Consider this: how much do you put into shopping around for home insurance? Or checking out the roaming rates before you head abroad on holiday so you don’t end up with a nasty surprise when you come home?
Now think about the length of time you spend perusing your annual pension statement, or considering what level of contributions you should be making to meet your end goals for retirement.
It doesn’t really stack up does it, when you think about the financial importance of your pension and the €100 or so you might lose out on by not shopping around for insurance.
“It’s all about engagement,” says Brendan Kennedy, pensions regulator at the Pensions Authority.
“You need to decide and plan for the lifestyle you want in retirement and then work out how to save for it. The average person retiring today at 66 has a life expectancy of 20-23 years. That’s a long time in retirement.”
Indeed, Jim Connolly, head of pensions at Standard Life, says one of the biggest mistakes people can make is failing to engage because we think that “something [magical] will turn up.
“Unfortunately, most people do not have a fairy godmother. You cannot rely on the State, your employer, fairy godmother etc. You need to look after this yourself. No one will care more about you than you,” he advises.
This approach sees too many of us fail to start saving at a young enough age. For example, a Standard Life survey from last year showed the average person wants to retire on almost €40,000 a year, but the average pension pot tends to be between about €4,000 and €6,000 a year.
“The best advice a 25 year old can receive is to start saving for their pension there and then. It will make life much easier for them when they get to 45, with children, school fees and a mortgage,” advises Connolly.
They will be the one of their friends who only needs to save €238 per month while their 45-year-old friends, who never saved a penny towards their retirement, will be saddled with catch-up savings of almost four times that amount (€864) if they want to end up with the same pension pot value.”
Making it easy for people
Given that private pension coverage is only about 50 per cent in Ireland, one way of getting increasing cover is to look to the solution adopted by the UK. Through auto-enrolment, people have to opt out of – rather than opt in to – a pension fund.
“It has been a success for the plans that have gone through it,” says Alistair Byrne, senior DC investment strategist with State Street, noting that opt-out rates are often less than 10 per cent.
“It has had a really positive impact on take-up and participation rates,” he says.
Connolly is also a fan, arguing that the mandatory nature of it will ensure greater coverage, while we can learn from some of the mistakes that the UK made.
“In the UK, the rules on who needed to be enrolled are overly complicated to such an extent that auto enrolment is more of a payroll issue than a pensions issue,” he says, suggesting that this leads it to be seen “as a compliance exercise rather than something which promotes the merits of the pension planning itself”.
Getting ready for retirement
But if people aren’t getting saving early enough, another problem is a lack of engagement even when retirement looms.
“One thing we’ve found in our research is that people don’t have a very clear idea of how they’re going to use their retirement savings until they’re quite close to the point of retirement. In some cases it’s only within a couple of years of retirement when it become clear,” says Byrne.
Of course, this poses a challenge for investment strategy.
As Byrne notes, ideally people should be making decisions about whether or not they might buy an annuity, or stay invested via an approved retirement fund (ARF), 10-15 years before they come to retirement.
However, the likelihood is that many people are only starting to prioritise saving into their pension at this point.
“A lot of lifestyle strategies have been based on the idea that members can buy an annuity with their assets on a stated retirement date,” says Byrne, adding, “but what we find in practice is that a lot of people are not doing that.”
Indeed, with annuity rates very low at the moment, many are opting to stay invested in an ARF, but this has implications for people in terms of whether or not they should be selling out, or staying in, particular investments.
As Byrne notes, for someone staying invested after retirement, an appropriate investment strategy is typically of the order of about 40 per cent in growth assets, such as equities, with the rest in fixed income and cash. But an annuity-focused lifestyle strategy will have 75 per cent or more in fixed income coming into retirement.
Trusting the trustee
In such scenarios, it puts the focus back on trustees to act in the best interest of members of the pension plan.
“This management, which is the governance decisions made by the trustees, has a profound effect on the outcomes for the members, that is, on the retirement benefits that they eventually receive,” says Kennedy.
This is particularly important when you consider, as Byrne points out, that in a defined-contribution scheme, which is increasingly replacing the old final-salary type of defined-benefit pension, as many as 80 per cent of plan members will opt for the default option.
And, as Kennedy says, “The default investment strategy is decided by the trustees.”
So if you’re in a pension scheme, you should recognise the importance of your plan’s trustees, and the ultimate role they will play in how much of a retirement you will get.
“It’s important to remember that trustees are the ones looking after your money, so you should have no difficulty whatsoever in approaching them to ask questions,” advises Kennedy.
