Retirement: don’t let your present self screw your future self!

The Irish Association of Pension Funds (IAPF) recently commissioned a national survey, conducted by IReach, to explore the level of engagement in retirement planning in Ireland and to examine “whether people are being realistic as to their expectations for retirement age”. Their conclusion, and one that will come of little surprise to us, “people simply avoid thinking about retirement for much of their working lives”. In fact, the IAPF estimate that only 50% of people in Ireland are participating in a pension scheme to save for retirement.

As part of an industry tasked with helping people reach their retirement objectives, it is not an exaggeration to say that our biggest challenge still remains increasing participation levels. A lot of people face a very cold hard reality when they retire, inadequate pension provision to fund an enjoyable retirement. This is why, as a company, Invesco continue to put resources into education campaigns in order to generate more engagement. We have intentionally rid ourselves of industry jargon that only serves to feed apathy, a process that is ongoing, as we seek to better connect with members on the need to plan for retirement.

In my recent blog post Retirement Planning: Looking to the Future, I talked about how people must strike a balance between spending in the present and planning for the future. This dilemma between what we might call our present self and our future self is perhaps best summed up by comedic genius Jerry Seinfeld, in his “Night Guy” sketch. He laments the fact that he never gets enough sleep, because his “Night Guy” self always wants to stay up late, while his “Morning Guy” self has to deal with the feeling of being groggy and exhausted the next morning. “What about getting up after five hours sleep? Oh that’s morning guy’s problem, that’s not my problem, I am night guy, and I stay up as late as I want”. As Jerry hilariously concludes, “night guy always screws morning guy”.

But what about the state pension you say? Oh yes, the state pension backed by no assets (unfunded) and paid through the current tax take (leave aside the fact that this payment is only going to cover basic sustenance). In other words, the current workforce in Ireland funds the state pension for those pensioners who have reached retirement. That’s a burden maybe we can afford at present with a population that has an estimated five workers for ever pensioner. However, the inevitable tipping point awaits, with the ratio of workers to pensioners continuing to drop as the population ages, expected to fall to a ratio of 2:1 by 2050.

There is no doubt that the government must play a much bigger role in heading off this potential time bomb, as large groups of people face retirement with inadequate pension provision, and the issue of unfunded state pension liabilities can only get worse. Sadly, in recent years, the government has taken a step backwards in addressing this pension crisis and if anything, has only served to make the problem worse.

How better to motivate people to save more for retirement than apply a sneaky little pension levy on private pensions? Looking for bailout money for the banks, why not raid the €25 billion National Pension Reserve Fund? Forget the fact that its purpose was to prepare for the impending pension crisis as the population ages. Of course, then there is the elephant in the room, the egregious public service pensions (particularly at the high end)! Unfunded and to be paid by…you guessed it, the taxpayer trying to save through a private pension! We’ve moved forward in this country on marriage equality, but pension equality is still a pipe dream. Is it any wonder that people are so apathetic?

So what needs to be done? Well, the OECD has recommended that coverage in funded pensions needs to be increased and can be achieved through: “compulsion; soft-compulsion, automatic enrollment; and/or improving existing financial incentives”, arguing that a compulsive sign up is the “the least costly and most effective approach”.  These options need to be explored further. On past measures, the government has lost credibility and the inequality between private and public service pensions is not helping. Therefore, reform of the public pension system is required immediately.

As an industry, we must continue to push for reform at a public policy level. At a scheme level, we continue to work with trustees on education for members on the subject of pensions, removing unnecessary levels of complexity, and providing and utilising more useful communication tools that can drive engagement. The younger people start contributing the better, no matter how small the contribution is, as it becomes as much a habit as anything else. Companies also need to play their part; a matching contribution demonstrates to staff a company’s commitment to the future of their employees, encouraging member participation.

In conclusion, while pension reform might be a long time coming, effective communication at a member level still remains paramount in informing people of the retirement dilemma they face. Our job is to help people make sure that their present self does not screw their future self!