Barry Prost, Co Founder & Managing Partner, Yala.ie
“When you consider that pensions are a major part of your finances, it’s surprising how few employers play this card at the recruitment stage. I believe it is a demand side issue – employers will contribute if they believe it will help them attract and retain talent. The perception by employers is that candidates are more interested in the top line salary figure than their pension, so employers inflate their salaries accordingly at the expense of pension contributions. The issue is around the value placed by Irish employees on their pensions. Given that there is full tax relief on pension contributions in Ireland, ranging from 15% to 40% depending on the persons age profile, candidates need to be made aware that a pension is a highly tax efficient way of investing your money. If this is successfully achieved, pensions will become a key part of a firm’s recruitment strategy.
According to a survey conducted in 2015 by the IAPF The Irish Association Of Pension Funds, the average total contribution is just over 10%. The survey looked at the projected pension income that this level of contribution was likely to generate for individuals. It showed that many workers in these pension schemes (even those with long service) may not achieve the comfortable retirement life they had planned unless they take more of an active role in their retirement planning and do everything they can to enhance those benefits.
Other points of concern raised by this survey include that:
- Over half 53% of Employers of smaller schemes contributed less than 5% which is wholly insufficient and people involved in these schemes should consider either increasing the level of contributions or look at other retirement funding options.
- Only 4.5% of larger schemes contribute more than 15% in total.
Looking at an individual’s projected pension from 65 years old as a % of final salary based on 11.1% contribution rate, it is quite revealing to think that in order to achieve just under a ¼ of your income at retirement age, you need to contribute over 11% of your salary from the age of 25!
What are the issues?
- Reputational: You hear horror stories about people losing their pensions in 2008 – do pensions have a bad reputation and what can be done to address this?
- Accessibility: Is it overly complicated to find out information about the benefits of setting up a pension?
- Too expensive: To realize a sufficiently large pension upon retirement simply costs too much for a lot of people. The fact that people can’t afford was cited as one of the main reasons that they didn’t have a pension, in a survey conducted by the Central Statistics Office in 2020.
Here are some questions and possible solutions to consider:
- Increase awareness. One of the other main reasons that people don’t have a pension, according to the CSO survey, is that they just didn’t get around to it. I think there needs to be publicity generated by the private sector, with events like pensionsawarenessweek.ie, and the government around the importance of pension planning.
- Policy: The Government is to introduce a system of pension auto-enrolment on a phased basis from 2022 which will compel employers to match employee contributions.
- Alternatives: What other retirement funding options are there? Can we set out alternatives to pensions for people to boost their retirement savings.
- Higher returns for younger people. Should people in their 20s be advised to accept higher levels of risk when it comes to their pension investment strategy and therefore realise higher returns? When you are older you are less likely to be in a position to take on the same level of risk.