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Pension version of the SSIA might be the answer to an ongoing problem Back  
The adequacy of pension provision has received considerable press attention in recent years. However, to most people, the topic remains a subject of little interest and pension coverage remains low in certain categories. Recognising this, the Irish Insurance Federation commissioned Life Strategies to calculate the retirement savings shortfall in the Irish market. Padraic O’Malley examines the findings of the report.
TTThe report set out to calculate the retirement savings shortfall in the Irish market.The target group when calculating the shortfall in the labour force aged 20-64. This group earns a total of approximately €55 billion. Firstly, we established the required income in retirement, which varies with the current income level. The higher the level of income, the lower the required replacement percentage. In aggregate, we calculated required income of €35.7 billion or 65 per cent of current income.

Some of this required income will be replaced by State pensions, occupational pensions and other savings and investments. We calculated that these will replace approximately €25 billion, leaving an income shortfall of €10.7 billion per annum.

This income shortfall translates to an annual savings shortfall of €6.0 billion. This represents the additional amount of savings per annum required to deliver the income required at retirement. Table 1 shows the shortfall in absolute amounts for the population broken down into 5 segments, as an absolute amount per person and as a percentage of income.

So the average person needs to save an extra 11 per cent of their income or about €3,300 per annum. A few comments on these figures are appropriate:

• The 11 per cent and €3,300 figures are averages, and are not necessarily appropriate for individuals. They allow for those who already have some savings and in particular some pension coverage, as well as those who have no provision. These would not be adequate savings levels for someone starting with nothing. The figures also disguise the fact that those with defined benefit pension plans generally have a much lower shortfall than others.
• The lowest income group, generally, has quite a low shortfall. The State pension is a high percentage of income for this group and as such provides quite a high replacement level. The core issue for this group is to increase their earnings, rather than to increase pension coverage.
• The highest income group also has quite a low shortfall, especially at older ages. This reflects the fact that this is the group that has most of the assets and the highest levels of pension coverage.
• The middle-income groups show the most dramatic shortfalls, ranging from about €2,500 per annum to about €5,000 per annum per person and consistently about 13 per cent of income. These groups represent 71 per cent of the total population, so this demonstrates a substantial group of people with a significant shortfall. Policy needs to be directed mainly at this group.

We examined the impact of a number of different assumptions to determine the sensitivity of the results. Some of the results from the scenario tests can be seen in table 2.

These figures show that there is quite a degree of variability. Retirement age, in particular, has a significant impact upon the results, something that should be borne in mind if considering early retirement.

Case studies
The actual shortfall for each individual will be different. To help demonstrate the differences that can arise, we have presented a couple of typical examples opposite.

Much greater awareness and education regarding the pensions issue is needed. Few people are aware of what pension they should expect at retirement or what level of savings they need to set aside now, in order to achieve a satisfactory level of income in retirement. As a result of this lack of awareness, many people are not making sufficient provision for their retirement and will have to face some difficult decisions approaching their chosen retirement date, such as postponing retirement or releasing equity in their homes.

One possibility that might help ease the scale of the problem would be a pension version of the SSIA targeted at an appropriate level. This would be modelled on the SSIA and would involve the Government matching contributions on a one for four basis up to, say, €5,000 per annum. This Government contribution would replace tax relief for these contributions. From the phenomenal take-up of SSIAs, we have seen that such an incentive would be understood and appreciated.

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