Society of Actuaries in Ireland Pensions - Delivering by Design. A Time for Change Liam Quigley. 3 rd April 2007

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1 Society of Actuaries in Ireland Pensions - Delivering by Design A Time for Change Liam Quigley 3 rd April 2007

2 What s new in benefit design A time of great change except in relation to benefit design Defined Benefit Retirement at 65 1/60 th accrual, integrated with state 50% spouse s contingent pension Member pays 5%, company pays the balance Defined Contribution Member pays 5%, company pays a little more Range of investment options Annuity at retirement

3 Employers attitude - Coverage Coverage at present Little over 50% employees Vs long-term target of 70% No Private Pension Coverage Private Pension Coverage

4 Employers attitude - Adequacy Benefit adequacy Target replacement ratio of 50% of earnings State Pension alone covers only the lowest 30% earners Public DB good, Private DB OK, DC likely to fall short Numbers Covered Personal Pension/PRSA 311 Private Sector DC Private Sector DB Public Sector DB 's

5 Recent developments Virtually no new DB Employers moving to DC for new entrants Existing employees not affected Some evidence of increased employee contributions A minority have changed future benefits for existing members Accrued benefits unchanged Some DB schemes winding up More recently increased evidence of other solutions

6 Employers attitude - DB Pressure from companies to contain DB exposure reflecting Accounting standards Liability on the balance sheet Enormous volatility (if invested in equity) Emerging focus on true economic cost Dawning reality of far higher costs increased longevity low interest rates..and higher risks!

7 Cost of pensions spiralling Increasing pension costs Declining mortality rates Interest rates at a generational low 0.14 % pension purchased Dec Dec Dec Dec Dec Dec Dec. 2005

8 Employers attitude - DB Pressure from companies to contain DB exposure reflecting Regulatory risk & Compliance requirements Regulation creep increasing liabilities Increased compliance burden Minimum Funding Standard EU involvement Changing employment patterns and attitude Emphasis on transportability & short term reward New employees remain ambivalent on pensions Peer pressure & limited employee resistance

9 Employees attitude Young employees are still at best ambivalent Older employees much more pension focused Those with expensive DB provision have a myopic resistance to change DB always good and DC always bad syndrome

10 Impact Moving to DC for new entrants may help in the mediumlong term Impact on company accounts/cash flow will depend on the level of DB turnover Low turnover will have minimal impact High turnover will accelerate benefit of switch Legacy DB liabilities will remain

11 Impact Future contributions low DB turnover Thousands Total Contributions DB Contributions DC Contributions 200 0

12 Impact Future contributions high DB turnover Thousands Total Contributions DB Contributions DC Contributions 200 0

13 Contributions Adequacy 80% DC schemes established in 1990 s Average contribution rates of 5% employee/6% employer Inadequate except at very low pay levels Some evidence of higher rates being negotiated now Projected benefits on statements from 2008 will increase awareness

14 Target Pension versus Average Contributions Total contributions required to target a pension of n/60ths at 65, including State pension, Salary 30,000 Contribution rate 20% 15% 10% 5% 0% Extra contribution (% Salary) required to target pension Mercer 2005 Survey Average DC contributon (11%) Age at entry

15 Target Pension versus Average Contributions Total contributions required to target a pension of n/60ths at 65, including State pension, Salary 50,000 Contribution rate 25% 20% 15% 10% 5% 0% Extra contribution (% Salary) required to target pension Mercer 2005 Survey Average DC contributon (11%) Age at entry

16 The cost of delay Member joins at age 30. Contribution required to target a pension of 50% Salary (including State pension) at 65 Contribution rate 35% 30% 25% 20% 15% 10% 5% 0% Extra contribution due to delayed increase Extra contribution required from age30 (5%) Scheme contributions (11%) Age starts extra contributions

17 The role of the state Pensions are now firmly on the national agenda Everyone should have a decent pension, security and dignity (...in retirement) Seamus Brennan, TD Minister for Social and Family Affairs

18 Irish pension system Ist Pillar Basic State Pension Prevent Poverty 2nd Pillar Voluntary Private Income Adequacy & Comfort

19 Global trends towards three pillar approach Ist Pillar Basic State Pension Prevent Poverty 2nd Pillar Mandatory Private Income Adequacy 3rd Pillar Voluntary Private Retirement Comfort

20 Global trends towards three pillar approach Switzerland Chile Netherlands UK Uruguay Argentina Colombia Peru Australia Denmark Hong Kong Sweden Poland Hungary Kazakhstan El Salvador Costa Rica Mexico Bolivia Slovakia Lithuania Russia Estonia Croatia Romania Latvia Kosovo Bulgaria Macedonia Dominican Rep * *some recent countries not yet implemented

21 The State Pension to date Development of State Pension 34% 32% 30% 28% 26% 24% 22% State Pension % National Average Earnings 0 20% Year Amount per week % National Average Earnings

22 The State s Prospective Commitments 12% 10% Cost of Basic State Pension 2000 Gross Cost % GNP 8% 6% 4% 2% 0% -2% Dependency Ratio projected to fall over period Year Population over age 65 (000's) Cost Net of PRSI Contributions Population over aged 65 Pensions Board

23 The State Pension relative to other countries Ireland Netherlands Denmark UK Luxembourg Spain Sweden Belgium Germany Greece Finland France Italy Austria % GDP

24 Towards 2016 General To provide an adequate income in retirement To enhance occupation pensions coverage Green Paper imminent Protecting older people Enhancement of basic state pension Increases to qualifying dependants allowance

25 Towards 2016 Pay, workplace & employment rights Unions can make claims introduction of new or improvement of substandard schemes Cost issues recognised Agreements may include phasing National Implementation Body Financial pressures in DB acknowledged, Pensions Board to consider alternative designs Government to consider transposition of Occupational pensions provisions of TU Directive into Irish law

26 Other Solutions Defined Benefit Variable NRA Employee Career Average Security Life Cycle Cash Balance Retirement Units Defined Contribution Employer Risk

27 Conclusions All change but traditional bias remains in relation to pension provision Government must provide clarity Level of state pension and retirement ages Regulation of private pensions Employers and employees need to recognise economic realities Many possible solutions exist, its not all about DB or DC