By Niall O’Callaghan – Partner and Head of DC, Mercer Ireland
Irish Independent, 16 April 2014
From economic boom to bust to bailout, Ireland’s 20-somethings have already faced many changes and challenges. However, possibly the biggest challenge they face is one with which many of them are completely unfamiliar – our ageing population.
One in five 20-somethings may live to be 100. When they come to retire in 40 to 50 years, there will be only two workers for every retired person, as opposed to five for every retiree today. This demographic shift means they will need to work much later in life or start saving much sooner and more than previous generations because the state will not be able to provide the same level of support to people in retirement as it does now.
Money being left on the table
Many occupational pension schemes offer voluntary membership, so an employee must opt in to avail of a contribution from their employer towards their retirement plan. Our analysis of a representative sample shows that over 70% of employees in their 20s are not taking up the offer of employer contributions to pension. On average, they are leaving behind some €1,600 per annum of unclaimed employer contributions. This equates to approximately €80 million per annum across the population.
Each year in which someone chooses not to contribute reduces the size of their pension fund at retirement by approximately €15,000 in today’s money. So, given what we know about our ageing population, these decisions are going to increase the challenge for our Generation Y’ers as they age. But what is driving this behaviour − is it affordability?
The power of inertia
When we reviewed take-up rates in schemes where membership was automatic unless employees opted out, the results were startling. The take-up rate for under-30s went from less than 30% in voluntary schemes to over 90% in schemes where employees had to opt out. Further, where the member was defaulted to the highest level of employee contribution in the scheme, over 80% maintained the highest contribution rate. This analysis suggests that it is actually inertia, not affordability, driving this behaviour.
Implications for government policy
This low level of take-up in voluntary occupational pension schemes by our under-30s has massive implications for the cost of supporting the retirees of the future. Each year in which this level of employer contribution is foregone will reduce the pension funds available nationally for these individuals by €750m. This cost will ultimately fall back on government and the strain on state finances as our population ages will increase exponentially.
The findings point unmistakably to the benefit of introducing auto-enrolment for private pension provision. The evidence from our analysis and from recent experience in the UK shows that auto-enrolment will increase the level of take-up and the amounts that people are saving for retirement.
Critically, before the government introduces auto-enrolment, it must:
- Abolish pension levies to project the right message about the importance of saving for retirement.
- Replace the existing, complicated defined contribution (DC) pension system with one type of DC pension scheme to enable people to understand their pensions better and reduce costs to employers.
What can I as a Gen Y worker do?
The good news is that it is not too late: now is the time to start saving for your retirement. Even small amounts today can make a big difference at retirement. The cost of a takeaway coffee, if saved in your pension with a matching contribution from your employer and compound interest, could translate into a three-course meal in a top restaurant when you retire.
What can I as an employer do?
Obviously, moving to auto-enrolment will most likely increase the number of members and the cost to you as an employer. However, as many organisations internationally are now finding, the costs of having a workforce in the future who cannot afford to retire may become a greater challenge as your workforce matures.
It is becoming increasingly important to provide a DC pension scheme that is easy for employees to understand, provides communication materials that engage those employees and, at the same time, has sophisticated investment capability to ensure the best outcomes for them at retirement.
The prospect of one in five Generation Y’ers living to age 100 is difficult to grasp but the economic and social implications are very real. The time for facing up to this challenge is now. Successfully doing so will provide a great service to Generation Y and future generations.