Pensions crisis shows real value of a public sector job
INSURANCE and pensions giant Aviva put the frighteners on us all this week by spelling out the size of the pensions gap — namely, the amount of money those retiring between 2017 and 2057 need to save each year to achieve an adequate standard of living in retirement. Aviva estimates that the gap has increased in the last six years from €20bn to €27.8bn. The message seemed pretty clear. If you are going to retire in the coming 40 years you need to save an additional €1,000 per month. Who has that kind of money? There are those under 35, most of whom don’t have a pension plan. Many of them definitely don’t have that kind of savings capability and little inclination to think beyond the next Electric Picnic, never mind retirement.
There are those close to retirement who may well have seen their pension pots diminish, depending on the nature of their employer pension scheme. If they are in a defined scheme and nearly over the line, they should still do pretty well, unless it has gone completely wallop.
Then there are those in the middle. Some of them are still in negative equity on boom-era houses. They are up to their necks in child care bills, the USC, higher motor insurance premiums and rip-off bin charges.
They have seen defined benefit pension schemes enjoyed by predecessors in companies they work for shut down before they had a chance to benefit from them. So many of these schemes have now closed, they should be renamed “defined (for the time being) benefit” pension schemes.
But where is this money going to come from? Well, the report has its own definition of an adequate standard of living. It may actually be too aspirational and based on the expectations of a generation who did get to benefit from decent pension provision from employers.
In fact, the report barely mentions the role of employers. It even has examples of case studies with people who firmly believe we should pay for our own pension.
Not surprisingly, it doesn’t mention the part pension providers play and how a government commissioned study in 2012 found that pension charges can take 17.4pc of retirement savings.
There is also the contradiction of how since the crash consumer’s net savings have increased as debt is being repaid, but pension participation rates have declined. It is as if people are busy saving money but just not putting it into pensions.
Overall, there is a big day of reckoning coming and Aviva is right about that. Pensions are in deep crisis and it is being compounded by the fact that interest rates are so low at the moment.
Any pension fund buying up a slice of the 10-year bond issued by the NTMA this week is looking at a guaranteed yield of 0.33pc per year. You won’t build much of a pension on that.
Defined benefit schemes are either effectively gone or running up massive deficits. A study of 26 of the largest companies in Ireland, conducted last year by LCP Ireland, showed a combined deficit of €5.4bn in 2014. AIB’s was at €1bn and Bank of Ireland’s stood at €986m.
The grim reading of the Aviva report contrasts sharply with the extraordinarily privileged position that many in the public sector have in relation to pensions. The state should be the best employer, but should its pension provision come in so far above the private sector?
Politicians earn pensions that would cost millions to buy. A minister who serves for just one full Dail term can qualify for a pension that would cost several million euro for someone to buy as an annuity.
The state guarantee behind a defined benefit pension scheme is cast-iron, but it appears transient when given by a company. If a company goes bust, its pension commitments can be shattered.
None of these risks apply in the public sector. Public servants had to stomach a pension levy in the crash but the guarantee that underpins the ultimate value of defined benefit pension schemes is always there.
Take universities for example, which have suffered from underfunding in recent years in particular.
They may be victims of underfunding from the state but they have “overpensioned” in the past too.
UCD’s pension liabilities amount to €1.8bn. Trinity College’s are around €1.4bn.
We may have some blue chip companies in Ireland but when it comes to pensions, the real blue chips are held by the public sector.