REFORMING THE PENSION SYSTEM

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REFORMING THE PENSION SYSTEM

• DAVID KINGSTON
• CHAIRMAN
• ACUVEST

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WHAT HAS CHANGED?

• Ten years ago What a great system!
• Now How do we adapt to survive?
• Is the change perception or reality?

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IRISH PENSIONS SYSTEM

• English speaking model state benefit plus
  prefunded private provision
• Was common to US, Canada, UK, Australia, South
  Africa, Scandinavia, Netherlands etc.
• Most of these have changed for a variety of
  reasons

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TYPE OF CHANGE

• Australia and South Africa now all defined
  contribution. Australia is compulsory.
• UK has seen
• State reduce its commitment
• Indexed to cost of living
• Means tested supplements
• Attempt to increase age of civil servant
  retirement
• Private sector closing DB schemes

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WHAT IS GOING ON?

• Why change at all?
• Are the changes just tinkering?
• Should we do something fundamental?
• What are the roles in all of this of employers,
  trustees, advisers, fund managers etc?

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WHY CHANGE AT ALL?

• Longevity is increasing
• Interest rates have fallen both actual rates
  and real rates
• Accounting standards have changed
• Intentions have turned into guarantees
• Early leavers have benefits preserved

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EMPLOYER PERSPECTIVE

• Pension schemes have become more expensive,
  costs have become more volatile, I am being
  saddled with guaranteeing the fund and the true
  cost is now appearing on my balance sheet.
• Does this sound attractive??

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TINKERING OR REAL CHANGE?

• Longevity
• DB to DC
• Investment
• Cost recognition
• Guarantees/Insurance

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ELEMENTS OF AN IDEAL SYSTEM

• Flexible retirement age
• To cater for longer active life
• To cater for phases of retirement partial,
  full, incapacity
• To acknowledge ageing of population
• Change has to be phased

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ROLE OF STATE/PRIVATE SCHEMES

• There has to be a universal state flat rate
  scheme related to average earnings. Needs to be
  different for nursing home care.
• The role of private schemes is to allow people
  have a retirement standard of living which is
  reasonably similar to that when they work.

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CHANGES NEEDED IN STATE SCHEME

• Test adequacy of benefit
• Slowly increase retirement age starting about
  20/25 years away
• Introduce flexible retirement
• Cater for minimum standard nursing system

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CHANGES NEEDED IN PRIVATE SCHEMES FOR NEW ENTRANTS

• Flexible retirement ages
• Limitation on fixed benefit
• Adequate contributions accepting that people
  will pay more as they age
• Capacity to take different benefit when only part
  retired

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CHANGES NEEDED FOR EXISTING DB SCHEMES

• Investment policy which matches liabilities
• Investment responsibility transferred to plan
  sponsor with Trustees having oversight
• Recognition of what reasonably conservative
  investment policy can achieve

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CHANGES NEEDED FOR EXISTING DB SCHEMES

• Acceptance that some benefits will not be paid -
  see UK and US situation
• Mechanism to force negotiation
• Widen flexibility in taking benefits
• Removal of salary indexation in Government schemes

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MESSAGES FOR DIFFERENT PARTIES

• For employers, manage the liabilities and the
  assets
• For employees, be prepared to trade some benefit
  for flexibility
• For trustees, concentrate on oversight/corporate
  governance etc
• For advisers, make sure that pensions are managed

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REFORMING PENSIONS

• Periods of change demand concentrated management
  and effective action
• The problem with pensions is that they have
  always been to-morrows problem the virtue of
  accounting standards and regulation is that they
  can force the problem to be to-days
• Flexibility is vital and so are adequate
  contributions

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REFORMING THE PENSION SYSTEM

• DAVID KINGSTON
• CHAIRMAN
• ACUVEST