By 2020 pension landscape will look much different

The last five years have seen major shifts in defined benefit (DB) and defined contribution (DC) pensions, but further change is inevitable. At the same time, the State pension will need to adapt to a future in which one in five 30-somethings may live to be 100, and where there will ultimately be only two workers to support each of them in retirement.

Against this backdrop, how do we expect the Irish pensions landscape to look in 2020? In a recent report*, Mercer predicts the changing shape of the pensions provision. Our predictions aim to help all stakeholders to provide the best basis for pension savings over the next decade and beyond.

By 2020, second careers and working beyond retirement age will be more commonplace. It will become rare for individuals to move from “salary” to “pension” in one go. Rather, it will be increasingly common for workers to reduce their hours in their 60s and to “partially retire” so that their income comprises both salary and pension. The State and the EU will increasingly require employers to facilitate this.

Pension plans will be seen as whole of life vehicles, with all stakeholders understanding that a “through retirement” approach is critical to achieving the best plan outcomes. Pensioners’ financial needs will evolve from “active retirement” through “passive retirement” and, increasingly, into “frail retirement”, when long-term care needs may stretch dwindling savings.

Retirees will commonly set aside some of their pension pot to buy insurance against outliving their savings. Tailored outcomes will be the norm.

Although DC pensions will be simplified, workforce management will become more challenging. More employees will want to work beyond the State retirement age and employers, in addition to facilitating more flexible working options, will need to provide personal retirement planning programmes to help them navigate the mix of benefits and options available, long before they retire.

Government will simplify the current system so that there is only one form of DC retirement saving, with standardised benefit and tax rules.The Government will also have pushed ahead with auto-enrolment (ultimately moving to a mandatory system).

A relatively low minimum contribution rate will apply to employers who do not already make pension contributions on behalf of their employees and an escalating scale of contributions will be phased in for both employers and employees over the next decade.

DC members will typically choose between risk-rated investment portfolios rather than funds. Trustees will work with providers to create a range of risk-profiled choices that are easy to understand but have the sophistication to drive better outcomes for pension scheme members.

This simplified system together with a more intuitive approach to explaining investment choices will allow more members to become actively involved in their retirement saving.

Irish DB, or final salary, schemes may number around 500 in 2020, one-third fewer than in 2014, and it is unlikely that any will remain open to new joiners. Schemes will have implemented robust governance strategies to ensure benefits are sustainable in the long term. Many will have de-risked their investment portfolio significantly and their funding level will be well protected against shocks in investment returns.

Many DB schemes will also have implemented wider risk management strategies, such as hedging against longevity risk or transferring risk outside the scheme. Employers will want to ensure that scheme risks are fully understood and mitigated where possible and trustees will be aware that scheme sustainability is intrinsically linked to successful risk management. Increased choice in areas such as retirement age and benefits will result in additional engagement with members before and at retirement.

With fewer workers financing more retirees, the State pension may be lower in real terms and paid from a later date with more onerous qualifying criteria.

The government will consider linking the State retirement age and entitlement to the State pension to a population longevity index, which would increase the age at which the pension kicks in every few years in line with increasing life expectancy.

Employers will use new technologies to facilitate the accelerating transition from “DC for pensions” to “DC for all benefits”, with online benefit exchanges providing access to medical and other health insurances; death in service, disability and other risk insurances; and voluntary benefits and personal finance products.

In this environment, the onus will be on employers and trustees to promote higher levels of pension benefit adequacy; to offer employees access to higher quality pension and investment solutions, enhanced support, education and flexibility both before and at retirement age; and to enable those employees to make sound decisions that support their evolving retirement needs.

Employers, trustees and members who start planning now will be well placed to navigate confidently through this changing environment.

Tom Geraghty is chief executive of benefits consultants Mercer
* Charting the Course to 2020