The Two Ages

Jul 09, 2018

Sunday Business Post, 8 July 2018

Shakespeare maintained that there were seven ages of man, sweeping across from cradle to grave.  As in so many things, he may well have been right (even if he did exclude women from his reckoning) but a working life can be divided in many other ways.  There are the two ages to a working career; the age in which one is indifferent about retirement and the age when retirement, and how to pay for it, becomes all consuming. 

In my experience a fascination with retirement and pensions kicks in at the later career stages, by which time little extra can be done in terms of pension provision.  Even if you're not at that particular point in your career, don't look away now because promised changes coming down the line will affect people at every stage. 

At its simplest, a pension is about spreading earnings beyond the span of the working career to include the span of retirement.  It has three elements – a method for saving some income to be spent post retirement, a way of investing those savings, and finally a way of accessing the benefits from the pensions savings made during the working career when in retirement. 

Nothing could be simpler?

You would think nothing could be simpler, yet successive years of pensions policy has made providing for retirement mercilessly complicated.  Schemes which guarantee a pension income (defined benefit schemes) have different rules to those which do not (defined contribution schemes).  The pension system also succumbs to a pitfall of the tax system by being overly concerned with how people earn their money rather than how much they actually earn.  Hence the pension rules distinguish between the self-employed and employed people in the public sector and in the private sector.  On top of all that, there are distinctive rules for how money put aside for a pension is to be invested and taxed, and other special rules governing pension payments post retirement.

The pension funding situation is getting worse for reasons that cannot really be controlled by the worker.  The era of permanent and pensionable work – a job for life – is largely over for most people in the private sector.  I am somewhat wary of statistics and surveys in this area (they tend to be generated by recruitment agencies) but more official surveys such as those carried out by the US Bureau of Labour Statistics suggest that most workers will change jobs and careers multiple times.  That makes longer term pension planning more difficult and it can also mean that workers at retirement age will find themselves as beneficiaries of several small pension schemes rather than one large pension pot.

Also we are all living a better quality of life for longer.  That means that whatever the size of the pot of pensions savings at retirement, it is likely to be spread more thinly.  And lastly the traditional method of providing a private pension, which was to use the pension pot on retirement to buy an annual income known as an annuity, is no longer cost effective.  That has more to do with the state of capital markets than anything else. 

Consultations

The recently formed Irish Interdepartmental Pensions Reform and Taxation Group is currently carrying out a series of consultations, in part at least to see how the current convoluted system could be simplified.  Pensions simplification isn't just an aspiration for a tidy mind.  People are uncomfortable with complexity, and less willing to make savings and investment decisions under a regime which they don't fully understand.  Women can be at a particular disadvantage as they are more likely to have broken employment histories due to caring responsibilities.  The whole project is backed by a government “roadmap” for pensions reform.  We have seen such plans before, which largely have resulted in very little change.  While the current minority government can't deliver very much, it hopefully will set a reform agenda for future administrations to follow. 

One of the more interesting (though not entirely new) aspects of the roadmap for pensions reform is the notion of automatic enrolment.  Automatic enrolment involves signing people up to pensions contributions from the time they start their new job.  The rationale is that more people will remain in a contribution mechanism automatically set up for them (though they can opt out) than will go about setting up a pensions scheme for themselves.  This logic has been validated in New Zealand and in the UK, where auto-enrolment works as a useful policy tool for encouraging pension contributions. 

All to the good

While this is all to the good, we are still a long way from addressing the situation that only one in three private sector workers are making their own provision for retirement on top of the contributory state pension.  More people need to do so.  There is an undertaking in the pensions reform roadmap that the state pension will not fall below one third of the average industrial wage.  While that's good news, it needs to be seen in perspective.  The trade union supported calculation of the minimum living wage level by the Living Wage Technical Group has just been revised up to €468.82 per week.  The current maximum contributory old age pension is €243.30.  That’s quite a gap. 

The strongest signal from the current government’s pensions roadmap is that simplification and incentives for pensions savings are what are required now.  That is also to the good because there must not be threats to reduce the tax and investment rewards currently in place for those who are making the effort to fund their own retirements.  What would be the point of encouraging more people to save for pensions, while at the same time penalising those already doing so?  It would only add a third age to the working career – an age of complete confusion as to the right thing to do when preparing for retirement.
Dr Brian Keegan is Director of Tax and Public Policy at Chartered Accountants Ireland