How can we avoid becoming Grumpy Old Men?
The Government is sorting out our pensions... but will the scheme put a smile on faces?
Social welfare minister Regina Doherty is determined that fewer people will end up like the characters in Grumpy Old Men. Jack Lemmon and Walter Matthau played two retirees – one with serious financial troubles – who lead boring and lonely single lives and end up nearly killing each other.
A big part of their problem was lack of financial resources – a future facing the two-thirds of private sector workers who don’t have a pension.
This week Ms Doherty outlined the Government’s proposed solution to the problem – automatic autoenrolment in pensions for everyone (in three year’s time). Everyone aged between 23 and 60 earning more than €20k a year will be enrolled in a pension in their job under the proposal, which was approved by Cabinet on Wednesday.
If they don’t want to be in a pension, they can always opt out after six months. And the sweetener is that employers will have to make a contribution to match yours – and the Government will also contribute (probably).
As ever, you can’t keep everyone happy.
The minimum contribution for employers and employees will be just 1.5 per cent for three years.
This will increase by 1.5 percentage points every three years up to a maximum of 6 per cent at the beginning of year 10.
Some critics – trade unions and brokers – said that’s a bit of a slow burn if you’re in a hurry to build up your pension.
I punched the numbers into a pension calculator for someone on €50k a year aged 40.
A 1.5 per cent pension contribution – matched by your employer – wouldn’t get you a pension worth much more than €1,000 a year even over 38 years – and 3 per cent or 4.5 per cent won’t go much further.
Even at 6 per cent contributions, the maximum to be matched by your employer, your projected pension would be just over five grand a year – plus whatever state pension you qualify for. That’s a total income of €18k.
However, the Government contribution has yet to be decided and that could add a couple of thousand more – and you can always bump up your contributions if you want to build it up faster.
The real reason for the slow build up I imagine is to protect employers from a sudden hike in costs.
The key point here is that this is an optional bonus for workers. They can take it, leave it, or increase it.
But if they do take it, their employer – and hopefully the State to a lesser extent – must match their contributions up to the relevant level, which is a valuable benefit that didn’t exist before.
When you add on the bonus of tax relief, then you can get an awful lot of bang for your buck when you bump up your pension.
For a net outlay of €210, you could get €700 when contributions max out at 6 per cent. See the table (above right) as to how it would work.
There’s nothing new about this. Many employers already bump up their employees’ pensions, sometimes by as much as 15 per cent, never mind 6 per cent.
But those employers are often high-falutin’ finance firms or multinationals – the crème de la crème of employers. The new proposals will ensure that all employers have to row in, which will reduce the rampant pension inequality in this country. No doubt some employers will bitch about the extra costs with
Brexit on the horizon but matching a 1.5% payment in three years’ time isn’t that onerous. The Government has, if anything, erred on the side of caution here.
And that perk will only slightly make up for the fact that our pay has been lagging way behind economic growth for years.
It’s about time some of the benefits of the boom were redistributed into our pockets.
Regina Doherty headed off potential criticism that people will have to pay high charges. Charges are limited to half a percent a year, which is on the reasonable side. Brokers complained about this, claiming it won’t pay for decent advice, but they would wouldn’t they?
My beef with this week’s announcement is that we don’t know yet how much the Government is putting into our pockets – and how much it will take out elsewhere to make up for it. A key part of auto-enrolment in other countries is the contribution from the state. Ms Doherty is coy about exactly how much that will be – if anything.
But speculation has focused on a rate of €1 for every €3 invested by employees, which would be decent. Minister Doherty assured us that the mandatory pension scheme would not replace the non-meanstested State contributory pension, which she described this as the ‘bedrock’ of the system.
Alas she is in no position to make such guarantees on behalf of future finance ministers in ten, twenty or thirty years’ time. Her own party urged everyone to put their money in pensions for years – and then raided our pension pots to raise cash during the financial crisis.
However, that’s just conjecture. As things stand, it does make sense to sort out our pensions.
While it won’t totally defuse the ‘pensions timebomb’ the mandatory scheme is long overdue and should be a good day for workers.
And if the Government keeps up its end of the bargain and adds on a decent contribution, it could make us all a little less grumpy in our retirement.