24 November 2014

Ireland, Dublin

Mercer’s analysis of a representative sample of 5,000 defined contribution (DC) pension plan members reveals that Ireland’s ‘squeezed middle’ is facing a significant drop in income in retirement. Based on current savings levels, it is projected that 35 to 45-year-old DC pension plan members can expect an average income in retirement of just 22% of final salary.   

According to John Mercer, DC Specialist, Mercer, “The squeezed middle is facing a perfect storm when it comes to retirement.  Existing private pension saving is inadequate, reliance on the state pension is not an option and they are facing higher levels of debt than previous generations when they come to retire.”  He added “Given that the average 40-year-old is expected to live up to 28 years in retirement, it is essential that there is a renewed focus on retirement saving to avoid increasing levels of poverty for people in retirement.”

During the recent financial turmoil, 35 to 45-year-olds struggled through the effects of falling disposable incomes, rising costs and high levels of personal debt. Pension saving was an inevitable casualty of this upheaval. As a result, 50% of all 35 to 45-year-olds have no private provision for retirement. In addition, only 14% of DC plan members are making additional voluntary contributions beyond the minimum required.

Mercer’s analysis also illustrates that Ireland’s national debt, aging population and increasing life expectancy mean that future generations cannot expect to receive the state pension in its current form when they come to retire. The figures speak for themselves. The ratio of workers to pensioners is set to fall from 5:1 today to 2:1 by 2060.  Therefore, there will be insufficient social insurance contributions, to support the numbers in retirement. This would contribute to an unsustainable shortfall of €324 billion in funding the state pension by 2066, almost double the national debt.

This is a serious cause for concern given that, unlike previous generations, the squeezed middle has financial commitments stretching up to and beyond retirement. These commitments include long-term mortgage debts and costs associated with having children later in life.

All of these factors combine to make it very clear that the squeezed middle needs to actively prepare for retirement. The more positive news according to Mercer is that, if this group acts now, there is still sufficient time to make a difference when they come to retire. John Mercer commented “A recovering economy and the recent abolition of the pension levy mark the beginning of a more positive era for longer-term pension saving.” 

He explained “a 40-year-old earning €45,000 pa could increase their pension fund at retirement by an estimated €118,000 by saving an additional 5% of salary pa.” He added, “Tax incentives mean that for a higher rate tax payer, the real cost of each €100 invested in a pension plan is just €59. This makes pensions an extremely tax-efficient savings vehicle.”

For today’s 35 to 45-year-olds, retirement may still seem like a long time away, but according to John Mercer, “The challenge for us all is staying one step ahead in planning for our future.”