Wednesday, October 08, 2003

My Pension

I thought I'd like to introduce you all to my pension. Its with (as I just found out for myself this week just before I threw out the brochure) a company called Becketts. They are a Cork based company and use the word "corporate" a lot on their website.

Now I happen to understand what the middle class civil servants on €50k+ per year didn't when they thought up what they thought was a very clever idea and called it a PRSA. This incidentally, is virtually identical to a stakeholder pension in the UK. Anyway, my unique insight is that a pension is far more expensive for somebody on the lower tax band (which means any single person earning less than €28,000 per annum with no extra allowances) than it is for those on higher tax bands, who get far more generous tax breaks for having a pension.

A second point is that one of the reason why many companies don't have a pension scheme is that in order for the scheme to be officially recognised as a company scheme and therefore subject to all the niceties that go with it, the employer has to make a "meaningful" contribution. And as Ireland is riddled with cheapskate employers who shirk at the idea of anybody having a paid coffee break, you can imagine that a huge number of SMEs had no pension scheme. This effectively meant that large numbers of workers have no pension and will depend on the state pension.

Well Cheeky Charlie has decided to change all that. From now on it is compulsory for every employer in the country to offer a pension scheme. However, there is a catch. Under the PRSA scheme, it is no longer compulsory for employers to make a contribution. So the scheme is entirely dependent on whatever the employee decides to put into it. So its really no different from the scheme that Bank of Ireland in College Green and the Irish Permanent in Swords have desperately been trying to sell me for years. Its also a two fingered salute to every company who offers a "proper" pension. Although in fairness, employers can claw back some of their employer PRSI contributions under the existing company pension scheme. Which is why when my companies pension scheme was set up, the Queen of Meanness who devised it set the maximum employer contribution at 6% of salary. (This contrasts heavily with my companies policy in the UK, where many of my colleagues are on a pension scheme on a par with public sector workers by virtue of the fact that they work on one of our many public sector contracts there.)

Also there is another caveat. The reason that the PRSA was created was in order to increase the number of workers on private pension schemes. However, if you look at the take up rate on pensions generally, you will notice that the take up rate steadily decreases as income decreases. This is because the lower the income, the less likely it is that somebody will be able to afford to save. Is there anything in the new PRSA scheme to address this? No. Not a thing.

And while charges are capped at 1% you must remember that this is going to be 1% of the lowest paid workers' (in theory anyway) savings. Is there anything to prevent lower waged pension holders from losing savings? No. Nothing.

But a fundamental unfairness remains in the fact that the lower waged earner is always going to get a smaller tax rebate than higher earners - which is surely highly regressive. This has led many commentators to describe it as a pension "for middle income earners, designed by middle income earners." So is there anything there to entice somebody on a low wage to start a pension, any hidden carrot? No, nothing.

Actually when you look at the statistical incomes in Ireland, you quickly realise why the take up on PRSA has been miserable. For many years we discussed the "average income" in Ireland, and segregated the "average income for all, including non-earners." After Fianna Fail were elected in 1997, this system vanished without trace and every time earnings were discussed, we mentioned only the "average industrial wage." This is the average annual income for a worker in industry. So in an economy with about a couple of million earners, how many earners does that represent? If we assume that "industrial" means manufacturing, at the last count it was taken to mean the 60,000 workers in manufacturing. So this statistic applies to less than 6% of the entire workforce? So why has this been consistently accepted as the "average" income in Ireland? Its probably down to powerful vested interests like IBEC, who consistently use it as evidence of "soaring wage costs."

So what is the real average income in Ireland? I have managed to work this out from the Combat Poverty website, which defines the "poverty line." Now the traditional measure of poverty is the "poverty line" which is basically defined as 2/3rds of the male median income. The median income is the income of those at the dividing point between the top 50% of earners and the bottom 50%. Since normal "averages" take into account huge earners (who at the highest in the EU, the UK, earn on average, 24 times the wages of the lower earners in their company) and distort the real picture with soaring fat cat salaries. the median is more likely to give a true picture of what an "average" person earns.

According to Combat Poverty, the male median income in Ireland for last year was just under €20,000. This is less than 65% of the "average industrial" wage touted by the government and their spin doctors. So we can assume that 50% of the male population earn this. Since women still statistically earn less than men, the female median will be even less. However, it is a useful yardstick. Considering that only 76% of adults are dependent on paid work, we will ignore the plight of those who move from the benefits system to the pension system, as they will actually gain income from a state pension which is 24% of adults. So here we are talking about the 24% who presumably probably earn something around the €16-20k mark. This is quite a large minority. We can add to this a significant number of people who earn above the median but less than 120% of the "average industrial" wage. This is probably quite a large chunk of the workforce. The total income of a pensioner once the government fulfills its promise of raising pensions to €150 a week is about €8000 a year for a single person. For somebody earning €40,000 a year before retirement this represents a drop of 80%. However, for somebody earning half that (€20,000) the drop is only 60%. If the target for the "best" pensions (defined benefit) is 66% of the final wage, anybody not on such a scheme will probably be lucky to get about 50% of this amount. However, with no pension at all, the low earner is only going to get 10% extra - or €15 per week, for all the scrimping a saving for YEARS! So where is the inventive to take up a PRSA if the net benefit is a measly €15 a week? And that doesn't even take into account the possibility of the pension fund collapsing, as many have, leaving the holder with even less? (I know of one pension holder who retired early on a miserable €50, yes €50 per week from his pension fund. This man, who is 61, has had to take up a 30 hour per week job as a security man in order to make ends meet).

So what is the real intention behind PRSAs as clearly they are of very limited benefit to lower earners? The answer lies in the fact that with the stock market in the doldrums its been a difficult time for investors seeking new products. And this is an early Christmas present for them.

Just out of interest, I visited the Becketts website to see if I could find out anything about my pension, since I found nothing in the original handbook to explain to me how I can find out about my pensions progress. Nothing. I wonder how many financial products exist that basically leave the consumer utterly in the dark about their investments. I'm sure there are not many.

No comments: