close to 60% of the world’s population. It has grown from 11 countries in 2009 and is the most comprehensive comparison of pension systems globally.
Professor Deborah Ralston, Executive Director of the Australian Centre for Financial Studies (ACFS) said the expansion of the Index reflects the fact most countries are grappling with the social and economic effects of ageing populations and global comparisons can lead to global lessons for government, industry and academia as they debate how best to provide for an ageing population.
“Although each country’s retirement income system reflects a unique history, there are some common themes as many countries face similar problems in the decades ahead and the Index aims to highlight the best solutions and share them globally,” said Professor Ralston.
“It’s pleasing to note average scores are increasing over time, suggesting pension reform around the world is having a positive effect. The average score for the 14 countries in 2010 was 61.7 compared to 64.3 for the same countries in 2014,” she said.
Good governance critical for success in changing world
Beyond the Index rankings, the 2014 MMGPI looked at the importance of trust and transparency in a retirement income system.
“The tides of accountability for ensuring financial security in retirement are shifting from State and employer responsibility to individuals in many countries. This trend will continue as life expectancy continues to increase and many governments reduce the per capita expenditure on their aged population. Increasing individual responsibility means communication to members has never been more important or come under more scrutiny from members, employers, regulators, consumer groups, politicians and the media,” commented Peter Burke.
“Ensuring transparency and the trust of individuals is becoming increasingly important. If you lose community trust in a pension system; you risk losing the effectiveness of the system.
Governments, regulators and financial industries have to ensure good governance frameworks and practices that promote regular, easy to understand communication, clear benefit projections, and access to comparative information in a cost-efficient manner.
The pension industry must develop efficient methods to be transparent in meaningful and relevant ways to all stakeholders. There is now no alternative,” he said.
How can Ireland’s retirement savings system improve?
The MMGPI identifies possible areas of reform for each country that would provide more adequate retirement benefits, increased sustainability, and greater trust in the pension system.
Suggested measures to improve Ireland’s system include:
• Increasing coverage of employees in occupational pension schemes thereby increasing the level of contributions and assets.
• Introducing a minimum level of mandatory contributions into a retirement savings fund.
• Providing greater protection of members' accrued benefits in the case of fraud, mismanagement or provider insolvency.
• Reducing government debt as a percentage of GDP.
Challenges common to many countries include the need to:
• Increase retirement age to reflect increasing life expectancy – Ireland has notably made steps towards this.
• Promote higher labour force participation at older ages.
• Encourage higher levels of private saving.
• Increase coverage of the private pension system with an element of compulsion or automatic enrolment.
• Reduce the leakage from the system prior to retirement.
• Improve the governance of private pension plans and require improved transparency.
The Index looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State Government.
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