Jill Kerby: Pension reform? Not the kind we really need

In good economic times, most people don’t get too bothered about what others are getting paid or the size of their pensions. But when the gap widens between those receiving huge salaries and pensions – like ex-bankers and politicians on €500,000 a year – and the taxpayer struggling to foot the bill, and hardship seems only to be happening to the payers and not the recipients, the status quo is replaced by a new reality, of anger and resentment.

In good economic times, most people don’t get too bothered about what others are getting paid or the size of their pensions. But when the gap widens between those receiving huge salaries and pensions – like ex-bankers and politicians on €500,000 a year – and the taxpayer struggling to foot the bill, and hardship seems only to be happening to the payers and not the recipients, the status quo is replaced by a new reality, of anger and resentment.

Of course these massive payments are wrong. The state is bankrupt.

The two worst banking culprits – Anglo and AIB – like the ESB, Irish Nationwide and Permanent TSB went bust. Their pension funds were and are hundreds of millions in deficit and without the state/taxpayer bailout would most likely have been wound up.

When other private sector companies go bust and their defined benefit pension funds (whether in deficit or not) are wound up, what money there is is used first to protect existing pensioners, then the workers’ and deferred workers’ pensions get to split the remainder (which might be nothing).

In the case of AIB and Anglo, their pension funds were financially rescued or supported (in the case of Anglo) by the taxpayer since 2008. (AIB’s deficit of over €740 million was cleared by a €1 billion once-off payment by the state so that they could offer an early retirement package.)

Their ex-bosses are being paid their massive pensions for life from these taxpayer-supported bailouts – €500,000 a year in the case of AIB’s Eugene Sheehy (a man only in his 50s). Even Sean Fitzpatrick’s wife is getting her share of her bankrupt husband’s huge bailed-out pension.

It’s exactly the same story for the politicians. Whatever about honouring the pensions of ordinary employees of the state who retired pre-2008, is it really morally correct in a bankrupt state to keep paying the vastly enhanced pensions of early retiring post-2008 politicians who participated in creating the policies that helped to collapse the state?

The entire pension system is deeply flawed. On a practical front, public service pension contributions, which even politicians make, are never invested.

Contributions are a very small part of the potential life-long benefit that will be paid out, especially for early retirees who may end up living 30-plus years on pension earnings. Some will earn more from their pensions every year than the workers who step into their old jobs. Many earn more from their pensions than they did in their jobs.

All state pension payments – including the state old-age pension – are paid not from the contributions made (via PRSI) but by direct, day-to-day taxation. They are Ponzi schemes that will end when the ratio of young workers to pensioners gets too low – probably when today’s young workers are ready to retire.

Private sector pensions have failed on many levels as well: for defined benefit pensions, recipients are living longer than the funds will last, the money invested is not performing well enough and bond rates are too low to provide a decent final income. Defined contribution pensions put all investment risk onto the saver alone, and costs are too high. The government is making things worse by taking 0.6% of the total value saved from every private pension saver’s fund. They say they are creating jobs with this money...

The pension picture is very bad for anyone who does not work for very strong, well-off companies that can maintain their occupational pension schemes or has not been saving/investing for their entire working life.

We need to wake up to the dangers. Start by checking out your own position and then seeking out and paying for good, independent, impartial advice. Ask yourself how you will live if some day your private or public sector pension is less than you expect it to be, or if the contributory old-age pension stops paying out €12,000 a year.

Meanwhile, do you have other savings? Could you keep working into your 70s? Do you have children who will support you some day?

If you’re a young person, start saving and investing now. Take advantage of available tax relief and tax incentives while they last, but don’t count on them. You have time and the magic of compound interest on your side – but only if you have the discipline to put at least 10% to 15% of your income away every year and can find good, solid, diversified assets to invest in from the moment you earn your first pay cheque.

A tough but wonderful way to have a good retirement is to become an entrepreneur and build yourself a company that pays you a good living … and ensure a good retirement.

There was a lot of talk (pre-2008) about introducing a universal pension scheme to Ireland. Everyone (except the public sector and politicians – its first flaw) would join, a minimum contribution would be made by workers and employers, and costs would be capped.

Unfortunately, minimum contributions tend to become the standard contributions and the risk is that everyone would end up with an inadequate pension.

There is no single silver bullet to solve the modern pension problem. Prudent saving and investing from an early age is the only way and it has to happen voluntarily (a hard sell in a welfare-dependent state). Pension reform, like tax reform, social welfare and health service reform, needs more than just tinkering with. It needs to start again.

Until then, seek out a good, knowledgeable adviser who can help explain your current position. Pay them a fair fee.

There isn’t going to be any positive outcome for our retirement woes from the current tiresome row about the size of Eugene Sheehy’s or Bertie Ahern’s and Brian Cowen’s pensions. Proper reform would not be in the self-interest of the politicians, bureaucrats or pension industry chiefs who have vast pensions to protect.

Do what you can in your self-interest. Pension provision is part of building your personal financial ark.

jill@jillkerby.ie