No More Irish Pensions?

Dominic Coyle of the Irish Times reports, Warning retired Irish workers not guaranteed State pension:

Irish workers cannot be sure of receiving a State pension in retirement in future generations, according to a report published this morning.

The cost of existing hidden state pension liabilities are estimated by the Pensions Authority to be €440 billion – more than double the €203 billion national debt estimate for the end of this year, a figure that already amounts to 111 per cent of GDP and requires significant reduction under European budgetary rules.

That raises doubts about the sustainability of the State pension promise, the Irish Association of Pension Funds annual benefit conference will hear today.

A study of 25 state pension systems by the Australian Centre for Financial Studies and Mercer finds that Ireland’s State pension is among the best in the world in terms of adequacy. However, Ireland’s overall score is dragged down by doubts over its sustainability, where it is ranked just 20th of 25 countries.

It is the first time that Ireland has been included in the study.

Overall, Ireland is ranked 11th of the countries surveyed in the Melbourne Mercer Global Pension Index (MMGPI) with a “score” of 62.2.

This compares to the 82.4 awarded to Denmark, which is seen as having a well-funded system, giving good coverage, a high level of assets and contributions, adequate benefits and a parallel private pension system with developed regulation.

Australia and the Netherlands are seen as having the next best state pension provision.

Ireland scores well above Denmark on adequacy - second best overall behind Australia – but dramatically poorer for sustainability, a measure that assesses the likelihood that the system will be able to provide promised benefits into the future. It ranks 15th in terms of system integrity.

Ireland is seen as on a par with Germany’s state pension system and ahead of the United States, but behind Britain.

“The Melbourne Mercer findings highlight that future generations cannot be sure of receiving a State pension [in Ireland] in line with current levels,” said Peter Burke, DC consultant at mercer who presented the findings.

“Now is the time to reform the pension system so as to reduce the risk of future pensioners facing poverty,” he said, urging the introduction of an auto-enrolment system for current workers.

Alongside suggestions that Ireland might increase occupational pension scheme coverage and introduce a minimum level of private sector pension saving, the Melbourne Mercer study says working age adults in Ireland should enjoy greater protection for their pension savings in the event of company insolvency. It also proposes that companies should be restricted more tightly in the level of in-house assets held by occupational pension schemes.

The index attributed a 40 per cent weighting to adequacy, 35 per cent to sustainability and 25 per cent to issues around integrity.

You can read the Melbourne Mercer Global Pension Index 2014 report here. All previous reports are available here.

What are my thoughts? I take the annual Melbourne Mercer Global Pension Index report with a grain of salt and use the information as describing the symptoms of a deep systemic crisis that policymakers have largely ignored. The weighting of the index is somewhat biased and doesn't represent the real strengths and weaknesses of various pension systems.

More critically, the report offers little in terms of improving global pension systems. I have firm views on what developed economies need to do to significantly improve their pension system. First, they need to admit that defined-contribution (DC) plans are an abysmal failure that will exacerbate pension poverty. The brutal truth on DC plans is they're not pension plans, they're savings plans which leave individuals vulnerable to the vagaries of public markets, thus exposing them to pension poverty if they retire during a bear market.

Second, we need to move beyond public sector pension envy and realize the benefits of going Dutch on pensions. Importantly, the benefits of defined-benefit (DB) plans are grossly underestimated for the overall economy which is a shame because as more and more people retire due to the demographic shift, they will face a new retirement reality that will severely constrain their spending and add more pressure on public finances as social welfare costs skyrocket.

Are public pensions perfect? Of course not. We need to introduce reforms implementing logical changes that reflect the fact that people are living longer and we need to introduce risk-sharing so these plans are sustainable over many years. In the United States, they need to introduce major reforms to their governance so public pensions can operate at arms-length from state governments.

As far as Ireland is concerned, four years ago I wrote a comment on why the luck of the Irish is running out, lambasting their government for using pension money to shore up Irish banks. That's exactly the type of governance which will bleed public pension funds dry!

Finally, there are no guarantees in life. When I was 26 years old, I was visiting New York City with a buddy of mine when all of a sudden I got a weird feeling under my feet. I was diagnosed with Multiple Sclerosis and it hit me like a ton of bricks, forever changing my outlook and perspective on life.

When I hear civil servants at municipal, provincial and federal agencies in Canada talk about their "constitutional right to a pension," I remind them that what is going on in Greece can happen here. And if it does, the bond market will determine their pension benefits, not the constitution (if you don't believe me, ask Greek pensioners, civil servants and private sector workers).

A lot of people roll their eyes when I say this but they're living in Fantasyland if they think their pensions are guaranteed no matter what. I'm all for universal public pensions for every citizen but let's get the governance and risk-sharing right or else the math won't add up and these pensions will implode.

Below, David Knox of Mercer's Melbourne Office discusses the findings from their global survey on pensions and the lessons we can take from Australia. I'm highly skeptical of lessons from Down Under and think Canada has the potential to surpass Australia if we bolster our public plans for all Canadians (ie. enhance the CPP!!).