Many people have said that.
Yet the State Pension has survived.
I say that it will be reformed, yes, but not obsolete.
Cabinet approves auto-enrolment scheme
- Thread starter Brendan Burgess
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Many people have said that.
Yet the State Pension has survived.
I say that it will be reformed, yes, but not obsolete.
Brendan Burgess
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We cannot afford the state pension at its current levels and coverage.
So it will have to be means tested.
And guess what? People who have been auto enrolled will have means so they will get a reduced pension.
But the self-employed who contributed nothing to a pension fund and only 4% of their declared income in PRSI will get the full state pension.
Brendan
So it will have to be means tested.
And guess what? People who have been auto enrolled will have means so they will get a reduced pension.
But the self-employed who contributed nothing to a pension fund and only 4% of their declared income in PRSI will get the full state pension.
Brendan
You are basically suggesting an end to Social Insurance.
You are suggesting that at some stage PRSI will be scrapped, or reduced, as it will no longer fund a State Pension.
Note that there are strong reasons to have a SI pension scheme.
PRSI is used to finance social insurance benefits:
JSB
IB
CB
SPC
USC is a tax, used to finance all other Govt expenditures.
Auto-enrolment is personal pension savings.
Brendan Burgess
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I am suggesting the very opposite!
We are not paying in enough for the benefits being paid out.
So we should increase the contribution levels dramatically and make the benefits depend on the size of the pot contributed - much the same as any other pension scheme but with a side portion of insurance.
Brendan
Ok, I agree. PRSI cont rates are too low at 4%, and will have to be increased, yes.
Yes, the benefit should be more closely linked to the conts, I agree.
Brendan Burgess
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Is there any chance you could summarise it on one page?
On your website, the summary is 4 1/2 closely typed pages. Only a few of us have the interest to read that.
I would very much doubt that any politician has.
Your summary could be a simplification.
Brendan
We agree the first 5 years it will have no effect. (Assuming they even manage to launch it in time).
In 5 years time it might be much easier to buy a house.
By 5 years time it will be priced into everyone's income, and thus will still be a relatively level playing field of difficultly. I.e. your competitors today will still be your competitors then and they will have similar reduction in income.
Colm Fagan
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Brendan. You're right that few people want to read 4 pages of an explanation! Here's my effort to shorten it.
The key is to capture the Equity Risk Premium (ERP), which experts claim is 3% to 5% a year over risk-free, on average. The extra return is earned throughout the employee's entire membership, i.e. both pre- AND post-retirement. An extra 4% a year for (say) 50 years (say from 30 to 80) means six times as much in the pot at the end.
Returns are smoothed over decades to remove the volatility. The result is that smoothed returns will be positive throughout, even if markets crash. The charge is 0.5% a year, taken off the investment return. The account looks like a high-interest post office savings account, with money going into the account pre-retirement, being withdrawn post-retirement. The "interest rate" varies by only a small amount each quarter.
There is a separate "Lifetime Income Fund", which addresses the longevity risk. I'm not going into that now, but it's also very straightforward.
The key is to capture the Equity Risk Premium (ERP), which experts claim is 3% to 5% a year over risk-free, on average. The extra return is earned throughout the employee's entire membership, i.e. both pre- AND post-retirement. An extra 4% a year for (say) 50 years (say from 30 to 80) means six times as much in the pot at the end.
Returns are smoothed over decades to remove the volatility. The result is that smoothed returns will be positive throughout, even if markets crash. The charge is 0.5% a year, taken off the investment return. The account looks like a high-interest post office savings account, with money going into the account pre-retirement, being withdrawn post-retirement. The "interest rate" varies by only a small amount each quarter.
There is a separate "Lifetime Income Fund", which addresses the longevity risk. I'm not going into that now, but it's also very straightforward.
I'd agree that multiple providers and multiple funds is way too complex.
Imo It should be one or two best practice fund, Which will reduce costs, make it easier for everyone, and focus us all on ensuring the one or two funds are doing sensible things.
The providers can then compete to run the funds.
Imo It should be one or two best practice fund, Which will reduce costs, make it easier for everyone, and focus us all on ensuring the one or two funds are doing sensible things.
The providers can then compete to run the funds.
Brendan Burgess
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How many politicians would understand that expression?
It really has to be simple language.
Brendan
Steven Barrett
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I'll eat my hat if it's up and running by 2022. Building a central processing unit that can be used with all the different provider's computer system will be no mean feat. And they also have to get the life companies to tender for the contracts. I can see some of them not bothering as it will be a long time before they make any money off it. Someone of €35,000 a year, contributing 3%, a life company will make a fiver in year one from that person. They will have 10 year contracts. It is unlikely they will make any money from that person in 10 years.
Steven
www.bluewaterfp.ie
If any future government decides to means test the state pension in the future ...they will in effect be shooting themselves in the foot , having a situation where workers who do the right thing and provide for the future by contributing to an occupational pension effectively disqualify themselves from the state pension ... really ... they wont be getting my vote.
Colm Fagan
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Steven. You're absolutely right. Furthermore, it's going to cost them a fortune in consulting fees to make that discovery. That's why I'm suggesting one account for everyone, with one set of trustees to look after it all, no investment choice, no need to manage unit-holdings in different funds, etc.
Gosh, Brendan, you're being hard on me! In a nutshell, I'm making the very simple point that, if you're prepared to take a risk with your money, you'll get a bigger return in the long-term. Otherwise, why bother taking a risk in the first place? But that extra return comes with a hefty price tag. You could lose a lot in the short-term, and the "short-term" could extend to a number of years. Smoothing the return over many years eliminates that hefty price tag and really does give a free lunch to contributors.
Nicetoknow
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Will borrowing power on paper actually change if the central bank LTI levels stay the same and are based off gross income? Currently someone that pays 20% pension cons has the same borrowing power as someone that pays 0% pension cons.
The deposit will be harder to raise I can see.
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Absolutely agree.
A State agency (such as the NTMA) should simply act as the sole trustee for the entire scheme, appointing/replacing investment managers, following a periodic tendering process, to manage a series of simple, age appropriate, target date funds as the default option.
That agency can determine the appropriate glide path, investment style (active/passive) and investment mix (there's a relatively narrow band of reasonable options).
Did the Minister/Department actually talk to anybody in the asset management business? This looks like an expensive train wreck before it even leaves the station.
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Colm Fagan
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@Sarenco I'm with you most of the way. As you know, though, I don't believe in sacrificing return (estimated at 3% to 5% a year on average, which is massive in the context of expected returns nowadays) as people get older. Fluctuating market values are no concern in a fund with positive cash for the next 20, 30 years or longer. Why attach such importance to market values of assets that won't be sold? It's a bit like me getting worked up over the fall in the value of my house a decade ago. I didn't care much, as I had no intention of selling it.
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Brendan Burgess
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Colm
That is a very well made point which I have not seen stressed enough in your various summaries.
Brendan