By Mairead O’Mahony, Defined Contribution & Financial Wellness Leader, Mercer Ireland
Published in the Sunday Business Post – 17th September
Irish life expectancy in 1916 was 53; now one in four babies born in Ireland today will live to 100. This impressive turnaround begs an important question: can we afford the financial costs associated with our new-found longevity?
As it stands, the truthful answer is no, and it’s an unpalatable truth for many: just this week, ESRI research presented at the Oireachtas Committee on Budgetary Oversight suggested that one solution might be to increase the pension age to 70. This prompted understandably concerned responses from advocacy groups for the elderly.
However the reality remains that Ireland faces a pension gap of €560bn, or twice our annual GDP, and this is growing as our population matures. Put simply, individuals and government are just not saving enough.
We are not alone in this dilemma. Mercer research, in collaboration with the World Economic Forum, puts the global retirement savings deficit at a mind-boggling $70 trillion. And this gap is just part of a broader set of financial challenges people may encounter throughout their lives.
Fears about our financial well-being are also taking up a huge amount of time in the workplace. Mercer’s Inside Employees’ Minds survey revealed that employees spend up to 13 working hours per month worrying about personal financial issues such as paying bills or saving for retirement.
To help ease these concerns, and to ingrain a savings and financial wellness habit into our DNA, we need all key stakeholders - including the State, employers, and individuals – to work together to address these challenges. A recent Mercer paper entitled “Bold Ideas for Mending the Long-Term Savings Gap” provides a four-step approach to how this could work.
First, we need to provide the appropriate framework to help those individuals take control of their financial future.
With the steady trend away from defined benefit pensions towards individualised savings, individuals are assuming an increasing share of the responsibility for planning and providing for their retirement. This is against a backdrop where the financial crisis has damaged trust in financial markets.
The State can re-instil trust in the financial system through the creation of an appropriate regulatory regime, requiring strong standards of governance and transparency within the savings vehicles available to individuals. State-sponsored campaigns similar to those for mental health or road safety, and early intervention at primary and secondary schools, can also raise awareness and kick-start the necessary behavioural changes needed to address the savings gap.
Employers too have an important role to play. They are uniquely positioned to understand their workforce and can raise employee awareness of the financial benefits available and how they can be put to best use. Many employers recognise the win-win inherent in contributing to a happier, more productive workforce in this way. Those 13 hours spent fretting about money each month have an impact: international research by Mercer shows that the average cost of lost productivity attributable to employee stress is 7.8% of payroll.
Secondly we need to design pension systems intelligently to encourage better outcomes.
According to the annual Melbourne Mercer Global Pension Index, the smartest retirement saving systems in the world – such as those in the Netherlands and Australia – are generally designed to make pension saving compulsory.
An effective approach is the auto-enrolment model, whereby people are automatically signed up for pension contributions as soon as they start a new job. There is strong evidence that this model works, with opt-out rates in the UK hovering around 9%-10%. Here in Ireland, successive governments have expressed support for this approach, with Taoiseach Leo Varadkar outlining his vision for a universal savings plan as part of his campaign earlier this year.
The third change needed is in the way people think about their financial fitness. A comparable example of how this might be achieved is the world of physical fitness, which has been transformed in recent years. Online personal trainers, Fitbits and corporate wellness programmes are now commonplace, and measuring physical performance and well-being has never been easier.
We need a similar revolution in the world of financial fitness. Saving and financial planning must be transformed into an engaging consumer experience – one that is easy to understand, efficient to transact, and made of achievable short-term and long-term goals. Providers and intermediaries must look to consumer-friendly models such as Netflix and Amazon to help them create well-designed, intuitive solutions for those seeking financial products.
The final area of change required is around our traditional notions of work and retirement.
The digital revolution and more flexible work practices mean that many of us can choose to work for longer than was previously the norm. Employers may need to change, or even eliminate, set retirement ages to reflect these non-linear career trajectories.
This has implications for pension savings too. Working for longer will give individuals many more years of productive activity in which they are accumulating savings and do not need to draw on their pension pot. As they no longer have to accumulate long-term savings over such a compressed period of time, they may also be able to structure their earlier working years differently, with perhaps more time for caregiving and other family obligations.
Given our ageing population and our high debt-to-GDP ratio, we need to tackle Ireland’s financial wellness challenge now. Our current trajectory is putting large numbers of people at risk of poverty, undercutting the competitiveness and social cohesion of our society, and diminishing our workers’ productivity.
The good news is that with the application of creative and strategic thinking, we can bend this trajectory and transform the future for individuals and Irish society for the better.
Mairéad O’Mahony is Head of Defined Contribution and Financial Wellness at Mercer Ireland