FREE KIC - NO. 10 JULY 06

HOW BIG IS THE PENSION TIMEBOMB?

We moved house three weeks ago and while the removal company were packing our things I got chatting with the owner. He asked me about my work and I mentioned that I gave pension and investment advice. His reaction was reasonably typical of a number of people I chat with. He said that he didn't have a pension and it was his intention to never have one. I responded with the usual defence of pensions by saying that there were great tax benefits for people to start one but before I could barely finish the sentence he started saying that he didn't trust the government to protect pensions in the future and therefore he was going to keep away from them completely. He didn't say how he was going to live in old age but he struck me as somebody that will keep working until he drops.
The conversation with the removal man was similar to one I had with Trevor Brennan the current Tolouse and former Leinster / Ireland / Barnhall rugby player. Again I was chatting to him about what I do and again I got the response that he didn't have a pension and hoped to use property to provide for his family when he retires. This property would be directly owned and not within a pension arrangement. Thumbs down for pensions again.
A slightly different slant on this theme was the reaction of my cousin a builder. Again we were talking about pensions and again I mentioned the tax benefits but this time I got a different response. I got the sort of response that suggested that he just hadn't taken the time to think about it. He was too busy with living life to think about a relatively complex area like pensions. I got the impression that he thought it was quite likely that he could be ripped off and /or lose money in volatile stock markets. Again however I believe that he intends to have a reasonably good standard of living in old age without being an enormous burden on the state.

When the Government say that they have a target of 70% pension coverage I wonder whether the three people mentioned above are the type of people that they hope to entice into pension arrangements? Are these the people that the government believe are part of the pension time bomb?
I can see in a broad sense why the government might be concerned. If a large proportion of our population end up in poverty in old age that would be seen as a failure from a social and economic perspective. If the government end up providing income support to keep people out of poverty in old age well that could put an enormous financial burden on the state. As I said I can see why the government is concerned but could it be that they have not fully understood the reality of the situation? Could it be that a large proportion of the people without pensions have no intention of living in poverty and will not end up as a pressure group demanding ever more resources from the state? I say this because I wonder how many of the people that do not have a pension intend to keep working beyond "normal" retirement age or who are saving for retirement outside of formal pension plans?
Maybe my view is tainted by having a grandfather that kept on working into his seventies and by an uncle who is currently working as hard as ever in his early seventies. Personally I am the type of person who wants to remain economically active for as long as possible. (I look at Warren Buffet as an inspiration to all investors. He is still investing in his seventies.) I think that I would like to do some part time work as long as I am physically and mentally able. Maybe the state should be encouraging people to remain active for as long as possible?

I have a friend whose father has just retired at the age of sixty after forty years as a civil servant. He has gone from full time employment to full time retirement. My friend says that this has created some interesting issues because his father has now started painting and decorating and doing things just to remain busy. At sixty this man is still very healthy. Maybe the state should have encouraged him to go part time. Maybe the state could encourage him to do some voluntary work either overseas or at home. To me this sounds as if it might have been good for all parties involved. It would save the state some money and it would allow this man to ease his way in to retirement.
I know that this issue is being partially addressed by the government increasing the retirement age of new entrants to the civil service and by partially funding civil service pensions through the Pension reserve fund. The reserve fund is being managed by the NTMA (National Treasury Management Agency). This makes me think that prudent steps are being taken to make sure that the scale of the pension problem remains manageable.

So far in this opinion piece I have basically accused the government of exaggerating the size of the pension time bomb. I have based this on an incredibly small sample of self- employed people. I could be completely wrong if the sample of people I have met are not representative of the overall population. I wish that I had the confidence to believe that the government had done enough in depth research to find out how all the people that do not have pension plans intend to provide for themselves in old age. I wish that I had the confidence to believe that the banks and assurance companies were not pushing their own agenda by highlighting this lack of pension coverage. There is a whole industry built up around pensions and they have a vested interest in getting the government to go down the road of compulsory pensions.
I know that the Pensions Board prepared a report that was published earlier this year. Unfortunately I haven't got round to reading it yet. I intend to read it as soon as possible and if there is any hard statistical evidence to undermine my opinion I will gladly highlight it in a future opinion piece. Until I see that evidence I will remain sceptical as to the number of people that will end up unable to have the lifestyle they aspire to in old age. In other words the pension time bomb may turn out to be a bit of a hoax.


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Killeevan Investment Consultants Ltd, trading as KIC, is regulated by the Central Bank as an Investment Intermediary.
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Directors: Kenneth Power (Managing) B.Comm, MBS, ASIP, Regular Member of the CFA Institute.
Siobhan Power