This guest blog comes from our friends at LIA for Pensions Awareness Week 2023.
Kevin McConnell, Chief Executive, GEM Strategic
This is a summary of a full article that first appeared in the September 2023 issue of LIA’s The Advantage journal.
Ireland’s economy has been thriving over the past 5 years, driving net wealth to over €1 trillion in 2022. Reduced personal debt levels, increased asset values largely driven by the strength of the domestic housing market, and an unprecedented €160bn in retail cash deposits are reflective of that economic success. However, the shortfall in Irish pension coverage is now of critical challenge to the long-term stability of the economy.
The Pension Gap
Despite Ireland’s economic strength, the pension coverage falls vastly short of meeting the needs of our aging population. The country has only €120 billion in pension assets, equivalent to just 35% of our GDP, far below countries like Australia (130% of GDP), the Netherlands (210% of GDP), and Denmark (229% of GDP). To bridge the gap to an adequate system, Ireland needs to increase its pension assets from €120 billion to over €500 billion over the medium term.
Currently, only 35% of private sector workers are part of the pension scheme, leaving around one million workers with no private pension coverage. A hidden economic threat is likely to grow into a major political challenge.
Ireland’s relatively young population, with an average age of 38.5, does present an opportunity to address the pension gap. However, as the population ages, inadequate pensions could become a significant budgetary and societal challenge. Many retirees will face a dramatic drop in living standards, with the state “old age” pension at just €13,800 per year. Combined with falling home ownership in the economy, the “wealth cliff” faced in retirement is steepening.
Three Potential Solutions
To tackle the Irish pension challenge effectively, we need to explore three key solutions:
Ireland has accumulated a significant amount of cash in retail deposits, reaching approximately €160 billion. These funds could be channelled into long-term savings and pension investments, providing a much-needed boost to pension assets, with the benefit of superior long-term returns. Major tax benefits combined with a simplified transition from deposits to the safer end of the investment spectrum is now vital, with the rise in bond market yields.
In 2024, Ireland plans to introduce auto-enrolment, where employees earning over €20,000 will be automatically enrolled in pension schemes. However, the initial contribution rates of 1.5% from employers and employees, with a government subsidy of 0.5%, are too low and rising too slowly to address the pension problem effectively.
The cut-off age at 60 years is another issue. The vast proportion of the private sector working population will not retire at 60 and will need to continue to work and save for retirement in their 60s, and be supported by their employers and Government’s contribution during those crucial final years before retirement. An extension of the auto-enrolment cutoff is needed to build adequate retirement savings for this group.
Nearly 80% of people over the age of 40 in Ireland own their own home, but just a third of adults under the age of 40 are homeowners. This decline in homeownership levels poses a significant challenge, not just for those who end up renting into retirement, but for the future generations who will not benefit from any substantial inheritance.
Renting into retirement leads to major financial struggles, particularly as rents levels rise with faster than inflation. The Help to Buy and First Home Schemes have improved housing affordability, but the lack of new housing threatens to cost a generation of people the opportunity of home ownership.
Ultimately, Ireland faces the threat that the vast increase in rental costs in future retirement cancels out any gains made from auto-enrolment for the Irish wealth picture. We must double housing completion levels in the economy in the short term to have any chance of offsetting this impact.
The Irish pension challenge is a complex issue that requires immediate attention. As Ireland’s population ages, securing a comfortable retirement for all will become a major challenge. Unlocking deposits, improving the auto-enrolment system from launch, and addressing the critical housing shortage are crucial and vital steps.
Ireland can look forward to a brighter and more secure financial future for its people, converting economic growth to real wealth, but a radical change in pension strategy is needed to close the growing gap between a vastly undersized pension pot and needs of the population.
What is Pensions Awareness Week?
Pensions Awareness Week (PAW) is an initiative to raise awareness about the importance of pensions for all people in Ireland.
Many of us feel that we should be doing more to get to grips with our pension plans. Pensions Awareness Week is where that conversation starts. It’s the only place where pension savers, pension experts, businesses and financial wellbeing organisations get together to offer help. Join the conversation by registering today!