Pensions
By Brian Kennedy, Pension Broad
Retirement provision will have a major impact on the future progress of the Irish economy and the scale of the issue has the potential to result in serious consequences for the country at a macro-economic level. Adequate retirement provision also has an enormous personal impact on individuals in terms of their future quality of life.
Ireland’s current pension policy is a partnership between State and private pension provision. The State pension is designed to avoid poverty and to provide replacement income for lower paid people in the workforce. Private pension provision is on a voluntary basis and at this time just over half the workforce has made some provision.
Ireland has a more favourable retirement position than most of our other EU neighbours but there is still a sizeable number of people who face retirement with no provision to replace their income other than the State pension. Secondly, many of those who have made pension provision are not putting aside enough to give them a good level of income in retirement. Favourable Irish demographics give Ireland a window of opportunity to ensure adequate retirement provision, but that window is likely to have closed in twenty years time.
Starting a Pension….it’s your employee’s responsibility!
Who will look after your employee’s when they retire?
The current State social welfare pension is €11,611.60 per year (or €223.30 per week) as of January 2008.
……will this be enough for them to live on?
87% of a Pensions Board Consumer Research survey said that the State social welfare pension would NOT meet their needs in retirement.
Where will your employee’s ADDITIONAL income come from when they retire?
A man retiring at 65 now can expect to live to 85 and a woman retiring at 65 can expect to live to 88!
It takes a long time to save for retirement and the earlier a person starts to contribute to a pension, the better.
For those who switch off at the first mention of pensions, it’s time to get informed.
The Facts
- Only 61.8 % of the adult Irish workforce over 30 years of age
- Only 58.3% of men in the Irish workforce
- Only 50.6% of women in the Irish workforce
- Less than 25% of those working in
- the agricultural industries including farming
- working seasonal & part-time
- working in the catering & tourism industries
…..have private pensions (Source: CSO Survey Dec 2006)
The Employer’s Perspective
Did You Know
- By law employers must provide employees with some form of access to a pension, whether you are in full-time, part-time, temporary, contract or casual employment.
- Employees are legally entitled to information about the employer’s pension scheme or PRSA, thanks to the Pensions Act.
- Employees can save for retirement even if not working through a PRSA.
Employers Play your Part - A good deal for YOUR Company
A good pension scheme has been long recognised as a very valuable asset for both the company and its employees.
There is a stronger commitment from employees to participate in pension schemes where the employer makes a contribution.
Your company benefits from having:
- a reputation and respect as a good employer
- a workforce that feels valued and important
- increased loyalty and commitment from staff
- an enhanced staff recruitment, reward and retention package
Employee’s Pension Options - What you may need to explain
Employee’s can increase their income in retirement by using:
- A company pension plan - set up by an employer for its employees,
- A personal pension, such as
- A Retirement Annuity Contract (RAC)
or
Obviously, these can be obtained from financial companies such as insurance companies, banks, building societies and financial advisors.
All of these options allow for tax relief on contributions, the tax free roll-up of investment and a tax-free lump sum at retirement. They are therefore a very efficient way of saving for retirement.
The right choice for each individual will depend on their personal circumstances.
So what are PRSAs?
They are an investment vehicle used for long-term retirement provision by employees, self-employed, homemakers, carers, job seekers etc. that take the form of an individual contract between the contributor and the selected Provider. The benefits are determined by the amount of contributions paid in by and on behalf of the contributor i.e. the employer and the investment return earned on the monies. There are two types of PRSAs - namely a Standard contract which has capped charges and a non-Standard contract which does not have capped charges, however, is likely to offer greater investment choice and associated higher risk/return opportunities.
These contracts are provided by 10 institutions made up of banks, insurance companies, building societies and individual investment business firms.
Advantages of PRSAs?
The principal advantage of PRSAs is that they are portable, flexible and extremely transparent in the amount of regular and timely information provided to the contributor. For example:
Portability
This allows an individual move from job to job throughout their career taking their pension rights in an easy and cost-efficient way as they are always the beneficial owner of the contract and its underlying value.
Flexibility
PRSAs permit flexible contribution patterns. Individuals may choose a product that allows once-off contributions as well as making affordable regular contributions. Within this pattern individuals may stop and restart contributions without penalty or charge.
Transparency
They are designed to inform the contributor who receives information at regular intervals throughout the term of the contract. Six monthly statements are issued that show the amount of contributions paid into the account together with an investment performance report that shows the value of the contract at the selected date. Annually the contributor is given a Statement of Reasonable Projection that shows the expected level of benefit should the contributor continue with the current payment pattern to the selected date of taking benefits. Importantly, this statement also shows the value of the benefit in present day terms which serves to highlight the need for continued
contributions so that future expectations will be met.
Products
The product is regulated from approval to the drawing of benefits in the interest of and protection for contributors and there are 25 Standard and 34 non-Standard products available for investment. An important feature of all products is that they must include a default investment strategy which is a low risk lifestyle investment strategy that does not require the individual to have knowledge or experience of investment markets as they
commence making provision for their future.
Standard products have a cap on charges which is 5% of contribution and/or 1% yearly of the accumulated value of the fund. While this restriction does not apply to non-Standard products, in practice, there is little difference in the charging structures of the products.
Employer obligations
It is obligatory on employers to provide access to employees to a Standard PRSA where they have no occupational pension scheme in place or they operate a scheme where there are certain restrictions on entry or benefits. There is no obligation on employers to contribute to an employee’s PRSA, however, the benefits to be gained by employer involvement with employees pension provision may be high, including employee satisfaction and increased productivity.
Interesting facts
- To-date over 130,000 PRSAs have now been taken out with a total asset value of €1.25 billion as at end of December 2007.
- The ratio between Standard and non-Standard contracts is 80:20 while the ration between male and female contributors is 63:37
- Almost 70% of contributors are aged between 25 - 44 years
- The total number of contributors equates to 8.6% of total number of members in occupational pension schemes.
- About 36% of contributors make contributions through payroll while 20% of contributors have an employer contribution.
Further Information
The Pensions Board which is a statutory body set up under the Pensions Act 1990, produces a wide range of very practical information booklets on all aspects of pensions. All of these booklets are available free of charge and can be ordered from the Boards’ Information Unit at info@pensionsboard.ie or Lo-Call - 1890 65 65 65 or can be viewed and downloaded from the Board’s website www.pensionsboard.ie
Brendan Kennedy is Chief Executive of The Pensions Board, a position he took over in December 2006. The Pensions Board is the Irish statutory body responsible for regulating pensions and providing pensions policy advice to the Minister for Social and Family Affairs. Brendan joined the Pensions Board in 2004 as Actuarial Adviser. In this role, he was involved in a wide range of Board activities, including regulatory issues and the preparation of the National Pensions Review and the report on Special Savings for Retirement.
He has spent almost his entire career in pensions. Before joining the Pensions Board, he held a variety of life insurance and consulting positions, including with Canada Life, Howard Johnson and Company, and Irish Life. Brendan is a Fellow of the Society of Actuaries in Ireland and of the Institute of Actuaries.
The Pensions Board
Web: www.pensionsboard.ie
Published in: HR & Recruitment Ireland, March 2008