People need to work longer and save more

Irish people will need to work longer and save more if they are to enjoy a reasonable standard of living in retirement, according to a new report.

Ireland has been among the most progressive states in increasing the pensionable age - which rises to 66 next year and up to 68 by 2028 - the OECD says in its review of the Irish pension system, published yesterday. But it warns that projected gains in life expectancy over the next four decades will outstrip those rising retirement ages.

"Thus financial sustainability [of State pension systems] is not guaranteed unless pension ages are increased beyond current plans in most OECD countries, including Ireland," the agency says.

As a result, it argues that the Government needs to encourage people to save for their own retirement "to make up for reductions in public benefits that are already in the pipeline or are likely to be required".

But it warns that introducing a mandatory scheme for the private sector while continuing to allow public servants to remain on final salary, or defined benefit (DB) schemes could present problems.

"This could be perceived as unfair by the general public, given that DB schemes are generally regarded as a better deal for members due to the pension promise the employer guarantees while under defined contribution (DC) schemes, which dominate in the private sector, risk is transferred to workers," the report states.

"The Government's credibility when launching the new [mandatory] scheme could also be compromised if its own employees are left out of what is agreed to be a new and efficient long-term pension set-up for Irish workers."

However, a bigger concern for the report's authors is that Ireland continues to fudge the necessary decisions.

Despite the reforms of recent years, the OECD says further structural reform is needed. In particular, it calls for a "definitive choice" to be made on the future structure of private pensions, even if it cannot be implemented for a number of years.

"Given the many years that pension reform has already been discussed in Ireland without some fundamental choices being made about the way ahead, the time is ripe now to take some fundamental decision on the future of Irish pensions."

The report also raises concerns about charges in the pensions sector, especially on individual Personal Retirement Savings Accounts (PRSAs) or small DC schemes, which is says are expensive by international standards.

However, it is less open to complaints about the minimum funding standard - the regulatory measure which determines that all defined benefit schemes should be able to meet their obligations if wound up today.

Despite the recent tightening of the rules, the OECD says these remain "undemanding" in comparison to other OECD countries.

If anything, it expresses concern at the recent decision to allow pension funds invest in sovereign annuities, which it says creates new risks for pensioners.

It is also wary of the suggestion that pension funds should be encouraged to invest in major domestic infrastructure projects in an effort to boost the economy, citing it as "symptomatic of growing encroachment of government objectives in the management of private pension assets".

While the role of pension funds in supporting domestic economic growth is valuable, the report concedes, "it should not be used as an excuse to impose low returns on pension fund members".

Main points

– Change existing State pension for a universal basic pension or a means-tested model

– Introduce mandatory pension savings for all but the very lowest paid to improve private pension cover and adequacy

– Move new entrants and younger existing public servants to any new mandatory regime introduced

– Withdrawals from pension funds should be allowed only in the event of “significant” financial hardship

– The economic position of pensioners in Ireland is good when compared to other age groups and the international experience

– Charges on smaller defined contributions schemes, and personal pensions, are high by international standards

– People should be encouraged to work longer

– Existing pension incentives are not aligned with policy goal of improving retirement savings for middle to low-income workers.

– The priority order for pension schemes being wound up is inequitable and discriminates against members still working

– Defined contribution schemes need to have better designed default and lifestyling investment strategies

– Employers in “healthy” companies should not be allowed to walk away from pension obligations by simply winding up schemes in deficit.